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111th Congress
1st Session COMMITTEE PRINT Committee
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_______________________________________________________________________
MEETING ON
FHA OVERSIGHT OF LOAN ORIGINATORS
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
January 9, 2009
111th Congress
1st Session COMMITTEE PRINT Committee
Print 111-C
_______________________________________________________________________
MEETING ON
FHA OVERSIGHT OF LOAN ORIGINATORS
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
January 9, 2009
U.S. GOVERNMENT PRINTING OFFICE
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS McCOTTER, Michigan
CHARLES WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIC PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Meeting held on:
January 9, 2009.............................................. 1
Appendix:
January 9, 2009.............................................. 59
WITNESSES
Friday, January 9, 2009
Courson, John A., President and Chief Executive Officer, Mortgage
Bankers Association (MBA)...................................... 48
Hanzimanolis, George, CRMS, Founder, Bankers First Mortgage Inc.,
and past President, National Association of Mortgage Brokers
(NAMB)......................................................... 49
Heist, James A., Assistant Inspector General for Audit, Office of
Inspector General, U.S. Department of Housing and Urban
Development.................................................... 8
Murray, Phillip, Deputy Assistant Secretary for Single Family
Housing Programs, U.S. Department of Housing and Urban
Development.................................................... 6
APPENDIX
Prepared statements:
Courson, John A.............................................. 60
Hanzimanolis, George......................................... 67
Heist, James A............................................... 81
Murray, Phillip.............................................. 89
FHA OVERSIGHT OF LOAN ORIGINATORS
----------
Friday, January 9, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Waters,
Ackerman, Meeks, Moore of Kansas, Hinojosa, Clay, McCarthy of
New York, Baca, Lynch, Miller of North Carolina, Scott, Green,
Cleaver, Bean, Hodes, Ellison, Klein, Wilson, Perlmutter,
Donnelly, Foster, Speier, Minnick, Adler, Kilroy, Driehaus,
Kosmas, Grayson, Himes, Peters, Maffei; Bachus, Castle,
Manzullo, Capito, Hensarling, Neugebauer, Campbell, Posey, Lee,
Paulsen, and Lance.
The Chairman. This gathering will begin. As was noted last
week, we are not yet formally constituted as a committee, but
we do have the full complement of Members on both sides. So
while we have not yet been formally constituted by a vote of
the House as a committee, the membership is now complete. We
are still operating somewhat informally. The ranking member
informed me he has requests for 15 minutes of time, so we will
do 15 and 15. I hope we can move very quickly. Members on the
Democratic side who wish to say something should notify the
staff. I will begin first of all by taking note of the
disastrous job numbers we have today that is within the
jurisdiction of this committee. The collapse of the leave-the-
market alone with capital do it for us system is now stunning
in its impact.
We have lost over a million jobs in 2 months, really a very
extraordinary negative impact that we have haven't seen in a
very long time and it makes it all the more important for us to
do sensible interventions. I do want to announce that the
committee will be releasing today the draft of a bill to impose
conditions on anything that would--on any expenditure of the
second $750 billion of the TARP. I am going to talk about that
briefly. When we passed that bill, there were some who scoffed
at what we said were safeguards. There were predictions that
the entire $700 billion would be spent without any input.
We put in there significant oversight, which has now begun
to come forward, and more importantly, a requirement that after
the first half was spent, there be a period of notification for
Congress before the second half could be spent and the
resolution disapproval. That has worked maybe even better than
some people had thought it might so that we have frozen the
second $350 billion.
It is now clear that the incoming Administration
understands that. And by the way, we are beyond the point where
the current Administration could spend it. There is a 15-day
period after the triggering that would now get you into the
Obama Administration. There will have to be very strict rules.
Many of us have a great deal of confidence in the Obama
Administration, but I am prepared here to draw on the wisdom of
a previous Republican President, ``We will trust but verify.''
The verification will be a bill that will be mandating
attention to foreclosure to money being re-lent when it is
given to the banks for other things. A draft of that will be
released today.
We will have another one of these non-hearing-hearings on
it on Tuesday. The bill will probably come to the Floor next
week. Members will see it. We are not constituted so that we
can have a formal markup yet, but we will have the bill out
there. Members will see it. And we will be in conversations
about it. And as I said, I think it will go to the Floor.
The Bush Administration has not yet requested the second
$350 billion, so this might be academic. But we thought it was
important to make it clear what our conditions would be so that
if there is a request for the second $350 billion, even from
the incoming Administration or whether the new one does want to
have the ability to deploy it, they will know when it meets the
House of Representatives requires for them to go forward.
Finally, on today's hearing, we hope if we are able to work
out appropriate conditions to get the second $350 billion freed
up. If that is the case, it will increase, we believe, the role
of the FHA in dealing with this. We passed a bill, HOPE for
Homeowners, which was part of it last year in which we tried to
put the FHA in a position to help as a resource in diminishing
foreclosures. And it turns out it was drafted so restrictively
that it hasn't been used. We were concerned about being
excessively generous.
I think we erred on the other side. We have been talking to
a variety of groups, including the Chairman of the Federal
Reserve and others, about making it more workable. Making that
more workable will be something we hope will be done in the
second half of the $350 billion. But it involves a greater role
for the FHA. In an article in Business Week on December 31st of
this past year and in The New York Times article on December
10th, both of which I ask--although we don't really need
unanimous consent. We should put them in the record. If anybody
wants to put it in the record, it is open. We will do that.
Saying that there is a danger of the FHA not being able
sufficiently to screen the applications. We will be directing
more people, including some people who have been in trouble to
the FHA if the program works.
It is essential therefore--we are not here to talk about
that program. We are here to talk about the FHA because we want
to make sure that whatever increased role the FHA has, it is
able to deal with it, whether it has enough staff, whether it
is doing its job right, that whole range of questions. So the
focus today is on the allegations that have been published in
respectable publications, Business Week and The New York Times,
that there was too much laxity in the FHA. We want to see if
that is the case, and if so, more importantly, what we can do
to make sure it doesn't happen going forward. Because having an
FHA that is available to work with low-income people is an
essential part of having an alternative to the subprime
mortgage schemes that got us in trouble.
And clearly there were people who got subprime mortgages
who should not have gotten mortgages. And there were other
people who got bad subprime mortgages who if they were given
appropriate mortgages would not be in trouble. That is in part
the role of the FHA. So this hearing is about the capacity of
the FHA going forward to be an entity we can rely on. And for
that to be the case, we have to know what is behind these
allegations, whether they were accurate, and more importantly,
if they were--what is being done and what can be done to
diminish them. The gentleman from Alabama.
Mr. Bachus. Thank you, Chairman Frank, for holding today's
hearingon the FHA's insurance program and the procedures for
monitoring lender and mortgage broker participation in the
program and combating fraud. With the credit and foreclosure
crisis, FHA has played an increasing role in assisting
homeowners and is attempting to fill the void left by the
contraction of the conventional market. Over the past year, FHA
has seen its business as a share of home sales increase from 4
percent in 2006 to 21 percent in 2008. That 21 percent
represents a new peak. The last peak was 18 percent in 1990.
FHA's share of total mortgage volumes has gone from 2 percent
in 2006 to 26 percent in 2008. And this new level has not been
seen since prior to 1970. According to the Department of
Housing and Urban Development, a steady flow of homeowners
continue to use FHA to refinance out of subprime mortgages and
FHA anticipates that it will likely insure over 1.6 million
mortgages in Fiscal Year 2009, representing close to $300
billion.
Recent media reports indicate that HUD's Federal Housing
Administration, FHA, significantly increased market share in
2008, raising concerns that the agency is ill-equipped to
adequately oversee FHA-approved lenders and licensees, to
employ appropriate technology and to manage human capital to
protect the taxpayer from exposure to significant financial
losses. The December 1, 2008, article in Business Week that the
chairman mentioned quoted Inside Mortgage Finance, a research
and newsletter firm, and an estimate they gave that over the
next 5 years, new loans backed by FHA insurance will fail and
perhaps cost the taxpayers as much as $100 billion and as the
chairman said, that is sort of the driving force behind this
hearing, that report and others.
According to the article, former Federal housing officials
say FHA is ill-equipped to deal with the onslaught of new
lenders seeking to participate in the program. The HUD IG, Ken
Donohue, mentioned in the article and he was quoted as saying
that FHA ``faces a tsunami in the form of subprime lenders that
favor aggressive sales tactics and engage in fraud.'' In that
same article, Mr. Donohue noted that he is very concerned that
fraudulent subprime lenders are reconstituting themselves and
could potentially bring bad loans to the FHA portfolio, and
that is what all of us want to avoid and get assurances that
there are procedures in place to stop that.
The Business Week article further states, ``FHA staffing
has remained roughly level over the past 5 years at just under
1,000 employees. Even as the tsunami has been building that
Donohue points out, the FHA unit that approves new lenders
recertifies existing ones and oversees quality assurance has
only five slots, two of those were vacant this fall according
to HUD's Web site.''
And I continue to quote here: ``Former housing officials
say lender evaluations sometimes amount to little more than a
brief phone call which helps explain why questionable--ex-
subprime operations can reinvent themselves and gain
approval,'' and they close with another quote from the IG
saying, ``they are absolutely understaffed and they need a much
better IT system in place. That is one of their great
vulnerabilities.''
This hearing, I hope, will give FHA an opportunity to
address the concerns raised in Business Week and other
articles. And explain what steps the agency is taking to ensure
that the program is being run in a safe and sound manner. I
hope today's hearing can help provide the committee with some
answers on how we can ensure that the FHA continues to operate
in a safe and sound manner and help worthy borrowers achieve
homeownership. Thank you.
The Chairman. Let me go to a couple of others on this side.
The gentleman from Delaware for 2 minutes.
Mr. Castle. Thank you very much, Mr. Chairman. I share the
concerns of both the opening statements by the chairman and the
ranking member. I think we should be concerned. I have also
read this Business Week article and a few others and I would
concur that there may be some laxity in the circumstance. I do
not know, for example, Mr. Murray, if the FHA has sufficient
employees to carry out its responsibilities. But my greatest
concern is that there is no doubt that for the last half dozen
years, perhaps before this, we had a group of individuals, not
everybody obviously, a lot of individuals particularly in the
subprime areas and the Alt-A areas who had gotten involved in
mortgage lending and perhaps didn't have the background for
that. Some got involved in it feloniously and intentionally.
And if you read these stories--they may be highlights, but
even if they are highlights, it is a problem. You have a lot of
these same individuals being approved as approved lenders under
FHA. And I don't know what the vetting process is for the loan
correspondents and firms that are granted the authority to act
as direct loan endorsement agents. But my sense is that is
something that needs to be watched very carefully.
There is a huge shift right now as loans go to the FHA. And
I don't have a problem with that. And our obligation, your
obligation, in my judgment, is to protect the borrowers as best
we can and we are not doing that if indeed we have lenders out
there who are able to violate the rules. And we are condoning
that if we approve some of these lenders, particularly those
with rather questionable backgrounds from before. And I just
wonder if our enforcement mechanisms are sufficient. Those are
the kinds of answers that I will be looking for today. How does
the FHA involve itself in these situations, are these companies
all endorsed by the FHA, are they able to advertise they have
FHA backing therefore some sense of security to the borrowers
out there that perhaps is unjustified. These are issues I think
that we need to make sure that we are looking into to protect
consumers from fraudulent practices.
So I look forward to the testimony, and hopefully we will
get answers that are satisfactory and start down a path of
making sure that these problems are being addressed. I yield
back, Mr. Chairman.
The Chairman. The gentleman from Texas, Mr. Green, for 3
minutes.
Mr. Green. Thank you, Mr. Chairman. And I thank you for
your comments on the ``trust and verify.'' I absolutely concur
with you. I would like to, if I may, repeat some of what has
been said, because there are times when things are so important
that they bear repeating. It is important for us to note that
FHA does not lend money directly. FHA is sort of like having
your uncle co-sign for you and work with you to the extent that
your uncle has co-signed a note. In this case, the co-signer is
Uncle Sam because FHA is a part of the Federal Government. I
think that it is exceedingly important that we make all efforts
possible to assure people that those lenders who are now coming
into FHA will not bring with them the same habits that they had
when they were dealing in the subprime market, many of them
doing business in less than an honorable fashion.
I do not want to paint everyone with the same brush. There
were many persons who were honorable and who were doing
credible business and doing an outstanding job. But we do note
that we are in the circumstance that we are in because there
were many who were not and because we had many who were not and
because we have so many who are now moving into FHA, it is
anticipated that--actually FHA has grown from 16,000 to 36,000
brokers according to this Business Week article, the number of
approved lenders and broker, approved to participate in FHA
grew from 16,000 to--in 2007 to 36,000 today. That is a lot and
I think that it is appropriate for us to take all productive,
constructive measures to make sure that we do not allow what
has created a problem to continue to be a problem. I thank you,
Mr. Chairman, and I yield back the balance of my time.
The Chairman. The gentleman from Texas, Mr. Hensarling, for
2 minutes.
Mr. Hensarling. Thank you, Mr. Chairman. As we know, FHA is
one of the few government agencies that is entirely fee based
and does not receive taxpayer subsidies. As we are looking at
the single largest deficit in our Nation's history since World
War II, $7 trillion to $8 trillion of taxpayer exposure through
sundry bailout plans and a promised stimulus plan that may top
out at over a trillion dollars. I, for one, want to ensure that
FHA remains a fee-based institution. With the onslaught of loan
demand, though, I think it is entirely appropriate that we
examine whether or not FHA has the budget, the resources, and
the expertise to handle the challenge. A significant part of
the challenge will be presented by a multitude of fraudulent
players who may try to qualify as FHA loan originators and
borrowers.
We know it just wasn't lax underwriting standards that
brought us to where we find ourselves; it was out-and-out
fraud. According to FSN, mortgage fraud is up 1,400 percent in
this decade alone. And for every predatory lender--and there
were many--there were also many predatory borrowers. And
tragically, a lot of this fraud went undetected, and when
detected, usually went unprosecuted. It is also a reminder for
those who advocate more regulation; it is not always a matter
of more regulation. Quite often the solution is enforcing the
regulations that we already have on the books. As the ranking
member indicated, FHA, by some expert estimates, may be looking
at $100 billion in losses over the next 5 years. This simply
cannot be allowed to happen.
As important as it is for this committee to examine loan
originators, it is also even more important that we look at
loan criteria. No greater correlation between default and the
lack of significant downpayment and I hope, Mr. Chairman, that
this committee will look at increasing the downpayment
requirement in lowering the conforming loans. With that, I
appreciate you holding this hearing and I yield back the
balance of my time.
The Chairman. All members who have requested time who have
spoken who are here, so we will now turn to our witnesses. We
have and we appreciate his attending, Mr. Phillip Murray, who
is the Deputy Assistant Secretary for Single Family Housing
Programs at HUD, and James Heist, who is the Assistant
Inspector General for Audit, office of inspector general of the
Department of Housing and Urban Development. Mr. Murray, we
will begin with you.
STATEMENT OF PHILLIP MURRAY, DEPUTY ASSISTANT SECRETARY FOR
SINGLE FAMILY HOUSING PROGRAMS, U.S. DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
Mr. Murray. Thank you, and good morning. Chairman Frank,
Ranking Member Bachus, and members of the committee, I appear
before you today on behalf of the Federal Housing
Administration. My name is Phillip Murray, and I am the Deputy
Assistant Secretary for Single Family Housing at FHA. I am
responsible for managing all the single family business for
FHA, and I have been at HUD for 29 years, with the past 17 at
FHA. Let me begin by saying that prior to my current position,
I was the Director of the Office of Lender Activities and
Program Compliance responsible for administering the various
risk management activities of FHA-approved lenders, which
included sanctioning lenders and other related parties who
failed to comply with HUD and FHA requirements.
As HUD's former top cop, I personally take issue with
recent press accounts suggesting that FHA is vulnerable to the
same type of unsavory business practices as we have seen in the
subprime market. These stories misrepresent a well respected
Federal program that has provided untold benefits to millions
of Americans, as well as the efforts of hundreds of HUD
employees who administer it. FHA-insured loans are neither high
cost nor high risk to home buyers; rather, FHA is a vehicle for
borrowers to access prime rate loans. FHA has never, never
allowed the loose underwriting or expensive loan terms that
were characteristic of subprime lending. FHA borrowers must
provide evidence of income and employment to validate their
capacity to make their mortgage payments and FHA products never
carry teaser rates or prepayment penalties. Turning now to the
specific topic of today's meeting, the Department's efforts to
protect FHA insurance funds and serve the public are best
demonstrated by the thoroughness of its approval and monitoring
standards.
Lenders applying for participation in FHA insurance
programs are subject to rigorous initial approval requirements.
FHA scrutinizes lenders based on: one, the company's financial
capacity and resources; two, the possession of appropriate
State licensing; three, the eligibility of the company, its
principals and officers to participate in government programs;
and four, the company's quality control plans and compliance
procedures.
Additionally, lenders must renew their approval annually to
ensure ongoing adherence to FHA lender approval requirements.
Lenders that fail to meet these renewed requirements are
terminated and thus cannot originate FHA loans. Please note
that despite the extensive pressures to do so, FHA has not and
will not lessen its stance. Newly approved lenders must meet
eligibility requirements and programmatic requirements and are
held to the same standards as existing lenders. FHA is
constantly monitoring low-level compliance, lender performance,
and portfolio performance through a variety of risk management
tools.
