designed to enhance its ability to manage risk and specifically the decision to hire a chief risk officer probably well way overdue in your opinion while these recently announced measures are important steps i continue to be concerned about  fundamental to the future viability of the program and i look forward to hearing today about the steps being taken to bring into the twenty first century i would like to congressman adler on their bill h r thirty one forty six the twenty first century appropriate for the current market we have all heard about these mortgages were not even the first payment has been made a monitor first payment default rates so what what statistics do you have on these and what recourse do you have with the process and i was saddened to see that the ratio may drop below the two percent threshold mandated by the same token i have read where you indicated that we still have thirty billion dollars in reserves and that that thirty billion dollars will take us through the next several years where in the quiet that we are having to cope with at some point bottom end we may find ourselves on an upswing but i do the last eight or nine years could never get any traction in doing that and recently people realize that has to be dealt with and they have done effective job dealing with that and it's to make you restructured f h a you look at the appraisal problems you had in the past you looked at the underwriting problems default codes you've gone through it i think you've done an excellent job terminating how to make f h a profitable and viable in the future and i think you're probably going to find that today but many people don't realize what you made changes on the problem  areas that people think it's what it used to be and it's not if it wasn't for f h a there would be no housing market today in my opinion people are in a very difficult situation people who own homes have lost tremendous amounts of equity people want to buy homes at a point where they can finally afford to buy a home but if it wasn't for the work you're doing in the marketplace and on those opportunities would never be available i can't imagine what level housing prices would be today if you weren't serving the people you are serving because when you have far too many homes in the market there's just no loans available continue to drop i've never seen a time in the years i've been plan a critical role in the housing market in our economy right now insuring a third of all home purchase of home purchase mortgage mortgages and eighty percent of its purchase loans are for first time home buyers but as you know f h a recently announced that  independent non governmental actuarial review is expected to predict that f h a capital reserve will fall below two percent there's been considerable confusion about what this announcement means for an overall fiscal health whether this means the taxpayer will bear any responsibility going forward and so i welcome this opportunity to clarify our situation and to discuss the proactive steps being taken to ensure that f h a remains financially sound so that we can continue to support and revive our housing market let me simply state the outset that based on current projections absent any catastrophic for their home price decline f h a will not need to ask congress and the american taxpayer for extraordinary assistance we will not need a bailout  to reserve accounts which combined currently holds a record level of more than thirty billion dollars in cash reserves which is more than four point four percent of our insurance and fourth holds reserves for projected losses over the next thirty years this is far more conservative than international standards for banks or other financial institutions the capital reserve account is a plus reserve account that holds cash reserves in excess of the cash reserves held in our financing account this is somewhat analogous to a checking and savings account scenario the financing account or checking account serves to pay claims and losses and receives any payments from the public while the capital reserve the savings account surplus cash so why is the capital reserve ratio predicted to fall below two percent that's because the capital reserve ratio only measures how much capital is in that secondary reserve account in light of the severe decline in home prices overall performance of the economy and future housing price projections expect higher net losses than previously estimated on outstanding loan guarantees over the next thirty years as a result surplus funds will be transferred from the capital reserve account to the financing account that change will drive that secondary account ratio down below two percent however there will still be a substantial funds remaining in the capital reserve account over and above the necessary reserves held in the financing  meet future expected losses this is not a semantic point while these funds were transferred from the capital reserve account to the finance and account they have not been spent in fact even as we experience historically low exceptional conditions in the housing market  have reserves of more than thirty billion dollars in combined financing and capital reserve accounts i hope this visual helps but if you look at the two at the at the capital reserve the combined accounts as of september thirtieth the capital reserve portion was well above the two percent threshold as of the last report the financing account held the amount of funds needed to pay forecasted losses based on that independent review now that there's thus putting more money in the financing account to pay expected losses less money will remain in the capital reserve account below that two percent threshold requirement yet overall the combination of our capital reserve will be higher than it's ever been while private mortgage insurers lenders wall street firms and the g s participated in both owner occupied and investor on market they were exposed to exotic mortgages such as option arms interest only underwriting this response bill approaches allowed us to limit losses during the economic crisis and fulfill our mission of providing safe opportunities for homeownership to those who can afford a home still i am committed to ensuring that the agency takes every step possible to provide a clear direction to address this mortgage crisis in support of the president and secretary donovan's policy and vision to remain financially healthy for the long term i've already begun to improve portfolio analysis and risk management tighten risk controls and overhaul our targeting of monitoring we've made more significant credit policy changes in my first two months here than f h a has made in decades we've brought a new leadership with broader and deeper knowledge and skills and a tighter set of risk controls for the agency recently hired a new deputy assistant secretary for single family started this week and we are in the process of hiring our chief risk officer to oversee the single family division that we want devoted solely to managing a minute to the insurance