[House Prints 111-C]
[From the U.S. Government Publishing Office]


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






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




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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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