In addition to the rigorous approval standards FHA imposes,
the agency has nationwide quality assurance divisions. That
comprehensively monitors lenders performance and compliance
through remote and onsite monitoring reviews as well as through
electronic surveillance. Furthermore, FHA conducts an annual
actuarial review, and it also maintains credit subsidy models
that annually review FHA's book of business for risk factors to
identify any necessary forward adjustments. As a matter of
fact, it was these procedures that identified the unacceptable
and high default rates when loans close with seller downpayment
funding. FHA's last two audits have been clean, with no
material weaknesses identified. And FHA is no longer on GAO's
troubled agency watchlist. FHA is proud of these
accomplishments.
While I can assure you that FHA is fully committed to
continuing aggressive oversight of its program, I must restate
FHA's long-standing need for additional resources to further
bolster the agency's monitoring and oversight capacities. A
critical area is information technology. We need to replace the
35 legacy systems FHA uses in its operations. In spite of the
fact that these systems are based on technology and computer
programming languages that are decades old, FHA has made these
systems work. But this cannot continue and the IT
infrastructure at FHA needs to be replaced now.
Finally, I want to address a topic pertinent to today's
discussion of FHA's continued strength and vitality, the
proposed ``cram-down'' bill. FHA and Ginnie Mae do not have the
legal authority to reimburse servicers for the cram-down
amounts not received from borrowers but paid through to
investors. This could create a powerful disincentive from doing
business with FHA and Ginnie Mae, while costing taxpayers
additional dollars. FHA urges careful consideration as Congress
contemplates this matter so we can continue to help more
Americans realize the benefits of prime rate FHA-insured
mortgages. Again, I want to thank you for the opportunity to
explain FHA's comprehensive lender oversight and monitoring
efforts. I would be happy to answer any questions. Thank you.
[The prepared statement of Mr. Murray can be found on page
89 of the appendix.]
Ms. Waters. [presiding]. Thank you very much. Mr. James, is
that ``Heist'' or ``Heist?''
Mr. Heist. ``Heist.''
Ms. Waters. ``Heist.''
STATEMENT OF JAMES A. HEIST, ASSISTANT INSPECTOR GENERAL FOR
AUDIT, OFFICE OF INSPECTOR GENERAL, UNITED STATES DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Heist. Chairman Frank, Ranking Member Bachus, and
members of the committee, thank you for inviting me to testify
today. I very much appreciate the opportunity to testify on
behalf of the Inspector General on the important issue of FHA
oversight of loan originators. Over the years, we have had
concerns with FHA systems and infrastructure to adequately
perform its current requirements and services. This was
expressed by the OIG prior to the current influx of loans. We
continue to remain keenly interested in FHA's ability and
capacity to oversee the newly generated business.
The past year-and-a-half has certainly produced a lot of
changes. With the collapse of the subprime market, FHA has seen
a dramatic increase in new business. In September 2007, HUD
began to provide assistance through the FHA Secure Program to
refinance existing subprime mortgages. The Housing and Economic
Recovery Act passed last summer created a new HOPE for
Homeowners Program to enable FHA to refinance the mortgages of
at-risk borrowers. It also authorized changes to the FHA's
reverse mortgage program that will enable more seniors to tap
into their homes' equity. The volume of single-family loans,
FHA loans, has tripled from $59 billion in Fiscal Year 2007 to
over $180 billion in Fiscal Year 2008. Market comparisons show
that FHA's share of insured mortgage endorsements have
increased from 21 to 76 percent. And this is based on the
latest monthly data available compared to last year.
And that includes all endorsements, including refinances.
We continue to believe there is a critical need for more
resources at FHA: one, to enhance its IT systems; two, to
increase its personnel to deal with the volume; three, to
maintain a workforce with the necessary skills; four, to
oversee numerous contractors; and five, to increase oversight
in all critical front-end processes, including appraisals and
underwriting. We are gratified that a new penalty provision was
inserted into the Housing and Economic Recovery Act. The
statute now creates an increased criminal penalty for
committing fraud against FHA programs and will be a useful tool
for prosecutors. The results of the latest actuarial study show
that HUD has sustained significant losses in the single family
program. As of September 30, 2008, the fund's economic value
was an estimated $12.9 billion, an almost 40 percent drop from
over $21 billion in 2007.
The current value represents 3 percent of the mortgages
insured by FHA. Although above the 2 percent ratio required by
law, it is well below the 6.4 percent ratio from the prior
year. If more pessimistic assumptions are factored in, the
ratio could dip below 2 percent in succeeding years, requiring
an increase in premiums or appropriations to make up the
shortfall. Among our many audits, we have found that FHA needs
to improve its internal control structure by formalizing risk
assessments of its program and administrative functions.
In another area, our audit of the FHA appraiser roster
identified weaknesses in the quality control and monitoring of
their roster. Results from a number of other audits at FHA
lenders have noticed significant underwriting deficiencies,
inadequate quality controls, and other operational
irregularities. We have also recently initiated an inspection
of the mortgagee review board enforcement actions and its
efficiency effectiveness and impact in resolving cases of
serious noncompliance with FHA regulations. We note that the
FHA lender approval process is largely manual. FHA will be
challenged within current resource constraints to keep up with
the increasing volume of entities doing FHA business. We
believe that the oversight of these lenders could be improved
with monitoring loan prescreening systems. The tightening
credit market has increased FHA's position as a loan insurer
and with that is coming an increase in lenders and brokers
seeking to do business with FHA and a concern with some of
those loan originators.
For example, we are currently investigating several FHA
lenders who were also lenders in the subprime market. The
movement toward FHA is already underway and is reflected in
recent statistics. FHA lender approvals increased five-fold in
a 2-year period. Previous investigation of an FHA lender in New
York led to the debarment of its owner for a period of 5 years.
After the debarment was served, the lender resumed operations
using the same fraudulent practices. Another area of concern is
the growing reverse mortgage program. The larger loan limits
can be attractive to exploiters of the elderly whether by third
parties or even family members who seek to strip equity from
seniors. The Office of Inspector General stands ready to assist
in whatever way is deemed necessary and will be vigilant in its
efforts to protect the funds of the American taxpayer. We thank
you for the opportunity to relay our views and greatly
appreciate the activities of the Congress to protect FHA's
funds from predatory and improper practices and to ensure
effective oversight of the lending community at this critical
time.
[The prepared statement of Mr. Heist can be found on page
81 of the appendix.]
The Chairman. Thank you.
Mr. Heist, let me ask you on the one last point you made:
We have found a very enthusiastic response with regard to the
home equity mortgages, that has been--when done right, that has
been very helpful. The AARP, for instance, has been very
enthusiastic.
The problem we have found is one you touched on, namely
that there has not been any significant set of problems in the
execution of the program itself, but once an individual gets
the proceeds from that--in some cases, older people who are not
as sophisticated, may not be at the top of their game--they
have been vulnerable to bad advice about what to do with the
money.
Now, one of the reforms we put into the bill that became
law was to say that you cannot be the same entity promoting
that and then investing the funds for people. That is helpful.
But you very carefully referred to abuse by third parties or
family members.
I would urge you, if you have any ideas about how we can
further protect the recipients from abuse, to share them with
us, because we think this is an important program. And whether
now or later as we go forward, if there are further safeguards
that we could put in there to prevent victimization of the
people who got that money, please work with us.
Mr. Heist. We will be happy to do that. And while I am not
at liberty to talk about ongoing investigations, our
investigators are seeing schemes where the elderly are being
steered into annuity products, for example, with unreasonable
terms and--
The Chairman. Now, these are being steered by--is there
collusion between--I don't want to impinge on the
investigation--between the entities that are selling these and
then the entities that are doing the annuities?
Mr. Heist. We have seen where they have had identity of
interests.
The Chairman. All right. Let us do this because I don't
want to in any way interfere with the ability to break that up.
Please work with our staffs, as I think this is clearly a
bipartisan interest we have, in whatever you think--whatever
recommendations you want to make to minimize that, because I
don't want to see a program that can be beneficial and has been
beneficial dealt with that way.
Mr. Heist. The other thing we are doing is partnering with
organizations such as AARP to get the word out regarding
education and fraud awareness.
The Chairman. One of the things we can do on that is to say
that, for instance, we can make sure that these are done
through the FHA, that the FHA takes on a major role in warning
people against this.
So we did take the one step of saying--I think Senator
McCaskill has been very interested in that. My colleague from
Missouri and others, we have taken one step, but we are ready
to do more to protect this program.
Mr. Murray--and I apologize; I had to go out and deal with
another matter--but we have heard some of the criticisms. Have
you specific responses to some of them?
I guess the question is, are there inaccuracies or are
these things that can be cured going forward? And in
particular, are you staffed adequately and do you have
sufficient authority to find people who ought to be rejected
from participation and reject them?
Mr. Murray. First, I rather appreciate having the article
because it causes us to be here to discuss this. Let me assure
you, first of all, the sky is not falling.
The Chairman. You are a very tolerant man, Mr. Murray.
Mr. Murray. Yes, but the sky is not falling.
But, yes, we have a real need to upgrade our technology. We
have an absolute need to hire more staff. Although we hired 142
people last year who--with retirement and moving elsewhere, we
only netted 60 individuals. And we are in dire need of
additional contracting money, so we can procure some more fraud
detection tools, more people to work on our front-end
detections.
The Chairman. I assume if we are successful in fixing HOPE
for Homeowners, which we passed in a form in which the
intentions outpace the capacity to deliver, if we are able to
fix that and send you even more business, then these needs
would be obviously exacerbated?
Mr. Murray. Yes, sir.
But in terms of the story, although it may in most places
appear to be factual, what we did was we allowed Business Week
access to our public site on our Neighborhood Watch system
where you or any other citizen can look at the performance of
my lenders. They chose a few lenders and decided to explore
them further.
The problem that I think we had with this, that may
misrepresent, is that they look at these individuals and their
performance in the subprime market, and then in the next
sentence they refer to FHA. These two do not--it is not a
nexus.
The Chairman. In other words, you are suggesting that some
of the abuses that they alluded to were a non-FHA product?
Mr. Murray. Absolutely, sir.
And what the article also failed to say in its five--five
lenders, without talking about any specifics, two of the
lenders, one only made one loan, the other made 63 loans, which
is the very minimal loan for any of our lenders.
The other three, they were already on our radar screen.
There have been actions taken either by my compliance
enforcement people and/or the IG, and we have made referrals.
So--
The Chairman. I think it would be interesting--I don't see
any reason why you could not send us a document that would
identify those individuals. If there is a confidentiality
problem with one or two, you can cover that up.
Thank you. My time has expired and I appreciate that. And I
obviously will encourage--do you stay on or do you leave in a
week? Or what is happening?
Mr. Murray. No, sir, I am a career person.
The Chairman. You are career. Good.
Then what we would like is--someone will have to change it.
Make sure and tell them that we are specifically requesting--I
know there are problems with OMB. Please let them know that the
committee of jurisdiction will be specifically requesting what
you think you need to staff up both in terms of technology and
individuals to deal with this, because we want to make you more
of a player than you are.
So we need to know what we need to put into your hands in
terms of resources so you can do that job.
Mr. Murray. We stand poised and ready to serve, and we need
the assistance.
The Chairman. And that is a direct request from us.
The gentleman from Alabama.
Mr. Bachus. Thank you.
Mr. Murray, Mr. Heist in his written testimony talked about
your process for selecting lenders or monitoring the quality of
their loans is a post endorsement process, it is not a
prescreening process. Is that correct? And does that bother
you?
Mr. Murray. There is an approval process for new lenders
coming in. That is one separate set. Once they are in, lenders,
full-eagle lenders submit loans to us. During that process,
there are front-end analyses of that process, of those loans.
Mr. Bachus. That is just random and not all of them--
Mr. Murray. Absolutely, it is random. There is an algorithm
done, a significant statistical sampling of our loans done
through an algorithm, and so currently we do a random sampling
of 5 percent.
Mr. Bachus. Mr. Heist, you are recommending actually a
prescreening, just a program that large lenders use? Would that
be--
Mr. Heist. One of the concerns we have about the review in
the post-screening is--
Mr. Bachus. Pull the microphone a little closer.
Mr. Heist. I am sorry. I forgot to push the button.
One of the concerns we have with the monitoring that is
done is it oftentimes can take a period of time for the default
statistics to show up to provide for some intervention.
FHA has done a lot to enhance its early warning and
targeting; and, in fact, we work with FHA when we target
lenders for our audit work. With advances in technologies,
there are opportunities to do more on a prescreening basis
where you can actually--and actually insist on the lenders
doing more prescreening to identify red flags, if you will,
anomalies in appraisal information, whether the individual owns
multiple properties and is disguising himself as an owner-
occupant, those sorts of things.
But FHA needs the resources to be able to do those sorts of
things.
Mr. Bachus. So you just don't have the resources; is that
what--or have you thought about doing that?
Mr. Murray. Actually, we agree with the IG: but for funding
resources, we would have that. But bear in mind, we have many,
many tools. There is not one tool that is a panacea for
anything.
So when the new lenders come in, we do test cases. We run
them through test cases. They actually have to pass a test.
Mr. Bachus. Once the loans are made, you are reviewing only
about 1 out of 20; is that right?
Mr. Murray. I think that refers to our post-tech
endorsement at the front end. Once they come through the door,
we do a thorough analysis on 5 percent of the cases, based on
the properties and the underwriting criteria.
Mr. Bachus. For every loan?
Mr. Murray. Five percent of all the loans that come
through.
Mr. Bachus. Five percent?
Mr. Murray. Five percent. Our evaluation tells us that is
an adequate statistical sampling to do that with. However, we
would be more than happy to do a larger amount. But again it
all comes back to staffing and funding.
Mr. Bachus. Yes, if you required a prescreening, that would
obviously cut down on your losses, would it not?
Mr. Murray. All of our tools help us in assisting. So as
long--as you go along the way where there are checkpoints that
we stop.
When you are first approved, we make sure that you actually
know how to do FHA business through test cases. If you don't
pass our test cases, you don't get approved to do further work.
Once that happens, once the loans are made, we have a
variety of tools to monitor--
Mr. Bachus. But that is all manual, and it is random,
right?
Mr. Murray. Okay. I understand. What you are talking about
is the very front end when they first submit the loans in.
It is a manual screening as well as an electronic
screening. Seventy percent of our loans are done through lender
insurance, which is an electronic self-insuring process; the
other 30 percent is manual. And I can say despite a lot of
objections with us introducing lender insurance some years ago,
I can tell you today that the reason why we are still standing
and are able to handle this workload is because we went to
lender insurance where 70 percent of our loans are being done,
which relieves the burden from our staff.
Mr. Bachus. Let me ask you really quickly, you mentioned
that this new legislation on the bankruptcy cram-down presents
some unique problems for FHA and VA. Would you just give me
what you see as those problems?
You mentioned that--
Mr. Murray. Yes, I did. My job was to just sort of make you
aware of that. I will give you one example.
We pay partial claims, and if we--and if every borrower who
we have in partial claims decided to file bankruptcy, that
would cost us $640 million of lost revenue. That is just one
example.
Mr. Bachus. It would be significant losses if you weren't
carved out of that?
Mr. Murray. Yes, sir. Because we don't have the authority
to do that, nor do we have the funding to pay for it. Because
the investors have to be paid.
The Chairman. We do have the authority. You appropriate it
through the funding. Don't hesitate to ask us regarding both.
The gentlewoman from California, the chairwoman of the
Housing Subcommittee.
Ms. Waters. Thank you very much, Mr. Chairman. I am very
pleased.
The Chairman. The once and future chairwoman of the
Subcommittee on Housing.
Ms. Waters. Mr. Chairman, I thank you for holding this
hearing. This is very important. We all worked very hard to
strengthen FHA and to make sure that it was equipped to be back
in business doing what it was intended to do when it was
originated here in the Congress of the United States. And it
looks as if it is doing pretty well; it appears that FHA is now
in business.
We recognize that FHA was practically killed off by the
subprime market that was offering all kind of exotic loans,
which basically made FHA relevant; but now we are moving in
another direction.
But, Mr. Chairman, and members, I want you to hear this and
hear it well. We don't intend for FHA to do business with some
of the bad subprime lenders that got us in trouble in the first
place. Now, there is a scathing article in Business Week about
the fact that FHA is allowing some of the worst actors and
perpetrators of fraud to come in and be FHA approved, and
putting them back out into the market again.
We have a lot of work to do here with regulatory agencies
to clean up the mess that has created this economic crisis that
we are in. Can you tell me why you cannot vet and determine the
bad subprime actors, some of whom have been indicted, some of
whom have gone to prison, and some of whom have just changed
the name on the door; they are still the same players.
Why can't you know the difference between legitimate
lenders and these mortgage companies that we are reading about,
Mr. Murray?
Mr. Murray. Yes. That is a very good question, and we do--
we do a thorough vetting process to approve lenders.
The article is sort of misleading because it is guilt by
association. Because your father did this, your brother did
this or your sister did this, you therefore are somehow guilty.
Any lender who comes in for approval, they are afforded due
process.
We take actions against lenders through the Administrative
Procedure Act. We are very diligent in pursuing individuals.
You may not have been in when, in my opening remarks, when I
was saying that prior to this job, I was housing's top cop; and
I think in the 75 years of FHA, this is probably the first time
we have ever had an enforcement compliance person running the
show. So let me assure you that we are very, very aggressive in
going after individuals and very diligent in doing this.
Now, do we need additional authorities? Absolutely. Do we
need additional resources to help us get to where we need to
be? Absolutely. I do believe in the new loan officer registry
program that would help us even further for local authorities
who sanction individuals who can then feed back to us the
actions that they have taken in the more--a quicker way.
Ms. Waters. If I may just take back my time for a moment.
Are you familiar with Premier and Paramount Mortgage Companies?
Mr. Murray. Yes, ma'am.