and how that transition since then in the fall of two thousand and seven starting around august with the beginning of american home which ultimately led into the collapses of lehman and more and more again and others in the industry that  were engaged in the subprime marketplace particularly the sudden collapse in the industry affected this loan officer pool which was prevalent across the country originating those kinds of mortgages and what i saw when i was on the outside world running large financial institutions was a sudden migration almost overnight of what i would describe as rogue players on the margin who went to the industry to originate  loans that they could originate many of whom migrated to the program to originate loans that were in the manually underwritten band of the product which allowed them to use subjective decision making to do those loans that clearly impacted the books of business in two thousand and seven and two thousand and eight and that performance data is showing up very clearly into today's balance sheet and has a direct impact on this capital environment that we're in today a lot has changed since  then the first and foremost most financial institutions started by putting credit score floors on to their book of business but f h a as well other things that they were doing to improve that book of business most importantly the changes that we've put into place in recent weeks in my first two weeks on the job we suspended taylor being in whittaker which had a much lower credit profile portfolio profile compared to other institutions in our portfolio that was an institution i had watched on the outside and when i came in we immediately began a deeper investigation only to find that they had not submitted timely financials and that their behavior it was not acceptable to the f h a standards we suspended them within twenty four hours they had to close their doors which shows the weakness of that institution the changes that i made around capital that we're proposing by rule making now that will change the capital standards for the industry will do two things one it eliminates generally capitalized mortgage participants who should not be in the business and cannot back up representations and warranties the second thing that changing the capital will do it was all it will allow our team which is very qualified but has resource limitations to focus on the remaining sector of the industry to make sure that their manufacturing loans according to the quality except expected of the f h a well i thank you very much basically what you're telling us is that the quality of the loans that you're making the competence that we don't have to worry about extraordinary request any time soon let me let me just be very clear the quality of the two thousand and nine book is very different than the quality of previous books that's not just in our data but the actuarial data that's on the federal reserve board our average credit score is up significantly over previous years bordering  sixty six ninety from about six thirty the percentage of our business below six twenty five goes which is the worst performing book has dropped proximately fifty percent down to about ten percent and so we're not getting that kind of tail risk in the business as we would call it in the credit risk management world and in the data portfolio is very different i do want to articulate however that i am making certain that we take every step necessary to get the capital level to where it needs to be the steps that announced just in the past few weeks are in my opinion were very clear immediate steps that needed to be taken to make sure that we do things above and beyond whatever product quality would naturally do to get the credit characteristics k in my in my professional opinion looking at the role that f h a plays in the market our primary focus and the secretary's primary focus is to ensure that the housing market gets back on track today as we look at the portfolio the need for risk is not clear and in our professional view looking at the credit characteristics and the demographic characteristics of those who need and obtain insurance on their for their mortgages to buy their home we believe there could be an adverse in the industry and this individual will play a role to help be a arbiter an independent objective advisor soley focused on credit risk management when this individual comes in we'll will take that da review how he builds his team and take that into judgment without question in terms of decisions are made going forward let me ask you about the two reserve accounts that you have indicated th does not apply to on both sides the capital reserve as measured off of the secondary account which is really by law stated to be excess reserves above and beyond the reserves that need to be held to pay for forecasted claims but it's mandated by congress to stay at the two percent or above level correct correct ok so in the second one it falls below that because you're scraping the money off to meet what you anticipate future losses may be that's correct that ok let me just ask you where are where is this money is it actually in an account somewhere where you can draw down on it or is it like the social security trust fund out there well the money is held in the treasury is it held in a special account designed solely for the capital reserve we'd have to ask the treasury how they hold those funds what i would tell you and i think it's critical i've talked about this with other interagency is within the government in any this is true excess capital that was generated through collections that are held that are not being applied to losses those funds in any financial services standard would be our real capital and so how the treasury deploys capital just like a bank a bank will hold capital reserves every individual want to withdraw tomorrow their money from a bank would the bank have that money in the balance sheet i can't answer that question nor can i attest to what the treasury holds its reserves today related to obligated fun but i will tell you that it is real capital and it is real excess reserves and it is specifically and in fact of the moves that we take money from how do you anticipate moving that blue line up to the two percent if you're into supporting that the losses that the possible losses if you could occur we're looking at a market here now where we have rising unemployment we have reflection of the economy in general how do you anticipate moving that blue line and what point is that years into the future and how long can that point with a congressionally mandated  level of two percent so the remedy and we can talk about that maybe secondarily give the give the role of the secretary to get it back above two percent but before i go there let me just  answer that the real core to your question the independent actuarial review although it's not complete because it doesn't have the final fiscal year close september numbers and we don't expect it to vary significantly but the independent review is going to show that