Ms. Waters. Are you telling me that Premier and Paramount,
given their background of subprime lending and problems, that
you deem them to be all right to be approved by FHA to do
business with?
Mr. Murray. As I recall, with those lenders, we have no
evidence that they have been convicted or indicted of some
wrongdoing. We have many lenders who engage in subprime and are
perfectly--and even their own subprime bases may be fine.
Ms. Waters. What about Lend America in Melville? Mr.
Ashley, who pleaded guilty in 1996 in Federal court to two
counts of wire fraud, on and on and on; and then opened Liberty
Market, was on 5 years' probation, $30,000 fine, father spent 4
years in prison.
Is it okay to do business with them?
Mr. Murray. According to our attorneys, there is a--I
forget the term--there is a period of time. I guess the
question: When did this happen, what was the offense, is there
a nexus to the business?
For example--I give you a case I can recall--we had a
lender who was convicted 30 years ago when he was in college,
and we found that the conviction was that while he was in
college, he got in trouble with drugs. That did not have a
nexus 30-year forward to his--
Ms. Waters. Excuse me if I may. Obviously, we are not
talking about those kinds of cases. What we are talking about
is this:
Based on what I am reading, I see the bad actors moving
over to FHA because the money has dried up, and they can get
these guarantees. We are going to have a large amount of
defaults and we are going to have to pay.
Now, we really want--I would like to hear from FHA how you
are going to stop this. If you need some help from Congress,
you need to come and ask us what, and tell us what you think we
can do to help us to make sure that we don't--you have one
company, that is doing Alt-A loans. Why would you authorize FHA
backing for a company that is doing Alt-A when Alt-A loans are
at the epicenter of the crisis on these subprime loans?
Mr. Murray. I don't have a legal basis for stopping someone
from doing some other business with FHA. The practices that
they may or may not be doing have no bearing on FHA's business,
because we don't allow that. They cannot put that square peg
into our round hole. It does not happen.
We have many of our best, top, most-respected lenders who
also do subprime lending. That doesn't necessarily mean they
are bad.
Ms. Waters. The argument has been made here, there is some
good subprime lending and bad subprime lending. Obviously, I am
talking about the subprime lending that created the subprime
meltdown in this country and the economic crisis that resulted
from that.
We really do believe that--I believe that FHA does not have
to deal with people who have a record and a history of fraud
and creating problems.
What are you going to do about it?
Mr. Murray. I agree with you wholeheartedly and I share
your concerns with that. As a matter of fact, we are in the
throes of proposing new rules to help us deny these--
The Chairman. Mr. Murray, we are over time. These are very
important questions. We will ask you to respond in writing to
the questions of the gentlewoman, and we may be back to you on
that.
The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Heist, I don't know if you can answer this question or
not, but Mr. Murray indicated there is a thorough vetting
process to approve lenders. That may or may not be true. My
question is, is this vetting process a complete enough process
or should we be doing something more?
I think everybody up here is vitally concerned about rather
questionable lenders. We are hoping that FHA can stop the
bleeding of subprime lending and--etc. And the reports that I
have read and seen indicate to me that failure prediction under
FHA loans is pretty high as well. And I am very concerned about
these lenders, a lot of whom by their previous practices are
pretty marginal.
So do we have the right vetting processes in place? I am
not sure if that falls in your role as Inspector General or
not.
Mr. Heist. I can't comment fully on the vetting process
except to say that regardless of whether FHA is constrained on
its ability to keep people out, we advocate that they--and we
have talked about that in answer to other questions--that they
take advantage of the technologies that are available to be
able to prescreen the loans on a more comprehensive basis
through advances in technology to overcome the--
Mr. Castle. My question pertains to who is being approved
as a lender, who is being approved as somebody they are dealing
with, not to the actual people borrowing in this circumstance.
And maybe you are not qualified to answer that.
Mr. Heist. There are limitations. We have an investigative
case, for example, where at the time the case didn't meet the
dollar thresholds to prosecute criminally, but nevertheless we
pursued a debarment case against the individual. The debarment
is for a period of 5 years; 5 years ran, and the person was
back in business doing the same thing. We took the steps to
have--working with the Justice Department to file an injunction
to prevent that individual.
There are limitations to the vetting process. You have an
example of somebody who was debarred, the individual served
their time, and FHA has to let them back into the program. But
there are things they can do to increase the oversight.
Mr. Castle. Let me jump to Mr. Murray. Do you think we
should enhance or update or make stronger the vetting process,
or do you feel the vetting process is presently successful?
Mr. Murray. No, sir. I fully agree. We need additional
tools to help us to, further, to not allow folks in. There are
many individuals that I will take a look at--
Mr. Castle. When you say you need ``additional tools,'' I
understand the technology and those kinds of things, but do the
additional tools--is this something we should be doing as a
Congress or something that FHA can be doing?
Mr. Murray. That is something we ourselves can do through
additional rulemaking, because as time goes on, there are
different practices, people get engaged in different schemes
and the like. We need to constantly reinvent ourselves and to
move forward.
There are many folks I see as--
Mr. Castle. Why aren't you doing this now? I say this
because we are going from the subprime problem and the
continuing problems with loans in this country, the huge
numbers which you have indicated here today. So if we do need
to enhance the vetting process or the lending process for
insurance purposes, why don't we?
Mr. Murray. No. We are currently--we have a committee in
FHA single family across the board, putting together new rules
and procedures that--to address this subprime issue, to address
the new frauds and the things that we see coming down the road.
Mr. Castle. Let me ask you another question. What is the
FHA doing to review and update its net worth requirements for
FHA originators? Is that part of this?
Mr. Murray. Yes.
Mr. Castle. Part of it is that the lender should be able to
cover potential losses, whatever it may be. And if their net
worth is not higher, that is an issue.
Mr. Murray. To cover losses is not the purpose of the net
worth. But to answer your question, that is one of the issues
we have on the table. We have a litany of things that we are
putting together, drafting, and we are going to propose for
rulemaking.
Mr. Castle. Can you give me a rough time estimate as to
when you think this work will be completed in terms of things
we talked about?
Mr. Murray. We can't do anything until the next
Administration comes on board, and that is my intent, the first
thing when we are asked what we are working on is to present
all these rules that we have.
Mr. Castle. Are you thinking spring or early summer?
Mr. Murray. I am hoping this spring I will have the chance
to present it, once we get an okay to do it. Rulemaking
normally takes 18 months. That is outside of our control, but
that is what it normally takes. But to the extent we can do
things through a mortgagee letter, I fully expect to do it that
way.
Believe me, as a compliance person, I am very aggressive in
handling any potential fraud and people who are hell bent on
doing mischief. That is certainly something that I simply do
not tolerate.
Mr. Castle. Thank you. I yield back, Mr. Chairman.
The Chairman. Since we are not in regular order, I am going
to use some discretion here. The gentlewoman from California,
Ms. Speier, has been a very diligent member of the committee
and spends long hours at the bottom, although the good news for
her is that she has now gained several members to whom she is
senior on this committee. She had a question that was directly
relevant as a follow-up to her colleague from California. In
the absence of what I am sure will not be strenuous objection,
I call on the gentlewoman from California.
Ms. Speier. Thank you, Mr. Chairman.
Mr. Murray, you just said that you are very keen on
compliance and the gentlewoman from California went through a
list of problem lenders, and you suggested that they were
lenders who had very few loans or lenders who had violations
that did not have a nexus. Have you have an opportunity to read
the Inspector General's presentation to the committee?
Mr. Murray. Yes, ma'am.
Ms. Speier. So you are aware then of his reference to
problem lenders. As he highlighted in their audit, he
references a lender who had a number of serious issues related
to RESPA violations, such as paying marketing fees,
noncompetition fees, and quality incentives to real estate
companies in exchange for more than $57 million in FHA mortgage
business. The corporation's license was suspended by the State
of Arizona and has filed for bankruptcy. One of the principal
owners and principal managers reconstituted under a different
name, but operates from the same location. In 2008, HUD
approved the new entity to originate and process FHA loans
despite its principal's prior convictions for RESPA violations.
How do you respond to that?
Mr. Murray. I am glad you mentioned that, because that is
an issue that is very near and dear to my heart. The issue here
is the problems are with the lending entity. The individual was
not subject to that. If that individual had been debarred,
indicted, convicted, fine. I would have some legal authority to
not let them in. Absent that, I have no authority to stop them
from coming in.
Now having said that, that is part of one of the new rules
that we are putting together to allow us to say if you were a
principal of a company, we get a chance to ask you what was
your role, and we can then decide whether or not we will allow
you to come into FHA.
Even without the authority, I have attempted to do that,
but through our own attorneys, they caution me that legally I
cannot do that.
Ms. Speier. Are you saying that you have no discretion to
determine whether or not to allow someone to be a lender?
Mr. Murray. I have no discretion to say because you were a
part of this company, and this company did bad acts, that I can
infer those bad acts to you and not allow you to come in.
Ms. Speier. This is a principal of that company.
Mr. Murray. Yes, ma'am.
The Chairman. Would the gentlewoman yield?
Ms. Speier. I do.
The Chairman. Thank you. That has been very useful. You say
it takes 18 months to do this by rule?
Mr. Murray. For ruling.
The Chairman. But if we were to do it by statute,
specifically give you that authority, it would take a lot less
time, wouldn't it?
Mr. Murray. Yes, sir.
The Chairman. I'm sure the gentlewomen, my two colleagues
from California would want to work on that. Thank you.
Mr. Murray. I will be glad to work with you.
The Chairman. The gentleman from--they gave me the list and
I lost the list. The gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Gentlemen, back in April of last year when this committee
marked up the FHA modernization bill, I offered an amendment
that was accepted by the chairman--it doesn't happen often
around here, but it happened on that particular day--that
required borrowers to agree in writing to be liable to repay
the FHA any direct financial benefit achieved from the
reduction of indebtedness on the existing mortgage that was
derived from any purposeful misrepresentation that was made in
their certifications and documentation.
I had offered another amendment, which was not accepted,
that required that the mortgagor would actually provide
documentation to the originator of the mortgage that certified
that the data was complete and accurate, including statements
regarding income assets, debt, occupancy, and matters of
identification.
The Chair didn't accept that. There was a legitimate debate
and discussion. I think the Chair concluded he felt that was
too onerous. I didn't conclude that, he did, his opinion was
relevant. But as most of the questioning from the panel has
centered upon fraud on the lender part, I want to focus
somewhat on potential fraud on the part of the borrower.
The first question I would have with respect to the
language that was included in the statute is, how is it being
implemented? How are applicants being notified of the process?
Is there a form that they now sign, acknowledging that they
will be liable for the indebtedness for purposeful
misrepresentations? Mr. Murray, what can you tell me about the
matter?
Mr. Murray. I am sorry, are you referring to HOPE for
Homeowners?
Mr. Hensarling. Yes.
Mr. Murray. Yes. We propose to have the borrowers sign a
certification and to provide counseling to them that they are
signing the certification that they will be liable for any
fraudulent statements that they make.
Mr. Hensarling. I'm sorry, I didn't hear the first part of
the statement. This is currently being done? I know the program
has had scant demand.
Mr. Murray. Yes. The HOPE for Homeowners committee, they
have developed a form for the express purpose of notifying a
borrower that they will be held liable for any fraudulent
statements that they make.
Mr. Hensarling. But I am still unclear. Is it currently in
use or is it not currently in use?
Mr. Murray. Yes, it is.
Mr. Hensarling. Okay, thank you. Thank you.
The Chairman. It is called the Hensarling oath.
Mr. Hensarling. I like the name, Mr. Chairman.
Can you enlighten me, Mr. Murray, then just on the general
vetting process? We have talked about the vetting process for
the borrowers. I would like to be enlightened more on the
details of the vetting process for borrowers.
Mr. Murray. Borrowers?
Mr. Hensarling. Borrowers. Again, according to FinCEN, we
had the majority of the mortgage fraud over the last decade
that arose from borrowers misrepresenting their income and
misrepresenting their assets, misrepresenting their occupancy.
So again there is much predatory lending that took place in the
market. I would also offer the opinion there was much predatory
borrowing, according to the Inspector General's observations.
Already the single family program has sustained significant
losses. We have had a 40 percent drop in value. So I am
concerned about, again as I mentioned in my opening statement,
sustaining the fee-based program that we have here, and I am
concerned about what is the vetting process that is being used
on the borrower's side, not just the lender's side to protect
the taxpayer.
Mr. Murray. Yes, thank you, I understand.
We have introduced a Social Security check that we and the
lenders can use to go in to ensure that the person who is
representing themselves is not dead or that they are truly in
fact they themselves who are there.
We validate their employment and we also validate and
verify their income. And we also do Federal checks.
Mr. Hensarling. Now, how are you validating and how are you
verifying? Can you get more specific?
Mr. Murray. Yes, that is part of the loan underwriting
process where you actually go out, using the--
Mr. Hensarling. Clearly, it hasn't been done well in the
past, so I am somewhat concerned as to how are you using it
now.
Mr. Murray. I have no indication that it has not been done
well in the past.
I think it is important to say that the little snippets of
the examples of wrongdoing and fraud by everyone, and I--as an
enforcement person, I can tell you many, many stories. But when
you get down to it, it is less than 2 percent of people who
tend to do wrong things. FHA is no different; it is a macrocosm
of the society as a whole. There will always be someone there
trying to circumvent the system. Having said that, we are very
diligent in making certain we go after those folks, try to stop
them in any way, fashion or form that we can do that. But
historically we have always done verifications of the
borrower's income, to identify who they are, make sure they
don't owe other Federal debt and verify that they are in fact
employed. That is totally unlike in the subprime.
Mr. Hensarling. My time has expired.
The Chairman. Thank you. The gentleman from New York.
Mr. Meeks. Thank you, Mr. Chairman.
Mr. Murray, let me ask you this, one of the big problems I
have had with a number of mortgage brokers is that they are
able to charge what I think is basically almost a kickback. I
know they do it on FHA loan originations also, yield spread
premiums, and these yield spread premiums seems to give the
lenders an advantage for steering borrowers into higher
mortgages than what they actually qualify for. And this has a
devastating affect on poor people and folks who are just
aspiring for a better life, having to pay these yield spread
premiums.
So I would like to know whether or not the FHA, you believe
the FHA loans, which are supposed to be low cost as it is,
should ban the use of yield spread premiums?
Mr. Murray. That is a good question, and I share your
concern. FHA has absolutely no authority over yield spread
premiums. If Congress would like to provide us with that, I
would certainly find it useful.
Mr. Meeks. So you are saying that if we do something
statutorily with reference to that, it would be something that
you would see helpful?
Mr. Murray. Yes.
Mr. Meeks. I agree. Would you work with us on developing
that legislation?
Mr. Murray. I would gladly work with you on any and every
possible thing that we can do to safeguard the Federal funds
and the American public.
Mr. Meeks. We will be in touch with you to make sure we
work on that. Thank you.
Maybe you be help me with something else, because I am
having this huge difficulty in my district also in regards to
foreclosures and I have found that when I was able--I have
people coming into my office every day, counselors and lawyers,
trying to help the number of individuals who are going into
foreclosures, and when we are able to get to the banks, etc.,
we have been able to help some people stay in their homes.
When I look at the voluntary program, on its face, it seems
like it should be good. When I look at the HOPE for Homeowners
Program, it doesn't seem to be as successful. I was wondering
if you could give us any insight as to why, for example, it
looks--I think the statistics say 2.2 million subprime
foreclosures through the end of next year. We have to stop this
hemorrhaging--whether you can give us insight why HOPE is not
working or how HOPE can improve because it seemed like these
voluntary programs are not doing what they are supposed to be
doing.
Mr. Murray. We have been concerned with that, that the
eligibility criteria is candidly a little too restrictive.
Recently, there have been some changes to make it a little bit
more workable and we are now seeing more loans being done. I
think we are now at 380-something applications have been filed
and there are actually 15 loans that have gone to closing. And
so hopefully some of the relief we have given, but candidly we
would love to see further relief and some refinements to that
program.
Mr. Meeks. We then agree that something needs to be done. I
think that is something again that we need to work on very
closely because every day, somebody is being put on the street.
And until we get to the bottom of stopping this problem, we are
going to continually have the economic problems, the problems
of the value of homes continuing to depreciate, as people
leave, neighborhoods are being destroyed, because you homes are
being boarded up. And I am starting to feel that maybe just
voluntary participation in the program is not working. We have
to do something more than that.
The Chairman. Would the gentleman yield? In fairness to the
people from HUD, part of the problem is we drafted it for
homeowners, which we wrote. We did it at a time when there was
a lot of concern that we were being too lavish, too open-handed
and to respond to that we toughened it up some. We may have
toughened it up beyond what current circumstances require.
We have requested, in consultation with HUD and others,
changes in the plan to meet some of those problems, and we are
hoping it will be in the stimulus or maybe in the TARP bill. So
part of that has been offered and we have been working. Some
changes have been made administratively, but we acknowledge
that we were tougher than was workable and we are trying,
without being excessive, to open it up some.
Mr. Meeks. My last question is to Mr. Heist. Again, I am
trying to work my way through this because we are trying to
make the market move again. And it seems as though now the only
one who can buy a house or get involved in a house, I still
believe that the best investment that one can make is in real
estate or into owning their own home if they can afford it, but
now, you have to have a 750 or better score in order to get a
house, which then keeps the market stagnant and we can't get
out of these crises.
I was just wondering and trying to figure out with your
FICO scores of 750 or better being the only way that you can
get a mortgage nowadays, liquidity, thereby shutting down
people who have decent credit can't get a house. Do you have
any ideas or solutions? I would like to hear your thoughts on
how we can deal with this dilemma that keeps spiraling; it
seems like we can't get out of this circle.
Mr. Heist. As someone who is responsible for auditing these
programs, I can only deal with the requirements that are in
place right now. The reality, as you suggested, is a dilemma
and there is a correlation between credit scores and the
likelihood of that loan to default. That is a reality that FHA
has to deal with and factor in when it makes its rules and sets
standards for lenders when they underwrite loans.
The Chairman. One last comment, because I took some of the
gentleman's time.
Mr. Meeks. I yield back.
The Chairman. Thank you. The gentleman from Florida, Mr.
Posey.
Mr. Posey. I thank you very much, Mr. Chairman.
Gentlemen, in last year's Housing and Economic Recovery
Act, a provision was inserted to prevent the FHA from
implementing a risk-based premium pricing structure for the
riskier loans. Under the proposed initiative, in exchange for a
significantly lower interest rate, those with a higher risk of
default would have paid a slightly higher insurance premium.
We have seen a significant expansion of the FHA loans over
the past year. We have seen the balance in the insurance fund
drop by approximately 50 percent. We have seen FHA take on
riskier loans, and we have seen the Congress pass a law that
prevents the FHA from managing risk. It looks to me that the
Congress may have put in place policies that increased the risk
of FHA going into default like it did the conventional market.
Do you think that by eliminating the ability of FHA to
adjust for risk in this manner to fund is less solvent and thus
the taxpayers are put at a potentially greater risk? I would
like a response from both of you. Yes or no would be perfect.
Mr. Murray. First, I would like to say that we don't
believe that FHA has riskier loans, but we would also be very
desirous of having risk-based pricing.
Mr. Posey. Is that a yes or a no?
The Chairman. That was a Senate provision, so don't feel
inhibited in answering fully.
Mr. Bachus. We actually passed a bill and there was
bipartisan agreement in the House to put risk-based pricing in.
It did move to the Senate and a Member there added that
amendment, that amendment prohibiting risk-based premiums.
Mr. Heist. My only observation at the time was implementing
a risk-based pricing and the ability of FHA again to deal with
the increased complexities and the resources in the systems to
be able do it effectively, as far as a concept we were neutral
on that. Just concerned as far as the capacity to implement it.
Mr. Posey. Thank you for following up, Mr. Chairman. But do
you have an opinion whether the ability to do that would make
the taxpayer safer from risk?
Mr. Heist. No, I don't.
Mr. Posey. You really don't, no?
Mr. Heist. No.
Mr. Posey. Do you know who in the world might be able to
give us an answer on that?
Mr. Murray. For us, it reduces the burden of premiums and
the like on the less riskier borrowers. In other words, the
cost for an FHA loan would be slightly less. So in other words,
the risk goes to those who are--need to be the more riskier
borrowers.
Mr. Posey. Thank you, Mr. Chairman. I didn't want to even
take up this much time, but I think it is just a fundamentally
good question.
The Chairman. No, I appreciate it. I think this is a case
of Congress doling out authority to the FHA, so maybe it will
change.
The gentleman from Kansas.
Mr. Moore of Kansas. Thank you, Mr. Chairman. To both of
the witnesses, I think we all would agree that there is a
foreclosure crisis going on in our country right now. FDIC
Chairman Sheila Bair has a plan which I believe is reasonable
to address this problem. I believe we all appreciate the
lenders who are working with homeowners who are refinancing,
modifying loans to keep people in their homes. As Congress
considers how to allocate remaining TARP funds, would it be
appropriate to utilize a substantial amount, perhaps $100
billion, for foreclosure mitigation to keep people in their
homes and address this foreclosure crisis.
I am addressing this question to both of our witnesses.
Mr. Heist. I would defer to Mr. Murray on that one.
Mr. Murray. I am sorry. I really can't answer that. I don't
have an answer for that.
Mr. Moore of Kansas. Do you have any thoughts as to what we
might do to address the foreclosure crisis then if we don't use
TARP funds?
Mr. Murray. I would be more than happy to send you a
written response to that.
Mr. Moore of Kansas. I would appreciate that.
The Chairman. Mr. Campbell from California.
Mr. Campbell. Thank you, Mr. Chairman.
I wanted to ask Mr. Murray, during Mr. Heist's testimony he
talked about the reserve requirement being 2 percent and how it
has fallen from 6 to 3, and we all know about the conditions in
the marketplace and so forth. Since FHA is making--the volume
is up so much, and since there is such a much greater
percentage of the market is now FHA that is going out there,
shouldn't we be making loans now that should be adding to that
reserve requirement and not having it fall quite so much given
all this increased volume? Am I wrong? What is happening?
Mr. Murray. I would initially tend to agree with you that
with the uptick in volume, that does add to the reserve, but
that whole calculation is a highly, highly technical thing with
people who are far brighter than I at HUD who deal with that,
and I would be more than happy to have any questions answered
for you if you would like.
Mr. Campbell. Mr. Heist, I don't know if you are one of
those far brighter people, but take a stab at it.
Mr. Heist. Absolutely not. But I do know that those
estimates are profoundly sensitive to changes in overall
macroeconomic conditions, how much house prices are going up
and down. When you foreclose on a property, given the market
conditions in that particular community, how much are you going
to get on that property? FHA's loss rates, for example, have
been going up from what was in the 30s percentage range up
through the 40s over the past couple of years. So those sorts
of factors really drive how much FHA is going to expect to
lose.
Mr. Campbell. I guess for both of you--and here is where I
am going and I think you can tell that and what I am worried
about, is that we all know no matter how good your underwriting
was, you are going to have losses on things that have happened
because of the drop in house prices and the unemployment that
has continued to increase, etc. So we all know that is going to
happen. But now we have the benefit of knowing that has all
happened as we are making new loans and that presumably the new
loans we are making should be on more solid footing and thereby
should be adding to that reserve.
I guess I am just concerned about this thing, as the volume
gets bigger and the reserve numbers keep dropping, that is a
concern. Is there something wrong with the underwriting that is
going on now? Everybody has touched on this to some degree,
because the underwriting we are doing now is not as good as it
ought to be, and we are putting new loans on the books that are
actually damaging the reserve requirement as we are putting
them on?
Mr. Murray. I think--again, I don't want to step out here.
As a room full of Ph.D.s sort of articulate to us, it is more
of an accounting process that the reserve is small because of
the increase in volume that we took dollars from the reserve to
cover potential losses associated with the new huge book of
business. So it is an accounting function, but that is totally
outside of my ability to even comment on. So I don't want to
mislead anyone.
Mr. Campbell. Mr. Heist, anything more you want to add?
Mr. Heist. Not at this point, no.
Mr. Campbell. Madam Chairwoman, I hopefully--I am not sure
we got a good response to that, but I do think it is something
we need to be concerned about. Clearly, there will be more
volume going through here as we move forward. And that volume
should be helping the reserve balance, not hurting it, I would
think.
Ms. Waters. [presiding]. Absolutely.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Madam Chairwoman. Before I ask my
questions of the witnesses, I want to say thank you to you and
Chairman Frank for having this hearing to discuss FHA oversight
of loan originators. I ask unanimous consent to include in
today's record two documents, a CRS report entitled ``Housing
and Economic Recovery Act of 2008,'' and, secondly, an Overview
of the Conference of State Bank Supervisors, Supervision of the
Mortgage Industry Through Collaboration and Technology.
Mr. Chairman, I ask for unanimous consent.
The Chairman. Oh, I am sorry. As I said earlier, not
everybody was here, since it is not a formal committee we
announced that anything anybody wants to be put into the record
will be put into the record. I can't guarantee anybody will
read it, but it will be in the record.
Mr. Hinojosa. Thank you for that clarification. By the end
of the year, CSBS reportedly will have 33 States on the
mortgage origination system. Only 2 States have not committed
to be on the system, but they likely will join us in 2010 at
the latest. If not, it is my understanding that HUD will be
doing the licensing in those States.
Mr. Murray, I would like to ask you my first question.
Would you like to comment on the performance of CSBS,
considering what is required of the supervisors?
Mr. Murray. Sir, unfortunately I can't answer that. That
issue is not in my office. That is done in our Office of
Consumer Regulatory Affairs.
Mr. Hinojosa. Mr. Heist?
Mr. Heist. Is that the licensing of lenders and brokers?
Mr. Hinojosa. Yes.
Mr. Heist. Only just to say that the States control the
licensing, and we have noted, again given in light of FHA's
resources, there is minimal staff assigned to oversee that
process. And it is a concern of ours that FHA's oversight of
that and ensuring that the States are equipped to do the
licensing that they need to do is adequate.
Mr. Hinojosa. In listening to some of the questions that
some of my colleagues have asked before me, I question why you
have not requested an increase in funding for administrative
staff.
Mr. Heist. I can say that the Office of Inspector General
has asked for additional resources. We, like FHA, are strained
in our ability to audit and investigate single family fraud
cases.
Mr. Hinojosa. Mr. Murray, you said that you all were only
examining 5 percent of the loan applications and you thought
that if given the resources you might be able to increase that
to at least 10 percent of applications. How much money would it
take in resources to be able to do that?
Mr. Murray. I am sorry, I couldn't answer that just right
here.
Mr. Hinojosa. I have been informed that there are a lot of
claims and foreclosures to come before Federal Housing
Administration. So Mr. Murray, in light of this, why has the
FHA not taken the actions to adjust the underwriting
requirements to reflect a changing environment?
Mr. Murray. I think HUD's underwriting requirements are
very sufficient, they are well tested. I think most of the
foreclosures are due to economic conditions. It has nothing to
do with the quality of the loan. It is more like personal
circumstances.
Mr. Hinojosa. The reason I ask that question is that the
area that I represent in south Texas, deep south Texas, 80
percent of my constituents are Hispanic. And I find that the
highest hurdle for Hispanics seeking to purchase loans is the
downpayment. And that of course is getting worse under the
present changing environment that I am talking about. So I
think that FHA is the best path to homeownership for Hispanics
because they seem to be a little bit more lenient on that
downpayment. So I find that there needs to be some changes
considered and, if not, I think that you just don't have a good
pulse as to how difficult it is in regions of the country like
the one that I represent.
Mr. Murray. And I am quite certain that is correct what you
are saying, and it may be so in the conventional market, but
what we find, our--Federal fund rates are relatively low. The
fund rate for 2007 was 6.56 percent, and in 2008, it was 6.9
percent. But that is default, because people go in and out of
default. But the claim rate, which is what costs money, was
1.42 percent in 2007 and 1.3 percent in 2008. So that is a
very, very low rate.
I think that there is evidence that we pretty much have our
underwriting criteria pretty tightly triggered, but we can
always, always look at more. As I said earlier, we have an
internal task force to look across our business front end, back
end, REO and the like, and we are looking at what can we tweak
or fix given today's economic environment so we are not sitting
still. So we will make sure we take a look in Texas.
Mr. Hinojosa. My time has run out, and I have to yield
back.
The Chairman. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you, Mr. Chairman. Mr. Murray, on page
2 of your testimony, the middle paragraph, ``FHA-insured loans
are neither high cost nor high risk for homeowners.'' Do you
see that? It is actually the first page of your testimony.
Mr. Murray. Yes, sir.
Mr. Manzullo. Has FHA always required written verification
of a borrower's employment?
Mr. Murray. Absolutely.
Mr. Manzullo. Is that standard?
Mr. Murray. Absolutely, sir.
Mr. Manzullo. That obviously goes to the borrower's
capacity to meet the monthly mortgage obligation.
Mr. Murray. Right.
Mr. Manzullo. I guess what perplexes me, what bothers me is
July 17th, I believe, we had a hearing here with Fed Chairman
Bernanke who said that the Fed had done a top to bottom review
of all mortgage applications, etc. And they are now going to
require written verification that somebody actually does make
that amount of money once it is put into the application.
However, I believe that requirement does not go into effect
until October 2009. There was a gasp in the room when I asked
Mr. Bernanke why he waited 13 months. He said, ``because we
don't expect the housing market to recover until then.'' I
thought that was pretty cavalier on his part because these are
opinion makers. What I don't understand is why the FHA has
apparently always adopted very common-sense requirements for a
loan; i.e., you have to be able to repay it before you can sign
the note to get the property. I know you can't speak on behalf
of the Fed, but what happened here? You are the good guy.
Mr. Murray. I don't know. I think since 1934, which was
when someone decided that you needed a mortgage that lasted
more than 5 years, underwriting standards were put into place
and they have been continually refined. It is my
understanding--
Mr. Manzullo. What year, 1994?
Mr. Murray. I said 1934. And no, sir, I was not there.
Mr. Manzullo. 1934, okay.
Mr. Murray. The new Federal rules will mimic the FHA's
long-standing underwriting requirements. It is just good basic
business sense.
Mr. Manzullo. You just answered an inquiry as to the
default rate, FHA being 1.5, something like that, under 1.5.
Mr. Murray. The claim rate this past fiscal year was 1.3
percent.
Mr. Manzullo. Is that dollar volume or actual numbers of
mortgages?
Mr. Murray. That is a percentage of loans.
Mr. Manzullo. Pardon?
Mr. Murray. A percentage of loans.
Mr. Manzullo. Okay. So that would be--
Mr. Murray. 1.3 percent of the loans went to claim.
Mr. Manzullo. Meaning that the FHA insurance had to be
used?
Mr. Murray. Yes, sir.
Mr. Manzullo. Okay. That is pretty low, isn't it?
Mr. Murray. Absolutely.
Mr. Manzullo. Do you have any problems with the--it was FHA
Secure that allowed people who had loans that they could not
afford, not because of employment problems, but because of
balloons and teasers, and were allowed to bring those into the
FHA umbrella. It was about 350,000. The program ended at the
end of last year.
Do you have any problem that any of those loans could
exceed the normal rate of default to which you just testified?
Mr. Murray. Absolutely not, sir. We subject those loans to
the same underwriting requirements. And if they don't match,
they don't come in.
Mr. Manzullo. The HOPE for Homeowners Program has been less
than successful. I never liked it in the first place because it
is called a common law composition, which lenders could do at
any time with their borrowers, especially in light of fact that
this Congress at least did something wise where we said that
any forgiveness of principal--as to your principal residence
would not be considered to be imputed income under the income
tax.
Let me ask you an open-ended question. Aside from asking
for more manpower, etc., what do you think FHA can do to even
further improve your performance?
Mr. Murray. I think I answered earlier to the gentleman
over here that what we can do is put together some thoughts on
that. I am not prepared off the top of my head.
Mr. Manzullo. Okay.
Mr. Murray. I think that is a very deep subject and there
is an array of things that we could consider, and that is also
a part of our task force that we are working on now.
Mr. Manzullo. I appreciate that, because we always like to
look at models, government programs that have worked, and it is
apparent that there is a model going here, especially helping
out people who don't have the full amount downpayment that
could qualify under conventional mortgage.
Thank you, Mr. Chairman.
The Chairman. The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman.
This is a critical time. It is important that we prevent a
precipitous decline of home prices in all neighborhoods,
including those of us who represent the high-cost areas. The
FHA loan limit in the Fannie and Freddie limits as well have
declined with the new year. It is my understanding that FHA
actually makes a profit on its larger conforming loans, as does
Fannie and Freddie; and I hope that Congress passes soon
legislation so that the limits for Fannie and Freddie and
essentially FHA are no lower in 2009 in each area.
The Chairman. Will the gentleman yield?
Mr. Sherman. Yes, I will.
The Chairman. That will be in the economic recovery package
as a result of the conversations yesterday. We got the approval
from the Obama Administration. Obviously, it is something near
and dear to the heart of the Speaker; and keeping the loan
limits at last year's level for this year so we can then think
about what we will do going forward will be in the economic
recovery program for FHA, Fannie Mae, and Freddie Mac. Because
the gentleman is accurate that they are moneymakers.
Mr. Sherman. I thank the chairman, not just for those
comments but for his work in achieving a legislative result
that is so important to so many areas of the country and the
country as a whole.
Now, shifting to FHA operations, every mortgage broker is
required to submit an audit financial statement showing a net
worth of a quarter million dollars for some and for the
nonsupervised loan correspondents a $63,000 net worth. The
thing is that net worths of that level can evaporate very, very
quickly. They are not very large. We have seen 313 mortgage
bankers, lenders, and Wall Street firms go out of business.
Their net worth of much, much larger amounts evaporated very
quickly. And so we see that the thousands of dollars spent on
audit fees every year are not available for consumers. Instead,
they go to my old home boys in the accounting profession.
So I would hope that the FHA would take seriously effort
proposals to require a surety bond in lieu of an audit
financial statement or the creation of a recovery fund so those
thousands of dollars that are going to audit fees are instead
going to a fund that will be available for consumers.
I hope to be able to ask a formal question on that issue,
but I want to shift Mr. Murray to another issue.
The National Association of Realtors has expressed serious
concerns about the shortcomings of FHA technology. As they note
in their statement submitted for the record, currently, FHA
operates technology which is an average age of 18 years old;
and Brian Montgomery, FHA Commissioner, has stated that the
software programs are often older than the staff maintaining
them. You still have a COBOL system that is 30 years old.
It is estimated that $65 million is required to upgrade FHA
systems, according to the National Association of Realtors; and
that would not only upgrade the system but provide for
appropriate staffing. What is the status of your current
technology initiatives? When and at what cost do you expect to
bring the agency into the 21st Century?
Mr. Murray. The status is, as I said in my opening
statement, we are managing it. We are using it. We have managed
to do tweaks here and there through maintenance.
Candidly, in one of our 35 systems, for less than the cost
of maintenance, 1 year's worth of maintenance, we can turn it
into a Web-based system that would work fantastically for us.
We can't do it because we don't have working capital funds to
do it.
Our systems are adequate at this juncture, but it will not
sustain itself as our business continues to increase. So we
absolutely need additional funding. Our technology people
estimate somewhere between $20 million a year for us to segment
these certified systems into--
Mr. Sherman. So you feel you need $20 million a year over a
period of how many years?
Mr. Murray. Five years.
Mr. Sherman. $20 million in order to upgrade your
technology.
I don't know whether--all we can do is work with the
Appropriations Committee on that or whether there is a way to
change legislation through this committee that would achieve
that goal. But I can't imagine a better use of funds, given the
new mission or expanded mission of the FHA.
Actually, I believe my time has expired.
The Chairman. The gentlewoman from West Virginia.
Mrs. Capito. I would like to thank the witnesses for
sharing information.
First of all, I would like to ask unanimous consent to
submit my opening statement into the record. I think that was
already going to be done, but I wanted to make sure that was
all right.
In 2008, Congress shut down the avenue of the seller-funded
or the downpayment assistance avenue for FHA borrowers; and I
would like to know what percentage of your portfolio that you
have right now still has those seller-funded downpayment
assistance and what effect you think that might have on your
future portfolio moving forward and what you are finding now
that particular avenue has been shut down?
Mr. Murray. We don't--I don't have those numbers of what
they have, but I would guess that there is a pipeline of loans
that are there. We do know that 30 percent of those would
generally go to default.
Mrs. Capito. Let me just clarify that. Thirty percent of
the seller-funded downpayment assistance loans go to default?
Mr. Murray. Yes, that is correct. Yes. And we do know we
have significant amounts of new volume coming in, so,
hopefully, that would tend to offset that.
Mrs. Capito. Okay. So, hopefully, that will have the
intended effect to steady that downpayment issue.
We also raised the downpayment requirements from 3 percent
to 3.5 percent. What effect does that have? If we are having
more volume of FHA loans, where do you speculate or how do you
document where people are getting their downpayment and are
able to meet that requirement?
Mr. Murray. My staff is confirming what I was thinking.
What we are seeing is going back to where it was before, before
the downpayment assistance program came into being, and that is
from family and relatives and the like.
Mrs. Capito. Thank you.
I would like to say, as the volume of FHA loans has
increased, I know a lot of financial institutions that have put
in applications to become loan originators, I share the concern
of my colleagues of those who have been in maybe the subprime
and less than maybe aboveboard practices can then migrate into
becoming a large vendor, so to speak, for FHA loans. But I
would say I think we want to be careful not to cast a broad
brush here. Because, having been in one of my lending
institutions, a community bank in my own community, they have
an application before the FHA right now to become a lender.
They are a terrific institution that has, I think, a wonderful
reputation for providing great community services, financial
services to our local communities.
I would hate to see a situation where, as we cast a brush
to try to cast out the bad actors, that we then unintentionally
begin to harm the folks who are there doing the right thing,
have their applications in order, and intend to fulfill that
dream of helping folks achieve homeownership. So I would just
throw that cautionary flag before you, having been in several
of these institutions in my State of West Virginia and knowing
they are doing it the right way and want to be able to offer
FHA as a possibility for home buyers.
Mr. Murray. As part of our vetting process, to the extent
that we have the legal authority to prevent someone, a so-
called bad actor, however that may be defined, both from a
personal perspective and a legal perspective, if there are bad
actors, our process is not to allow you to come in. But, having
said that, absent us having that, then we approve them.
Now, if they are so inclined to engage in mischief, we have
so many checks and balances and electronic surveillance in our
operation they could not prevail for a long period of time,
because you will be caught very quickly.
Mrs. Capito. And the taxpayer will be on the hook once
again for the unscrupulous actions of certain folks, whether it
was the subprime lenders or it is somebody moving to FHA and
putting forward unscrupulous practices. It will be not only
that individual homeowner hurt in some form or fashion but all
of us as a general constituency will be hurt as well.
Mr. Murray. Right. Invariably, you have that, no matter
what.
Across the country I would argue--and I think the IG would
even agree with me--there is less than 2 percent of people
probably who stretch out to engage in mischief or wrong
activities. The vast, vast majority of lenders are very good.
They have exercised with extreme integrity.
I do want to point out that we have a process called Credit
Watch that no one else in the industry has that will do
electronic surveillance on a quarterly basis. At a press of a
button, we can examine the default and claim rate of every
approved branch of every approved FHA lender, that's 44,000
views, and the combinations of places they can do business
across the country. Every quarter, any lender who exceeds the
default and claim rate by 200 percent for the local
jurisdiction in comparison with others doing business, we will
send them a proposed termination notice of their branch and in
a 9-day period, we will send the notices, have a hearing and
make a determination whether or not to terminate them or have
them make some corrections and stay in place.
Mrs. Capito. Could I just make one clarification? On the
seller-funded downpayment assistance programs, you mentioned
that 30 percent of those were in default. Would that mean 30
percent of the mortgages in default are seller funded or that,
of the seller-funded programs, 30 percent of those are in
default?
Mr. Murray. Compared to our standard book of business,
seller-funded downpayment assistance as an entity is 30
percent--I am sorry, their loans perform 2 to 3 times worse.
Mrs. Capito. Thank you.
Mr. Murray. Okay.
The Chairman. The gentlewoman from New York, Mrs. McCarthy.
Mrs. McCarthy of New York. Thank you, Mr. Chairman.
Mr. Murray, you just talked about Credit Watch. Is that in
place now or has that been in place for a while?
Mr. Murray. Yes, ma'am we launched it in May, 1999.
Mrs. McCarthy of New York. So if you could clarify it for
me, the way you were explaining it, why didn't we see all the
subprime loaners during these years being picked up a little
bit faster?
Mr. Murray. Because we don't have subprime lenders in FHA.
Mrs. McCarthy of New York. So you are only looking at the
loaners that you have?
Mr. Murray. Yes, we only do FHA. So even if those folks,
the bad actors, were doing subprime and they now come to FHA,
they couldn't fit their square peg in our round hole. They
would be caught.
Mrs. McCarthy of New York. Maybe it is something we should
be looking at to expand then, being that we will not be able to
do that much.
One of the things I wanted to ask you, with your FHA
loans--I work a lot with the Long Island Housing Partnership in
Long Island, New York. We basically--or I should say they
basically work with low-income families, obviously trying to
allow them to buy their first home. Financial literacy has been
a big thing on my part here on this committee. I know we worked
on helping these different groups on educating people on how to
buy a home, to see if they could buy a home.
With your loans, even with your loans, even though they are
lower, do you educate them that it is not just the mortgage, it
is the insurance, it is the electric bill, it is the taxes in
the area that they live? Because, obviously, a lot of people
could buy a home. That doesn't mean they can keep up with what
it costs to keep that home going. To me, that is something that
I personally believe should be mandatory on every single
housing loan.
Mr. Murray. Yes. We have 2,300 housing counselors that we
fund; and their services are free or at very low cost. Part of
their pre-purchase counseling, that is exactly what they do, to
help them establish budgets and help them understand they have
to make a payment. You can't put that off. You put something
else off.
In terms of mandatory counseling, that may be somewhat
problematic. There has been tests of that back in the 1990's
and the like. There are just not enough housing counselors to
go around. If you have it mandatory, you may have a segment of
the population who is not served regularly or soon enough to
enter into a real estate deal.
Mrs. McCarthy of New York. The thing of it is, the housing
authority on Long Island has no defaults.
Mr. Murray. Right.
Mrs. McCarthy of New York. So if you are looking at a cost
basis, who is coming out ahead? Even though--I know it is not
mandatory. Nobody on this committee likes the word
``mandatory.'' I often wonder if we wouldn't be in the problem
that we are in today if things had been done differently that
we have been fighting for, for years on this committee.
With obviously your increased responsibility, and we have
heard constantly over and over again that you need more staff
and higher technology to work into to do what you are doing,
could you give me an idea on the flow of work that you have had
in the last 10 years and what has the growth been on having
staff, keeping staff? We heard you talk about the computers and
what kind of money you need for that. Obviously, that will be a
tough sell on every issue. Because, basically, every branch is
saying they need more help in that particular organization. So
if you could give me an idea of how much more work you are
doing over the last couple of years with maybe the same amount
of staff coming back from the 1990's.
Mr. Murray. Our environment has pretty much tripled. The
first 2 weeks in December, we have seen the largest volume we
have ever had in the history of FHA.
Our staffing levels have been pretty much the same over the
last 4 or 5 years, which is slightly less than 900 employees.
But also during that process, we have been embracing technology
to the extent that we can. For example, we had a contractor and
some staff doing the annual financial audit. We completely
automated that process and--where a system will run through the
audits to find deficiencies, and we maximize our staff
resources by just hiring five accountants to help look for the
deficiencies.
So we have been embracing technologies to the extent we can
and have the monies available to do that. Not only do we want
to fix the technology that we have, we want to embrace new
technologies. There are a lot of things we want to do that
would be state-of-the-art, that we want to embrace.
Mrs. McCarthy of New York. I can't see--my time is up.
The Chairman. The gentleman from New Jersey, Mr. Lance.
Mr. Lance. Thank you very much, Mr. Chairman.
To Mr. Heist, about a year ago, an audit was conducted of
HUD's Quality Assurance Division, and the audit determined that
it did not consistently require FHA-approved lenders to
indemnify loans with similar material deficiencies and did not
always resolve material deficient or potentially fraudulent
loans in a consistent fashion. Sir, could you update the
committee as to what has occurred in the last year and what
steps the Department has taken to ensure that uniform
resolutions to loan underwriting deficiencies are handled in an
appropriate fashion?
Mr. Heist. I believe our recommendations spoke to among the
various homeownership centers ensuring that they are referring
things on an equal footing, making decisions about whether a
particular case was so egregious that it should be indemnified
by the lender. And we spoke to headquarters improving their
oversight of the field just to make sure things are being done
consistently and that when they do have fraudulent loans, they
are referred to the IG.
Mr. Lance. Mr. Murray, would you like to comment on that,
sir?
Mr. Murray. Yes, we both strive for consistency.
With respect to looking at asking someone to indemnify a
loan, it must be material. These things are not one-size-fits-
all. You can have two lenders, in two different parts of the
country, perhaps having the same violations, but there are also
mitigating circumstances and factors that led to that. That is
a discussion in resolving those issues. So you will not have it
100 percent from homeownership center to homeownership center
or even within a homeownership center. Because you cannot just
say, you did this; therefore, you pay that. You just cannot do
that. It is not that absolute.
Mr. Lance. And, Mr. Murray, would it depend based upon the
region of the country and the cost of housing in the country or
would there be other factors?
Mr. Murray. No, it would be mitigating factors, what led to
that or did you subsequently find support documentation that
would allow us to say, okay, we will do something differently.
Mr. Lance. As a follow-up to the question from the
gentlelady from West Virginia, Mr. Murray, what percentage of
the FHA portfolio is in the now-banned seller-funded
downpayment programs? I am not sure I heard the--
Mr. Murray. FHA does not allow seller funding downpayment.
Mr. Lance. Yes, sir, I know that has been banned since
October of 2008. What percentage is in the portfolio now?
Mr. Murray. Before the ban, it constituted 30 percent.
Mr. Lance. Thirty percent.
Mr. Murray. So I would assume it is decreasing--not
decreasing, but with the influx of new loans--
Mr. Lance. Presumably, it is decreasing because of the
influx of new loans. But it was 30 percent when it was banned
on October 1, 2008.
And what effect will these types of loans have on the
capital reserve ratio?
Mr. Murray. That is one of those questions I have to defer
to my office of evaluation for that, but we are glad to get an
answer for you.
Mr. Lance. Thank you very much. I would appreciate that
through the Chair.
Thank you, Mr. Chairman. I yield the balance of my time.
The Chairman. The gentleman from California, Mr. Baca.
Mr. Baca. Thank you very much, Mr. Chairman.
Mr. Murray, many of the foreclosure consultants work in the
best interests of the clients to modify troubled mortgages so
homeowners may avoid foreclosure. However, as the foreclosure
rate has gone up, communities across the country, including my
district, have seen a rise in fraudulent actors to provide
legitimate foreclosure prevention services. Many of these
predatory actors have taken money in advance while not
performing any service at all, leaving many homeowners on the
streets with home foreclosures on them. You probably have seen
false flyers on cars and on homes and on TVs.
Just as with any real estate transaction, those assisting
with loan modifications should only receive payment once a
transaction is complete. In California, a foreclosure
consultant must be certified--and I state--must be certified
under the new real estate laws or pay penalty. Is this
something that FHA might be willing to consider?
Mr. Murray. I think in FHA, there is not that problem. Part
of our process is we require loss mitigation of our lenders.
That is early on in the process, from the first time they
become 45 days behind, the pamphlet goes out. So at least FHA
borrowers are informed or should be informed that these are
resources here to assist you in that.
And let me just add that in the last year, we did over
100,000 loan modifications, and 65 percent of those folks
retained their homeownership as a result of that.
Now the broader picture about these individuals who are--
there are many, many schemes. As we go to conferences, we try
to warn people. But that is totally beyond the purview of HUD.
We certainly cannot do what Justice and the FBI themselves
cannot do. Poor little FHA certainly can't do anything about
that. But to the extent that we might find our own servicers,
FHA-approved servicers, not offering loss mitigation, yes, we
will take immediate action against those guys.
Mr. Baca. You talked earlier too as well about new rules
that are needed. And as we look at new rules, we can come up
with all of the new rules, but we need the enforcement, which
goes back to what the chairman indicated at the beginning:
having the appropriate staff to make sure that the enforcement
is done there, because all the regulations, the oversight, the
accountability, can be there, but if you don't enforce those
laws, then we have these same predators continuing to do what
they are doing right now. I know you talked a little bit about
that Credit Watch, a little bit, but that is something that is
not in place.
Mr. Murray. It is in place.
Mr. Baca. It is is place. Then my question would be: What
legal authority would you need, because that is one thing you
said earlier; you need legal authority. So what do you need--
what do we need to do to make sure you have the legal authority
that we can go after some of these individuals?
Mr. Murray. We are going to propose rules. I don't know--
perhaps with respect to the Mortgagee Review Board, we may need
some statutory changes, making some statutory changes. But I
think for the most part, just through rulemaking we can enhance
and tighten our requirements.
As Ms. Waters was saying, I too am bothered by principals
of an entity who got into trouble, dissolved themselves, and
recreated themselves again. I do not have the authority, absent
these people being debarred or convicted, from stopping that
individual from forming another company. We have that on the
table right now to do that.
What we are trying to do is to say that if you have
unfinished business, unresolved issues, and we are looking that
if you have received a letter from either my monitoring staff
or from the Inspector General's Office, and if you shut down
business once receiving that letter, that we can then hold the
individuals accountable. Because we often, my monitors, as well
as Mr. Heist's folks, when they go out, oftentimes by the time
you send the finding letters to the lenders, they are gone. We
want to be able to hold the principals accountable. That is
rulemaking for us.
Mr. Baca. Did you want to answer, Mr. Heist?
Mr. Heist. On one front, the Congress has acted. Part of
the Housing and Economic Recovery Act provided for increased
penalties, making a criminal offense against FHA equivalent to
that against a financial institution. So we are hopeful that
will give some more motivation for prosecutors to go after some
of these cases. We also agree that going after the principals
is an excellent idea because it prevents being able to set up
shop as another company.
Mr. Baca. My final question--and I know my time has run
out--but in reference to the regulations that were not in
place, when did this actually start occurring? Because I know
that the chairman over the last 2 years has tried to put in
regulations and enforcement, but the regulations were lacking,
and that was part of the problem. When did all of this occur in
the regulations of the enforcement aspect, because apparently
there have been statements that say, we are overregulated, we
don't want government intervention; and yet, government needs
to intervene and needs to have those kind of regulations to
have the kind of accountability and oversights in the
enforcement.
When did this all start happening?
Mr. Murray. People and miscreants engaged in wrongdoing
have always existed. I think what happens is as situations
evolve, we need to evolve with them. There is always the next
mortgage fraud scheme. So I think what we are finding, and we
all agree, is that we are in a particularly difficult situation
now. There may be more and more people who have been engaged in
wrongdoing maybe looking to come to HUD, not knowing that they
probably cannot get away with what they were doing, but
nonetheless we still need to be able to hold folks accountable.
Believe me, my staff, we have 120 monitors who actually go
out on site and get into your books and your business. They are
very, very aggressive individuals. What we need to have as
well, as Mr. Heist is saying, is the authority to hold people
accountable to do the things that we really need to do to make
an example.
Mr. Baca. Let us know how we can help you there.
The Chairman. I will also note that starting in 2002, there
was a precipitous drop in FHA guarantees. It dropped very
significantly. It has gone back up again. I think what has
happened is the staffing hasn't tracked the increase in
activity. It went down in the 200,000 range. It is back up to
where it should be. It dropped by about two-thirds. I think
part of the problem is the lag there in staffing up as there
was an increase.
The gentleman from Texas. I keep ignoring him.
Mr. Neugebauer. I thank the chairman.
Mr. Heist, I think it has been alluded to a couple of times
that there is a model that determines what the current reserve
requirement is, based on actuarially and the portfolio
condition, and I heard you say maybe economic conditions that
are being projected, I guess, forward. Is there third-party
validation on that formula and how it is being calculated?
Because some companies got in trouble coming up with their own
models and leading someone to believe that in fact the reserves
were sufficient, when in turn they were not. So is there third-
party validation?
Mr. Heist. The actuarial study itself is by law required to
be conducted by an independent actuarial firm. That is actually
beyond the auditing realm that I deal with. So there is some
degree of third party, at least with respect to the assumptions
used. Again, this isn't under my purview, but in addition to
coming up with a bottom-line best estimate, they report what
would happen if certain things happened. If you were more
pessimistic in your assumptions, here is what the impact would
be. This is a concern because if things turn out worse than it
was projected back in September, the value of the fund will be
determined to be less.
Mr. Neugebauer. Which brings me to the question that
legislation has been introduced that would allow bankruptcy
judges to cram down lenders, and obviously FHA would fall under
that. Has anybody done any--or thought about doing some
calculations of what impact that legislation might have on the
condition of the fund? Because one of the things that could
happen here, we could actually pass this into law, and the
impacts of that on the fund could in fact cause the actuarial
number to go down; and, in fact, the fund could then be not
meeting the statutory requirement. I think that is important
information for this committee to have.
Mr. Heist. I am not aware of any study.
Mr. Neugebauer. Mr. Murray, who would we request some
evaluation of what impact this legislation would have on the
fund?
Mr. Murray. I will take that back to my principals.
Mr. Neugebauer. Could you put that on somebody's ASAP list,
because I have a feeling that legislation is moving rather
quickly. I think that is important, because the fund has lost
half of its value in just 1 year. So the trend is not good.
Additional legislation in the form of a cram-down could in fact
accelerate that. And I think if that is, in fact, going to
happen, I think this committee needs to know that.
Mr. Murray, the other question I have is, you feel like you
are doing a good job in vetting the people who are direct
endorsers and people who are able to participate in the FHA
program. But while you don't have risk-based pricing authority,
do you feel like you have the latitude on terms and conditions?
For example, have you thought about or is there a policy in
some areas where you have experienced high losses and you have
seen major devaluation in real estate values? Do you have the
authority or are you able to increase the downpayment
requirement on some of those loans?
Mr. Murray. No. FHA has never done this pricing regionally.
It has always been a national--
Mr. Neugebauer. In other words, if somebody applies for a
loan, and they apply for a 3\1/2\ percent downpayment, you
don't have any latitude--or, say, this is an area or a borrower
where we don't feel that it is in the best interest to make a
loan with a 96.5 percent loan?
Mr. Murray. I think the only two requirements are that
clearly if it is in a declining market, we now require two
appraisals. If the individual has a credit score of less than
500, we would require at least 10 percent down. That is a new
procedure we now have. But otherwise, our underwriting criteria
is consistent nationwide.
Mr. Neugebauer. So the credit score drives the downpayment.
Anything below 500 has to be a 10 percent loan?
Mr. Murray. That is the only credit score requirement we
have.
Mr. Neugebauer. What is your minimum credit score?
Mr. Murray. We don't use credit scores at all. The industry
may impose credit scores on our borrowers, but FHA, as a
policy, that is not part of our underwriting.
Mr. Neugebauer. But you do require additional downpayment
for a below 500 credit score; is that what you said?
Mr. Murray. That is correct.
Mr. Neugebauer. So that is really the only time that you
would look at a lesser downpayment, a credit-score threshold?
Mr. Murray. If we do cash-out refinances, that also
requires a higher so-called downpayment.
Mr. Neugebauer. I will look forward to hearing back from
you on the impact of the cram-down on the reserve fund.
Mr. Hinojosa. [presiding]. I would like to call on
Congressman Lynch.
Mr. Lynch. Thank you, Mr. Chairman. I want to thank the
witnesses for their patience today.
Mr. Murray, a long, long time ago in your opening
statement, you said that in your opinion, the sky is not
falling. While that should be reassuring to the committee, over
the previous months we have had a parade of stellar witnesses
who have given us the same expression. I call to mind Secretary
Paulson and Chairman Bernanke who sat in that very same chair,
at that very same table, and said that, first of all, they
said, we had no problem. Secondly, they said, we have it
contained. We heard from Fannie Mae and Freddie Mac that they
were fine, in good shape going forward. So please forgive me
for my skepticism.
While the sky is not falling, the balance in the FHA Mutual
Mortgage Insurance Fund certainly is; would you agree?
Mr. Murray. No, sir, not necessarily so.
Mr. Lynch. I have numbers here that said that last year we
had a balance of $21.2 billion, and today we have a balance of
$12 billion, a drop of 40 percent. That would constitute a
falling balance. Are we cool with that?
Mr. Murray. No, sir. It is in the unencumbered reserve
account. It is an accounting exercise.
Mr. Lynch. I understand how you calculate it. You calculate
a total. You calculated a total last year and you calculated a
total this year. I know you are projecting losses in the
future. But last year you projected--let's see, 40 percent
higher--let's say you projected a 40 percent greater drop this
year than you projected last year, using your own numbers.
Mr. Murray. I would have to say what I stated earlier, that
the actuarial and those sort of things are done out of our
Office of Evaluation. That is well beyond my purview.
Mr. Lynch. Let's go to Mr. Heist. You are the Inspector
General, correct?
Mr. Heist. Yes.
Mr. Lynch. You are familiar with this accounting?
Mr. Heist. Yes. In some limited way, yes.
Mr. Lynch. By statute, the Mutual Mortgage Insurance Fund
has to maintain at least a minimum 2 percent ratio between the
balance in the fund--the projected balance in the fund and the
amount of FHA loans out there. They were at 6.4 percent last
year; and they are at 3 percent this year, after a 40 percent
drop. Correct?
Mr. Heist. That is correct.
Mr. Lynch. The data forecast that was used to project that
is based on June 2008. Is that correct, Mr. Heist?
Mr. Heist. That is correct.
Mr. Lynch. I just want to say, June 2008 is a significant
date for the following reasons: it was before IndyMac, that
failure, which was mortgage-related; it was before the
government takeover of Fannie and Freddie; before Lehman went
under, the largest single bankruptcy in the country, in our
history; it was before the failure of AIG as a private entity;
it was before Washington Mutual went under, which was the
biggest thrift failure ever in this country; it was before the
Citigroup bailout; it was before Morgan Stanley and Goldman
Sachs went out of the investment bank business; it was before
Merrill Lynch collapsed, and also the collapse of Wachovia; and
it was before the unemployment rate went to 6.5 percent.
Now, all that considered, with all that data in front of
us, Mr. Heist, based on all the available data, I am concerned
about this. I think they are going to drop below 2 percent. And
I think they are going to need a bailout from Congress. And you
are somebody who has looked at these numbers. Could you give me
your opinion on this?
Mr. Heist. In fact, the independent auditors who work for
us, who did FHA's financial statements which were published in
the middle of November, said the same thing and expressed the
same concern; that the assumptions that were used may be
optimistic, and expressed a concern that the capital ratio may
indeed decline, at least towards 2 percent. And that is a
concern.
Mr. Lynch. Mr. Murray, anything to add to that? I
understand it is a different department within FHA, and a
different team, but the numbers are what they are. Can you
persuade me that we are not going to approach that 2 percent?
Mr. Murray. No, sir. I am sorry; I couldn't do that.
Mr. Lynch. All right.
Mr. Chairman, I yield back. Thank you.
Mr. Hinojosa. I would like to call on the gentleman from
Texas, Congressman Green.
Mr. Green. I thank you, Mr. Chairman, and I thank the
witnesses for appearing.
Mr. Heist, because time is of the essence, I may not have
an opportunity to ask you questions. I do want to assure you
that this does not mean that I do not love you. I will have to
show you some love on another occasion, possibly.
Mr. Murray, I do have questions for you. Without getting
into statistical analysis or differential equations or vector
analysis, let's talk for just a moment about this default rate
that you referenced a while ago. And I am talking about now
with seller-assisted downpayment.
Do you agree, sir, that if the buyer provides his or her
own downpayment, the success rate for those loans with HUD is
97 percent?
Mr. Murray. I am not aware of the statistics, but I guess
from a general theory--
Mr. Green. I believe it is correct. If you need to confer
with one of your colleagues with you, I will honor that.
Mr. Murray. They are not are from the Office of Evaluation.
Mr. Green. Ninety-seven percent. The success rate for
buyers who receive downpayment assistance from relatives, from
various programs, perhaps a program that a municipality is
affording buyers, is 95 percent. The success rate with seller-
assisted downpayment is 94 percent. If we subtract 94 from 97,
we have a difference of 3 percent. That is 3 times the default
rate that HUD has been referencing.
If this is incorrect, provide me with your statistical
information so that I may have some degree of clarity with
reference to what I have called to your attention.
Mr. Murray. Yes. Again, I really cannot speak to that. That
is an issue I have to get back with the Office of Evaluation.
Mr. Green. Mr. Murray, God bless you. You spoke to it
earlier. That is the reason I am back here. I had other
business to attend to, but I monitor these hearings. You spoke
to it earlier when you indicated that it was 3 times, I
believe, the default rate. Did you not make that comment
earlier?
Mr. Murray. Yes. HUD has long been on record saying the--
Mr. Green. Mr. Murray, you need to look into this
statistical information because it is entirely misleading if
what I have said is correct. Because what it causes one to
conclude is that the 3 times is some large number, some large
difference between the seller-assisted and the case wherein the
buyer actually pays his or her own downpayment, because 94 from
97 gives us 3, and that is the 3 times that HUD has been
referencing.
Again, if you have specific information to the contrary, I
beg that you give me the specific information to the contrary.
Mr. Murray. Absolutely.
Mr. Green. When you provide this, if you would, sir, I
would like to, for our purposes, have some timeline. How long
do you think it will take you to provide me with this
information?
Mr. Murray. My staff tells me we can possibly have our
office do it today.
Mr. Green. I understand. Staff tells me most things too. So
I appreciate what you are saying. It is exceedingly important
that we deal with this, because the seller-assisted downpayment
program is one that I support, Mr. Murray. I want to make my
position very clear, transparently so.
I support it, Mr. Murray, because we have many persons who
can make mortgage payments but don't have a downpayment. I
support it, Mr. Murray, because many persons who receive
downpayments from relatives are still having that benefit with
HUD, but the persons who get the downpayments from the seller
do not. And for those who would contend that this may create
some sort of collusion, we can move to what is known as a
blind-pool appraisal process, something used by the VA. The VA
utilizes a blind-pool appraisal process such that you don't
have collusion between the appraiser and any of the parties
associated with the loan itself.
I am honored to visit with you on any occasion to talk to
you about this, because I will be moving in this next session
of Congress, along with colleagues--by the way, I don't like
using the personal pronoun ``I.'' Most things are done with
other people. It is just that in this environment if you don't
say ``I,'' sometimes you lose the opportunity to let people
know that you are doing things. So I only use it for the
purpose of letting people know that I am involved. But I would
like to talk to you more about it.
I thank you for your testimony today, and I yield back the
balance of my time.
Mr. Hinojosa. Thank you. I would like to now call on
Congresswoman Melissa Bean from Illinois.
Ms. Bean. Thank you, Mr. Chairman. Thank you both for your
testimony today.
I want to go back to something that Congresswoman Speier
mentioned earlier. She had talked about some of these past
convictions of individuals and firms who are now applying for
FHA involvement and participation in their applications.
You have talked about lack of resources and an extensive
increase in the number of applications you are receiving, which
makes it even harder to go through. In the Business Week
article that mentioned some disturbing examples of those who
are now participating in the FHA programs but had been
contributors to the subprime crisis that we are now all
suffering through, in their past practices there was an example
of one individual who didn't include their criminal record in
their applications. In many cases, there are many firms and
individuals being investigated who have not yet been convicted.
Is it my understanding--and you can correct me if I am
wrong--that it is only those who have been convicted that you
have to consider. And if that is the case, do you have
suggestions on what you prefer to see as the criteria so that
you can better weed out those individuals and firms who are
contributing those types of practices as bad actors?
In other words, should they have to report investigations
or associations with or past employment with firms who have
been under investigations or convicted?
Mr. Murray. We have requirements where we do look at past
criminal activities and behavior and the like. The article is
kind of difficult to follow because there is a theory of
present responsibility. So when was one convicted, what did
they do when they were convicted, how does that play into the
action?
Yes, there are a lots of things that we want to do to try
to tighten up the requirements that will give us the ability to
say no, we don't want you to participate in FHA. Right now we
don't have that authority. We are very limited in what we can
and cannot do. And I mentioned earlier, clearly if we have an
entity that has been sanctioned, we can act on that. Because
the entity has been sanctioned and its principals chose to
reestablish itself, I don't necessarily have a basis for going
after that person unless someone took an action against that
individual, like a debarment or a conviction, or those sort of
things.
So, yes, there are things we want to do. But let me just
clarify one thing though. Even though we have tripled the
number of lenders trying to come back in, we have not lessened
our requirements at all. It will take as long as it takes to go
through a thorough investigation and review of an individual
before we approve them to come into our program.
So that is why it does take longer, and people complain
about that, but so be it. We are very, very mindful with our
gatekeeping, and not anyone will come into our program. If, as
I said earlier, if people would come in and choose to make
mischief, we have so many systems in place that you will get
caught sooner as opposed to later.
If I might, we have a process that no one else in the
industry has, whereas a lender--or let's say broker for
example--I don't want to pick them out, but if they wanted to
do bad paper in the conventional market, they would send it to
several different sponsors, and that sponsor would notice, hey,
this guy is sending me bad paper.
When you come to FHA, you can do the same thing, but I
track the performance of your loans by you. I don't care where
you send them, it is being tracked. So they all start going up,
I know that, and I can terminate your participation at least
for a 6-month period until you fix the problem. So we have that
and no one else has that.
Ms. Bean. Was that the Credit Watch that you were talking
about?
Mr. Murray. That is the Credit Watch.
Ms. Bean. I am only going to interrupt you because my time
is running out. Just to clarify, you are open to further
suggestions and further restrictions from this body?
Mr. Murray. Yes, absolutely. But whenever we put too many
restrictions on things, it just will not work.
Ms. Bean. Just eliminating bad actors.
Thank you. I yield back.
Mr. Murray. Thank you.
Mr. Hinojosa. I now call on Congressman Bill Foster from
Illinois.
Mr. Foster. Thank you.
This is for Mr. Murray. If the current trends continue,
have you done an analysis of how your rates would have to
change to preserve the 2 percent reserve fund? Are you in a
situation where you can make a relatively modest change in your
rates and have the reserve fund stay healthy?
Mr. Murray. I would not be in a position to speak to that.
That is all done through the Office of Evaluations, and they
are constantly doing these models.
Mr. Foster. I guess maybe this is a similar question, but
are you aware of any analysis where if there is, as many people
expect, a further 15 percent or 25 percent drop in real estate
prices, what that would do to the reserve fund?
Mr. Murray. I am not personally aware.
Mr. Foster. Would you be able to get that information to
us?
Mr. Murray. Yes. We can get it from the Office of
Evaluation.
Mr. Foster. In regards to the Credit Watch Termination
Initiative, you say that the lenders with a relative compare
ratio greater than 200 percent are subject to proposed
termination. First off, is the 200 percent 200 percent of the
nationwide average, or some sort of local average?
Mr. Murray. We do this at the branch level because we are
concerned about the effect on neighborhoods. So we do it at the
branch level. So if a particular branch of a lender, if his
relative default and claim rate is higher than that of the
national rate, and is also 200 percent or more of the local
rate, there--
Mr. Foster. They make allowance for neighborhood conditions
and so on.
Mr. Murray. Yes, because we are comparing them with other
lenders who are doing business in the same jurisdiction.
Mr. Foster. Which is sensible.
What fraction of these are actually terminated of the ones
proposed for termination?
Mr. Murray. We have not put a number on that. I can tell
you at one time it was like 80 percent we sustained termination
on. Eighty percent. That was at one point in time, maybe 3
years ago. That is not something we track deliberately because
we don't want the industry to believe that we have a quota and
that we are trying to get the folks. We want them to understand
it is a fully administrative proceeding. You can make your
case, mitigating factors, and we will review the facts.
Mr. Foster. When an originator starts originating a large
number of mortgages that default promptly, are there any other
financial penalties that they suffer immediately?
Mr. Murray. First of all, we believe from a monitoring
standpoint that any loan that goes in default within the first
2 years, they are subject to monitoring. Those are the ones we
target. Clearly, any loan that goes into default within the
first 6 months, we assume it is more of a problem with the loan
as opposed to borrower circumstance.
Mr. Foster. My question is: Does the originator suffer
promptly when he starts shoveling out a bunch of things?
Mr. Murray. Credit Watch is the quickest thing that one can
do. But at 6 months, they are required to go back and to
reassess why that loan went bad. Now, through our monitoring,
as we go out to the field and we look at fact base to see what
caused that, we then will request an indemnification if we find
there is a material violation.
Mr. Foster. What I am fishing for is, there was some sort
of deferred payment or penalty that would kick in so they
wouldn't get paid the full amount--or something like that.
Mr. Murray. That is what indemnification would do.
Mr. Foster. That is sort of a retroactive thing. I was
thinking if it was automatic, if they knew for sure that if
this thing defaulted for any reason that they simply wouldn't
get their last payment. Something like that.
Mr. Murray. We don't have the same authority that is done
in the private sector where when you bring bad paper, they make
you buy it back. We cannot do that.
Mr. Foster. Okay.
My last question: What is the role of tax records in
verification of income, and is there a useful legislative or
technological initiative that might make them more useful or
more immediately useful?
Mr. Murray. For borrowers or for lenders?
Mr. Foster. For borrowers.
Mr. Murray. That is what we use them for.
Mr. Foster. So you take the Social Security number and ask
the IRS, hey, is this income real?
Mr. Murray. We don't currently do that today, but that is
one of the things we have in our proposal.
Mr. Foster. It is on your technological roadmap. But you do
access tax records by asking the IRS?
Mr. Murray. The lenders do that.
Mr. Foster. The lenders get tax records.
Mr. Murray. It is up to the lenders to verify income and
employment and the like, and they do verify the tax records.
Mr. Foster. By going to the IRS, or does the mortgage
applicant provide them something?
Mr. Murray. There is an electronic process that they use.
Mr. Foster. So it doesn't represent a hole that fraud is
leaking through.
Mr. Heist. It would take a legislative change, but OIG has
advocated making those sorts of income verification mechanisms
available. There is a whole host of privacy questions that have
to be debated as part of that. Right now, the lender has to
verify the income through the borrower and through the employer
that the borrower says he is employed with. That wouldn't
necessarily catch all income, and it might not be the most
administratively efficient way to do it.
Mr. Hinojosa. Thank you. I would like to advise everyone
that in approximately 15 minutes or so, we expect that there
will be some votes. I have visited with the chairman, and if
any member here would like to come back and ask questions, you
may do so. So let me move forward and get as many as we
possibly can, and work with me and we will give everybody an
opportunity to ask their questions.
I would like to ask Congressman Walt Minnick from Idaho if
he has any questions.
Mr. Minnick. Thank you, Mr. Chairman.
Mr. Murray, I gather from your opening statement that you
think CitiBank is mistaken as a matter of public policy in now
approving of the restoring of a bankruptcy court's authority to
modify mortgages?
Mr. Murray. No, sir. I am only speaking about FHA.
Mr. Minnick. You think that would be appropriate policy.
Mr. Murray. I am only speaking in terms of how that affects
FHA and Ginnie Mae. We don't have the authority or the
financial wherewithal to pay the investors.
Mr. Minnick. I know you don't. But as a matter of public
policy--in your opening statement, you said you opposed any
kind of cram-down authority to a bankruptcy judge.
Mr. Murray. I was just talking FHA. It was not a broad
statement. Only FHA. I just wanted to bring that to this body's
attention.
Mr. Minnick. Even with respect to FHA, wouldn't giving a
bankruptcy judge that authority keep more people in their homes
and reduce the number of foreclosures and ultimately the cost
to FHA lenders?
Mr. Murray. I was not prepared to offer a personal opinion.
That would be a personal opinion of mine.
Mr. Minnick. So you have no view on the topic.
Mr. Murray. No, sir.
Mr. Minnick. I would hope that your Administration would
see the wisdom of giving a bankruptcy judge that authority. And
perhaps you could convey a message back that there are members
of this committee who believe that if we are going to keep
people in their homes, if we are going to make purchasers of
credit-backed mortgage securities do a better job of due
diligence, that we need to have that authority in the system.
Thank you very much, Mr. Chairman. I yield back the balance
of my time.
Mr. Hinojosa. At this time, I would like to call on
Congresswoman Suzanne Kosmas from Florida.
Ms. Kosmas. Thank you. I appreciate the opportunity to be
here. Frankly, most of the questions that I had in mind during
the course of the conversation have already been asked. But
referencing back to those questions asked by Congresswoman Bean
and to the Credit Watch, I too--we have been full circle,
starting with the Business Week article and the difficulties
described there, and then your very healthy confidence in FHA
and its ability to control and maintain the processes as well
as the requirements.
At the same time, it seems that the article that does refer
specifically to one specific lender that had 9.2 percent--I
think was the number of its loans in default-- and I heard you
talk about a suspension or termination for some period of time.
I guess I am more curious what enforcement measures that
you have beyond that for lenders who obviously are way outside
the realm of normal in the numbers of loans that they are
producing that go into default. That is significantly higher
than your 1.3 percent you described as the FHA number.
Mr. Murray. For that article we have to put that 9.2
percent in context. And I think that was a national number. I
think where we would look at where they performed their
business, there were only like 218 percent.
What I can say, two of those lenders we have absolutely
zero problems with that we have done an array of look-sees at.
We have had absolutely no problems. There are another three, I
believe, we have looked at prior to this article, and they were
already on our radar. We have reviewed them, we have taken
certain actions, we have made certain recommendations and
referrals to the Office of Inspector General by law, as we are
required to do. That just helps to support that even if you
come in, you will get caught if you continue your practices.
But Credit Watch is just the tool to do that. We have no
other authority to deal with people. It is not a violation to
have a high default claim rate. That is not a violation of our
program. But Credit Watch is a tool that we use to put you in
check; that if you do, we will give you a time-out.
Ms. Kosmas. I certainly appreciate that. Although it
appears minimal, as you can understand the reason for the
hearing and the reason that we are here is the fear that the
explosive number of FHA applications and mortgages that have
occurred during this time when the public, our taxpayers, have
lost their confidence in the processes in the financial sector
applies also to FHA.
While, as I said, I respect your confidence in what you do
and your ability to defend FHA's programs, and I certainly,
having been in the real estate business for 30 years, I think
much of what you say is entirely accurate, but we are in a new
ball game, so to speak.
My question to you would be specifically: If there were
greater opportunity for you to enforce some stricter standards,
if there are consistent situations in which the numbers higher
than what you deem to be an acceptable amount for any company--
and I am not trying to single out any company, just trying to
put you in a position where you have the opportunity--we have
talked about ways in which you can prevent; now I am talking
about ways in which you can stop the hemorrhaging if you do
have bad actors who are causing this problem to be exacerbated.
Mr. Murray. Absolutely. I have never been accused of being
shy about going after people. We are standing at the doorway
very diligently. We are very interested in any additional tools
that we can use. As a matter of fact, in Credit Watch, we are
expanding that and we are actually going to monitor the
performance of the underwriting lenders as well. Currently, we
do the origination, but now we are going to do the
underwriting. So we are tightening it up.
Ms. Kosmas. I guess what we are all saying is, tell us what
you need in order to fill your toolbox so that we cannot wake
up one day and say, we saw it coming but we didn't do anything
to prevent it. So we would appreciate being partners with you
in making that happen. Thank you.
Thank you, Mr. Chairman.
Mr. Hinojosa. Thank you. I want to give ample time to the
Congressman from Florida, Alan Grayson, to have his questions
heard.
Mr. Grayson. Thank you very much, Mr. Chairman.
Mr. Heist, how many FHA mortgages are outstanding today?
Mr. Heist. I don't have that information. I would have to
get it for you.
Mr. Grayson. Mr. Murray?
Mr. Murray. Possibly 4.5 million.
Mr. Grayson. Any idea how many Fannie Mae and Freddie Mac
loans are outstanding today?
Mr. Murray. No, sir.
Mr. Grayson. Since the housing crisis began 2 years ago,
how many of those 4.5 million loans have gone to foreclosures
claims?
Mr. Murray. Our claim rate in 2007 is 1.42; in 2008, 1.3.
The claim rate.
Mr. Grayson. So if there were 4 million, can you help me
with the math?
Mr. Murray. One percent of 4 million. Let me look from this
standpoint. We have approximately 38,000 homes in our
inventory. Typically, in the last 2 years--sorry; we have about
50,000 homes in our inventory. We sell about 38,000 a year, for
the last 2 years. Those are the ones that have gone to claim.
Mr. Grayson. So, cumulatively, somewhere approaching
100,000 homes since the housing crisis began; is that correct?
Mr. Murray. I guess.
Mr. Grayson. That is the number that have gone into
foreclosure during that time that are FHA-loan houses, correct?
Mr. Murray. Yes.
Mr. Grayson. Now, how many people have actually been
convicted of mortgage fraud since the housing crisis began 2
years ago?
Mr. Murray. I have no idea. That is probably something in
the Office of Inspector General. Now if you are talking very
specifically to FHA, any instances of fraud--because we make
hundreds of referrals to them each year, and we are required by
law to do so. I think we did 700 last year. So any incidences
of fraud we refer to the IG's Office of Investigation for
further review. They have to tell you from there.
Mr. Grayson. Right. But my question is, how many people
have actually been convicted of mortgage fraud since the
housing crisis began?
Mr. Murray. I don't know. That moves beyond the realm of
what we do.
Mr. Grayson. Let's explore that a little bit. You said you
have made 700 referrals. Of those 700 referrals, I think you
said, each year, how many of those resulted in a criminal
conviction?
Mr. Murray. Once it leaves us--because of our agreement
with the Office of Inspector General, once we make a referral,
that is their domain. We are no longer involved. Our hands are
off. So I do not track that data. I have no knowledge of that
data.
Mr. Grayson. Mr. Murray, aren't you a little bit curious to
know what happens after you make a referral like that? You are
accusing people of criminal fraud, and you seem to lose track
of them.
Mr. Murray. Not the ones that we take action against. I
know fully well what happens to those. We refer those to the
Office of Inspector General. They have their own reports and
audits.
Mr. Grayson. Mr. Heist, would you like to try to answer my
question?
Mr. Heist. I have the statistics right here, but that is
for the entire Department. We would have to break that out for
you and submit it to you for the record.
Mr. Grayson. All right. My question specifically is: How
many people have been convicted of criminal fraud since the
housing crisis began? I am talking mortgage criminal fraud. How
many?
Mr. Heist. That is the number we would have to get for you.
I would be happy to do that.
Mr. Grayson. Any idea? Is it a thousand?
Mr. Heist. One thing to keep in mind, criminal cases take a
period of time to get to us. So I would suspect that the number
would appear fairly small, because we are seeing cases now that
were in the pipeline when FHA's volume was low. As the volume
increases, we will expect more cases to come in. Very few of
those would likely have been criminally convicted at this
stage.
Mr. Grayson. The statute of limitations is 5 years, Mr.
Heist. How many people have been convicted of mortgage fraud in
the past 5 years? How many?
Mr. Heist. I don't have that information. I would be happy
to provide it.
Mr. Grayson. A rough order of magnitude, please?
Mr. Heist. We don't know at this point.
Mr. Grayson. Will you please provide the information? I
think the American people would like to know.
You provided information that said that 6.5 percent of FHA
loans are in default, and you said that you use Credit Watch
and Appraisal Watch to try to keep that amount in check and to
keep the foreclosure claims in check. How many lenders actually
have been terminated from the FHA program since the mortgage
crisis began? I am not talking about branches, I am talking
about lenders. How many?
Mr. Murray. I may have that here.
Mr. Grayson. I see my time is up, so maybe you can provide
that separately. I will point out to you that given the
increase in approved lenders in the past 2 years from 692 to
over 3,300, it seems that this would be a good time to do some
culling. Maybe you could make sure that lenders who have 3
times the default rate are excluded from the program because,
after all, inclusion in the program is not a right, it is a
privilege.
Thank you.
Mr. Hinojosa. Thank you, Congressman Grayson.
At this time, I want to thank the two witnesses for taking
the time to testify before our committee. We all appreciate
your appearance. This panel is now dismissed.
The chairman will bring up the second panel following the
last three votes we are now in the House, that is taking place
now.
I declare this portion in recess.
[recess]
The Chairman. I am sorry, guys. When we scheduled this, I
didn't anticipate votes today. So I thought we would have been
able to have fewer members around. This committee, we were
hoping to shrink it, but instead it got bigger.
I would, just as a courtesy to people, tell people that in
the future I am probably going to have to try to do more
hearings through subcommittees. It is unwieldy, and it is nice
to have people who want to be members, but we will have to deal
with it.
So I appreciate your staying around for this is directly
relevant. And I am here and, more importantly, the staff
members are here who will be listening.
So let us go ahead.
Mr. Courson, let us begin with you.
STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MORTGAGE BANKERS ASSOCIATION (MBA)
Mr. Courson. Thank you very much, Mr. Chairman. Good
afternoon, Chairman Frank, Ranking Member Bachus, and members
of the committee. Thank you for inviting the Mortgage Bankers
Association to testify this afternoon on the Federal Housing
Administration and the risk and rewards that come with the
Agency's recent growth in market share.
As someone who has been an FHA-approved lender for 40
years, I have special appreciation for the important role FHA
plays in our Nation's housing mission. When FHA began to lose
market share to subprime, MBA was one of the first to advocate
for legislation to modernize FHA. While some argued that FHA
had outlived its usefulness and should be allowed to wither on
the vine, we at MBA felt that more borrowers, not less, should
be encouraged to utilize its programs, programs we knew to be
safe, sound, and affordable. And so, with so much credit drying
up, it has become a lifeline to borrowers and a key component
to our Nation's economic recovery.
I would like to take a moment, Mr. Chairman, to acknowledge
the priority this committee has given on a truly bipartisan
basis to reinvigorating FHA. Working together, we passed a
strong FHA modernization bill as part of last year's Housing
and Economic Recovery Act. Many of the provisions of that
legislation were ones MBA had advocated even back in the years
when I was its chairman, reforms that will allow FHA to play an
expanded role in the current housing crisis for years to come.
Now, here is the good news: These efforts have worked and
FHA is back. It has gone from a mere 3 percent of the market
share 18 months ago to a healthy 20 percent today. That is
quite a rebound, and it is where we believe FHA should be.
But as we applaud FHA's turnaround, that increase in volume
is a double-edged sword that requires FHA and FHA-approved
lenders to be more vigilant than ever about who is allowed to
originate FHA loans. Much like you, we are concerned that some
unscrupulous lenders may now be turning their attention to FHA
and its programs. To be clear, MBA strongly opposes mortgage
practices that jeopardize consumers and damage the reputation
of the mortgage industry.
In the next few weeks, Mr. Chairman, MBA will be unveiling
its FHA agenda for the new Congress. Let me touch briefly on
the issues that will be at the heart of this agenda.
First, we need to provide FHA with greater resources, both
staff and technology, to expose and eliminate lenders that do
not uphold ethical standards. MBA has long supported an
increase in staff and newer technology to enable FHA and Ginnie
Mae to better serve the housing market. We are grateful
Congress has authorized funding for this purpose under HERA,
and now we want to work with you to ensure these funds are
appropriated.
FHA faces enormous challenges in managing its programs in
an ever-changing world, and it would be unfair to expect FHA to
respond to the housing crisis with anything less than our full
support. Moreover, MBA believes that FHA cannot keep pace with
an industry that is becoming increasingly technologically
driven as long as it lacks the authority to use its revenues to
invest in technology. Improvements in the FHA system will allow
it more effectively to manage its portfolio, thus increase
efficiencies and lower operational costs. Such an investment
would yield savings far in excess of any initial cost.
Second, we need to approve the quality of FHA originations.
MBA believes that an integral part of protecting the soundness
of FHA is ensuring the mortgage lenders and mortgage brokers
that participate in the program and originate FHA-insured
mortgages have the confidence and the wherewithal to protect
consumers and taxpayers from undue loss. MBA supports a bonding
requirement for mortgage brokers to participate in the program,
just as there is such a requirement in place now for mortgage
lenders.
We all support net worth requirements to assure that every
lender has a stake in the industry. We believe this committee
and Congress were right to reject proposals over the last 3
years to lower FHA's financial requirements.
And, finally, we continue to push for ways to reduce
mortgage fraud. As FHA endorses more and more mortgages, its
insurance fund runs the risk of being exposed to higher levels
of mortgage fraud. According to the Mortgage Asset Research
Institute, reports of mortgage fraud increased 45 percent in
the second quarter of 2008 from the same period of the previous
year.
Mr. Chairman, on behalf of MBA, we look forward to working
with the committee on our shared priorities: stabilizing the
markets; helping keep families in their homes; and
strengthening regulation of our industry to prevent future
relapses. I know it may be a little difficult for some people
to believe, but I am here today as the president and CEO of MBA
to say that we need more and better regulation in this field.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Courson can be found on page
60 of the appendix.]
The Chairman. Thank you.
Mr. Hanzimanolis?
STATEMENT OF GEORGE HANZIMANOLIS, CRMS, FOUNDER, BANKERS FIRST
MORTGAGE INC., AND PAST PRESIDENT, NATIONAL ASSOCIATION OF
MORTGAGE BROKERS (NAMB)
Mr. Hanzimanolis. Good afternoon, Chairman Frank, Ranking
Member Bachus, and members of the committee. My name is George
Hanzimanolis, and I am the past president of the National
Association of Mortgage Brokers and the founder of Bankers
First Mortgage. Thank you for inviting NAMB to testify today on
FHA oversight of loan originators.
The FHA program has helped insure over 34 million
properties since its inception in 1934. The program was created
to help home buyers who may have had some financial problems in
the past or didn't have a lot of money saved.
Since subprime products have slowly dissipated and
conventional loans are very difficult to obtain for some
borrowers, the FHA program has become a viable alternative. As
such, the FHA has experienced an increase in interest among
loan originators and borrowers.
There are significant differences between subprime and FHA-
originated loans. The FHA has some controls in place to prevent
losses similar to those seen in the subprime market. If HUD is
able to identify problematic individuals, properly monitor its
mortgagees, and is empowered to disbar them in a reasonable
timeframe, losses should be minimal; however, even conservative
mortgage lending is expected to have some losses. In times of
economic instability, FHA premiums may need to be adjusted to
cover added risk.
In order to provide stronger protection to the FHA
insurance pool, NAMB believes Congress should allow risk-based
pricing for FHA premiums and repeal the 1-year moratorium or
implement a complete government subsidy of FHA loans.
There are three types of FHA loan originators: supervised
mortgagees, which are depositories; nonsupervised mortgagees,
such as mortgage lenders who are not depositories; and finally,
nonsupervised loan correspondents who are often mortgage
brokers who originate for one or more sponsors. A loan
correspondent must be sponsored by a fully approved supervised
or nonsupervised direct endorsement mortgagee who agrees to
underwrite and fund the FHA loan.
Mortgage brokers never underwrite the FHA loan. A
sponsoring lender always underwrites the FHA loan and makes the
final lending decision. There are eligibility requirements,
including HUD policy and regulatory criteria a mortgage broker
must adhere to in order to become an approved FHA loan
originator regarding operations, employees, credit checks,
licensing, auditing, and more.
To become more effective in compliance and enforcement,
NAMB suggests the following: remove the $250,000 and $63,000
net worth; require FHA originator applicants to be on an
individual basis and subject to registry requirements of the
SAFE Act; update the Neighborhood Watch early warning system;
and increase the efficiency and speed of reviews performed by
the Mortgagee Review Board.
Net worth is a false predictor of honesty, integrity, and
performance; and a minimum net worth does not indicate the
competency of the originators within the company. Current
market reality as witnessed by hundreds of mortgage bankers,
lenders, and Wall Street firms that have gone out of business
proves that net worth can disappear quickly and without notice.
Net worth is not available when a borrower seeks redress.
Instead of the mandate for a net worth, NAMB suggests the
implementation of a recovery fund whereby every FHA loan
originator must contribute to such a fund in order to originate
an FHA loan. Similar requirements are standard for any person
who wants to become licensed in the State pursuant to the SAFE
Act.
Since 2002, NAMB has called for the licensure and
registration of all mortgage originators through background
investigations, testing and continuing education. I would like
to point out that this committee was the first to respond to
the need to track individuals. NAMB is very proud to have been
part of this process and to finally see the bill become law.
The SAFE Act should help to keep track of all FHA loan
originators as they now have to be part of the loan registry.
Since the tracking system created by the registry applies to
each individual and not each company, NAMB recommends that the
FHA application for loan originators apply to the individual
and not just the company. If the application process was set up
this way, it would be easier and more efficient for HUD to
track bad FHA actors.
In order to monitor compliance, HUD instituted the
Neighborhood Watch early warning system to identify mortgagees
who have unacceptable default rates. However, 24 months must
elapse to achieve a true average. NAMB recommends that HUD
update the Neighborhood Watch early warning system and expedite
the recognition of high default rates.
NAMB also suggests that HUD put more resources towards
improving the Mortgagee Review Board process, including
computerization.
Finally, the temporary increase in FHA and GSA loan limits
in the Economic Stimulus Act of 2008 is having a significant
impact in the high-cost areas, particularly in the California
housing market. For example, in October 2007, FHA insured only
688 mortgage loans in the State. A year later, the FHA insured
over 14,000 home loans in California. Under the proposed new
limits by FHFA and FHA, most areas in California and other
high-cost areas are scheduled to experience significant
reductions due to the transition for the terms of last year's
stimulus bill to permanent loan limit provisions in the Housing
and Economic Recovery Act.
We look forward to working with you and HUD to help sustain
the FHA program and all it has to offer consumers. Thank you.
[The prepared statement of Mr. Hanzimanolis can be found on
page 67 of the appendix.]
The Chairman. Thank you, Mr. Hanzimanolis.
Let me begin by saying that is striking. I have been a big
advocate, as you know, of keeping the loan limit. I just want
to be clear on all of it. The single most variant price in
America, based on geography, is housing price because of the
immobility. Virtually every other price, given the mobility of
things these days, is either uniform or varies very slightly.
House prices, housing not being mobile, vary greatly. For the
Federal Government to maintain one single house price, it has
to be either too high somewhere, too low elsewhere and skewed.
I am pleased to be able to report to you--you probably
heard this as you patiently sat through this longer hearing
this morning--that in the economic recovery plan, there will be
legislation that will keep the loan limits up for this year.
And then, because it is not healthy to do it year by year, I am
hoping that this year we will set a higher limit indefinitely.
What we have also done is--standard metropolitan
statistical areas were not geared to be a predictor of the
relevant house price because you can have an SMSA with widely
variant housing markets even within one area. So we have given
the administrators the authority to set subareas for the
purpose of assessing the appropriate median.
But as much as I was for that--those figures you gave us,
something like 600 to 14,000--it is one of the best
demonstrations of the success of an action that I can see. So I
thank you for that.
Let me just do a couple of things. As I understand it--
because in order to be honest, there was some concern before--
the ranking member had been a strong advocate of mortgage
licensing, and that wasn't always one of the most popular ideas
he put forward. But I take it that there is now general
agreement that is an important thing to do; is that correct?
Mr. Courson. From the mortgage banker's standpoint, that is
correct. And I will admit--being the new CEO, I will admit that
we were opposed to individual license fees, as the ranking
member knows, for a number of years. But, look, we are in a
situation now where we need to restore faith in the mortgage
industry, and there are a number of bold and aggressive actions
we need to take.
So we are in support.
The Chairman. I appreciate that. And you were very lucky
that the ranking member is far more gracious than I. So he will
accept your acknowledgement in that spirit.
But I appreciate the point you made about regulation, and
that if that is done right, regulation is promarket. The
absence of regulation can be very bad for the market because
confidence is an important part of a well-functioning market.
And when people don't have confidence, you get a resistance to
participating. So having people know, okay, I am going to be
dealing with this individual, and he or she is licensed by a
competent authority, that is one step--not the only step--
towards giving people some assurance.
Let me just ask one more question and turn it over to--Mr.
Hanzimanolis, you gave a list of things you thought could be
done to improve things. Could you tell me which of those could
be done by regulation, which would require a statutory change?
If you don't have that--if you don't have it now off the top of
your head, let us know because we do want to make these--yes,
sir.
Mr. Hanzimanolis. We will have a list and we are going to
release it next week.
The Chairman. Let us know we can do--which ones are
statutory and which ones are not.
Let me ask one other thing. It has been--on risk-based
pricing, by the way--you follow as well, that came from the
United States Senate; and I think it had its motivations in
some people who were in some competitive situations. I have
this one concern about risk-based pricing and that is, I don't
want a hardworking man or woman making $50,000 a year who takes
a loan and makes the payments ultimately to have to pay a lot
more than I would pay. And I would like to work out a way so
that the risk-based pricing, that the burden falls on those
people who are risks, but not unduly on everybody. And I will
ask your help on that. I would like to return the right to do
risk-based pricing, but in a way that does not unduly damage
people in lower incomes.
But let me ask you about the only other controversial one,
seller-financed downpayments. Do either of you have any views
on that?
Mr. Hanzimanolis. Our position has been to support the
seller downpayment assistance in the past. We are evaluating
that now, and especially given the numbers that we hear--
The Chairman. Let me make this--Mr. Courson, let me ask
what your sense--
Mr. Courson. We are opposed to that, the seller-financed.
I was--I just resigned as chairman of the California
Housing Finance Agency, and those housing financing and many
other downpayment assistance programs are available to
borrowers for FHA loans that are not seller--
The Chairman. Let me put it this way.
I think there is--and many of my colleagues who represent
minority communities have been interested in this. I think
there is a burden that exists on those who think seller-
financed has a role to play to show us how we can do that to
minimize the risk. And we would be willing to entertain that,
but I think that is what is going to be have to be done. So I
invite you to work with others to see if we can find ways to
minimize the risk.
We had proposals for a minimum credit score and some other
things. Mr. Olson, behind me, did very good work in trying to
make that less of a problem without throwing out the whole
thing. So we will need a consensus if we are to go forward.
The gentleman from Alabama.
Mr. Bachus. Thank you. Let me ask Mr. Hanzimanolis, you and
Mr. Courson, what are you all doing to encourage lenders to
defend themselves from fraudulent mortgage schemes? Are there
any programs that you have found helpful or that you believe
that Congress could benefit from knowing about?
Mr. Courson. We are very concerned. Obviously, it is a
strain on us and our members and our industry. So what we are
doing are a couple of things.
We have developed a model mortgage fraud bill, and we are
taking that to the States--to each of the States and
introducing a model fraud bill that really puts--in many States
mortgage fraud is not even in the same category as other fraud.
So this would create a statutory basis in each State to
prosecute on a criminal basis mortgage fraud.
The second is that a group of our members--and we are
working--we are doing the work for them--are putting together a
mortgage fraud database. This will be--it is a very expensive,
very big project. All of our large members are in it, and they
will be able to submit--and this will have mortgage insurers,
lenders as well--data on fraud that they see either by their
employees who have been terminated or by borrowers into a
database. They are going to make no judgment as to whether it
is or is not guilty--not guilty and so on. But the data is
going to go in and be able to be shared by a broad base.
We need transparency. We need to have transparency between
lenders on fraud that is taking place one against the other.
Mr. Bachus. Sure. How about the mortgage brokers?
Mr. Hanzimanolis. The National Association of Mortgage
Brokers developed the Lending Integrity Seal of Approval. We
rolled that out this past year, and it holds mortgage brokers
to a higher standard in addition to all the things that you see
in the SAFE Act, which is the equivalent background check.
Before it was ever required, we required a criminal
background check, education, ethics, and then also adhering to
our code of ethics and best business practices. And anyone who
is found not to comply with that would be thrown out of the
association and reported to the State associations and also
possibly the regulators, depending on what the situation was.
Secondly, as mortgage brokers, we are always working with
our lenders, our large lenders, and we have a number of them
that are industry partners within our organization. So we meet
with them regularly to try to determine what issues there might
be in the marketplace and how we can better make corrections
within the industry to prevent fraud.
I think we are making some great steps in that direction.
Mr. Bachus. Thank you.
Let me ask both of you: You have heard a lot about
bankruptcy cram-down, and it is back again. I will tell you
that I am uneasy about that provision because I--it sounds
wonderful, and it actually--since it applies to other
properties, it almost seems like a fair thing to do. But I am
concerned that it could cause maybe even almost an immediate
increase in the cost of a mortgage or in the interest rate that
is going to be factored in and everybody is going to pay it.
Do your associations have concern about these proposals?
Mr. Courson. I think the mortgage bankers' concern is
probably pretty well-known by this time about the cram-down,
and we are concerned. And we are concerned not only for the
immediate effects; it is the long-term effects on the markets
and the security holders.
And, frankly, thinking about where we are at FHA, I will
tell you that Mr. Murray this morning talked about the fact
that if there is a cram-down, FHA will not pay the lender the
amount of the cram-down as part of the claim. That means that
lender, therefore, has to pay that and has to, more
importantly, advance that cash through to the Ginnie Mae
security holder.
Even for big lenders, that is an issue. But for your
smaller and medium-sized servicers, it could get to the point,
Congressman, where they frankly just don't have the cash or
capital. And now what have we done?
Ginnie Mae takes the responsibility of making good on their
guaranteeing passing back. So there is--I won't take your time,
but there are many issues that have to be addressed despite an
agreement that we heard about yesterday. I wouldn't say that
was a real agreement in terms of really addressing all of the
issues that need to be addressed, particularly the FHA--
Mr. Bachus. My concern has been an increase in the interest
rate. But I think what you are saying is that another concern
is not only just the availability of mortgages, but what you
are saying is, a shift or the private market won't be able to
come back as quickly, I guess, is that--
Mr. Courson. Congressman, I know that history tends to
repeat itself. And once you statutorily change a contract by
allowing a cram-down, the market looks and the investor and the
worldwide markets look and say, can it happen again? And the
fear is, if an FHA who doesn't have the authority to pay those
claims--if you are an FHA lender and you fear that coming back,
what you might do is raise the downpayment requirement despite
the fact that FHA will take this 96.5 percent loan, you--to
protect yourself and your customer. So it has a lot of
ramifications.
Mr. Bachus. All right. I agree. And if you all would like
to submit a letter concerning that I would invite you to do so.
Or--
Mr. Hanzimanolis. It certainly is not an easy topic, and
our board of directors has met several times to discuss it
because while we definitely see there are concerns in the
marketplace and how it could be affected, we also look at the
other side of that from a consumer standpoint on how many
foreclosures could be out there. So it took several board
meetings to discuss this in great detail.
At this time, we support the cram-down because we feel that
if there are people with second or third homes that can easily
have their mortgages crammed down, why shouldn't a first-time
home buyer or someone with a primary home have that same right?
With the Citi announcement yesterday, we are evaluating
that to see if we agree with that completely, with that
position. But at this time, it is something that we are taking
the position that we support the cram-down, which some people
may find strange that someone on the lending side of the
business would do that, but we feel is a more responsible road
to take.
Mr. Bachus. Is that just a blanket ``we support it'' or is
it let us maybe--it is going to be hard to abrogate contracts
in the past, so I am not sure you can support it except for
going forward. I think there are some real constitutional
problems.
But let us just assume that we are talking about mortgages
that are made tomorrow or the next day, because after the law
is enacted, I see tremendous problems. I don't think you are
ever going to get something that the courts are going to ever
give a green light on. I think you are going to see injunctions
and all sorts of legal action.
But let us just say that you were to agree to something
going forward. Don't you have some unease about making that
permanent as opposed to just say they were reacting to an
emergency and we are going to do this for 6 months and see if
it works?
Mr. Hanzimanolis. I think when I say it not an easy
decision to make, it is not clear to say I am going to take
this one side completely. I think--I know our association feels
that is some merit in the cram-down. But the details are very,
very important.
So I agree with you, Congressman, it is not something that
should just be, yes, it is an absolute endorsement of it. We
need to make sure the details are right. That is why we are
evaluating Citi's position that was announced yesterday and how
it can be instituted to help the consumers and at the same time
not affect the lending side of the business.
Mr. Bachus. Yes. I think even a short term--a shorter term
to it and an expiration date if you are going to do it, I think
that only makes sense because I think there are--there had been
pretty much bipartisan agreement before the last 2 or 3 months
that this is not a good thing, particularly not long term.
Thank you.
Mr. Courson?
Mr. Courson. I was just going to respond to that. I agree.
And when you look at what was discussed yesterday, despite
their opposition to it, if, in fact, there is going to be an
agreement, we need to make sure that all the elements of the
agreement are considered--FHA, VA loans perhaps being exempted.
If it is crafted because of the subprime issue, then let us
include subprime loans. Let us have a sunset period. And maybe
there should be a waterfall that says no Congressman, and no
Senator wants to put people into bankruptcy. Maybe there ought
to be a waterfall that says, you go through these steps with
your servicer, and if you don't qualify for A, B or C, then
move into the cram-down with these strictures in it.
Mr. Bachus. I think those would all be moves in the right
direction and I think would minimize, at least short term, some
of the effect. You agree to these things and they are with you
for the rest of your life. And so I would caution you about
responding to an emergency with a permanent fix. Thank you.
Mr. Kanjorski. [presiding]. I am not going to take very
much time because it is getting late. I just wanted to welcome
to the committee my good friend, George Hanzimanolis. He is not
only a constituent of mine, but a friend of mine. And he is a
very progressive individual in the real estate community.
Mr. Bachus. Mr. Courson is, too.
Mr. Courson. Thank you.
Mr. Kanjorski. The question I have, just to sum this up is,
all day today I have been sitting in meetings that give some
pessimistic views of what we can expect and where we are going.
Could you tell us your opinions of where we are vis-a-vis
real estate, the deflation that is occurring in real estate?
And if you anticipate a turnaround in real estate and the
economy, when and under what circumstances? It gives us an
opportunity for some of the viewers of this meeting to get an
optimistic view before we bring this hearing to a close.
Mr. Courson. Mr. Chairman, as the new president and CEO, I
am sure that my research and economic department will shudder
when I respond to your question, but I will.
I think our view is--and we have said clearly that this not
going to be a quick turnaround. This is going to be a slow
process, and I think the market in terms of real estate values
and so on--remember--I must say that we have to remember that
there are few States impacting a large amount of the numbers
that we are seeing. And being from California, being one of
those States, there are many parts of the country where, in
fact, we have seen the diminution of value the way we have
others. So it is a very uneven--when you look at it globally,
it is a big number. But it is very uneven regionally.
But having said that, I think that the greatest concern now
is we were seeing real estate obviously decline. Now we have
the jobs issue. People have to have jobs. We are now moving
into delinquencies and loans coming into default that are prime
loans because of the lack of economic activity and the lack of
jobs. So we are into another set of borrowers. So we think that
until you solve the jobs issue, until the economy can start
moving forward, we are not going to see a substantial
improvement in prices.
Mr. Kanjorski. George?
Mr. Hanzimanolis. I agree with Mr. Courson. It is not
something that turns quickly, but I think there are things we
can do, especially with regards to FHA, that may be able to
help us move this along. Certainly, the more mortgage programs
that are available to the consumer, the quicker the inventory
dries up; and I think we all agree if inventory--if more people
out there are able to buy homes and the inventory dries up,
then we will start to see things move in the right direction
again.
That is one of the reasons in my testimony I mention the
idea of eliminating net worth from mortgage brokers when it
comes to offering FHA and, instead, putting in a recovery fund.
It is more responsible and it allows mortgage brokers to be
able to offer the FHA product to more people. Those people who
deal with mortgage brokers throughout the country would have
access to homes, easier access to credit and I think that would
help.
We also--the $7,500 tax credit that was passed and is in
effect until July 1st; personally, as a mortgage broker dealing
with customers every single day--it is a wonderful program and
very, very well received by the consumers. I would love to see
if that is something that can continue on because a lot of
people are coming out and buying homes now because of that.
So certainly jobs are an issue and these others are issue,
but what we have control over here is helping the real estate
market; and I think including mortgage brokers more, by
allowing them to offer more products, would certainly help the
consumers and help the economy.
Mr. Kanjorski. Thank you, George.
We are now at that time where the Chair notes that some
members may have additional questions for this panel which they
may wish to submit in writing. Without objection, the meeting
record will remain open for 30 days for members to submit
written questions to these witnesses and to place their
responses in the record.
The meeting is adjourned.
[Whereupon, at 2:16 p.m., the meeting was adjourned.]
A P P E N D I X
January 9, 2009
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