the f h a m m i fund will get back above two percent on its own above two percent within the next two to three years and the reason for that is the way the capital will grow is that it will grow because new insurance is coming into the balance sheet at record level with try to characteristics that are significantly different than passbook years particularly two thousand and seven and two thousand and eight and let me just share with you a couple of factors that the actuarial audit took into account when they were coming up with this when they were looking at the forecast of the fund they assumed three several key dynamics but i want to share a couple of dynamics they assume that claims on the two thousand and seven book of business actual claims would run at twenty four percent more than double the worst year in history almost it and that the two thousand and eight mortgages that  correct is that what is and i understand it correctly that total claims on the claims on the two thousand and seven book in total would be twenty four percent that's right correct and that the claims on the two thousand and eight book would run is about twenty percent now we'll see those numbers may vary slightly based on their final forecast but it's going to be close to that level that we expect to be in the review the second think it's going to use it's going to use a forecast receive from global insight who i believe is on the next panel that did a home price appreciation forecast now they'll revise home price or in depreciate well in this case of the depreciation forecast thank you and this was a significant change over the previous forecasts a year ago the audit was completed and provided to congress used a global insight forecast which forecasted that the home price market would bottom out towards the end of this calendar year in the in the forecast that's being used for this upcoming audit by our independent auditor the forecast is based on information from about a month ago which shows that home prices will not bottom out until somewhere in the end of the first quarter of two thousand and nine and home prices  end so that revision in that home price forecast which is somewhat conservative based on many of the forecasts we're hearing which i think is a well founded way to look and evaluate the strength of the fun that additional endeavoring to put in place if you would as briefly as you can because i have a theory of that i'd like to go into how this will function with the risk mitigation officer how will that and i appreciate your support of the moves we're making i've worked in a variety of financial institutions i was a senior vice president at freddie macas executive vice president wells fargo i've never been in a financial institution that hasn't had  officer that was the first move i promoted coming into f h a and the chief risk officer in f h a will function at an equal level to any direct report i have at the deputy assistant secretary level will also be directly involved  risk management discussions with the secretary and other senior leaders within interest ministration discussions as we talk about risk management so this individual becoming a direct report position to me this individual also act as a completely independent organization within f a a and i will be coming back with a request to create a broader organization under this individual over time to ensure that this  organization is resourced to the level needed to to appropriate we analyze and impact risk management with policy recommendations over time thank you that may be a vote that if it is i'd like to be fair to my colleagues so i'll be brief with my next question the net worth requirement for the mortgage that you're seeking to make sure that they are properly capitalized would you give just a brief explanation of how you plan to protect this congressman i appreciate the question as you know this is in this is a rule making procedure so it will go out for public comment what we have proposed is as is a capital breakdown of tangible versus non tangible capital which i'd be glad to talk about in further discussions but we've analyzed the ability to back up representations and warranties made by an institution in my estimation a million dollars should be the minimum in today's mortgage industry market with the loan sizes that we experience today in the marketplace that amount of capital is needed just to back up a limited number of claims that that an institution may have to support should they manufacture a loan incorrectly so moving to do something with the loan correspondence to make sure that they are  their own mortgages those loans are sold on a wholesale basis and underwritten and funded by a wholesale lender albeit wells fargo or bank of america whoever is alternately funding those loans for them mortgage brokers act as  essentially an extension of a lender and to that extent to be in the position of monitoring institutions that are clients of banks is not a position we should play and was the secondary market  place in the industry just to put it in perspective freddie macin fannie mae never monitor or approve mortgage brokers they only approve direct sellers and it really comes down to resource capacity and the ability to have those resources be able to inspect that level of institution in the marketplace or tens of thousands of mortgage brokerage companies in america if they had all the approval we would have to come to congress and of the thousands to be able to monitor but it will remove the obligation to the taxpayer and the government have to monitor these tens of thousands of mortgage brokers who do not actually underwriter fund their mortgages we believe it will be expansive to the marketplace as a net effect but at the same time it will control risk and fraud by putting that responsibility on the backs of the institutions that have the capital to back up representations and thank you madam chair i will yield back thank you very much for additional outside of that we think it's had some impact on first time home buyer access to the marketplace i think the exact impact is being measured right now by the administration and we'll we'll see as on certain markets so just to give you a perspective on that at f h a in our total portfolio loans over four hundred seventeen thousand dollars are about two percent of our portfolio so very little use of the dollar loan limits has been however from it would be you know if you're looking at a five hundred thousand dollars sales price today and you have a family that wants to buy a home they're qualified they have income they have good credit but for lack of a fifty thousand dollars down payment which would be ten percent or one hundred thousand dollars down payment which would be a hundred which would be twenty percent they can't buy a home and that could retard the recovery of community so with about a twenty thousand dollars down payment they can buy that home through remember these are fully documented borrowers with jobs good credit there's no stated income no nothing but a thirty year fixed rate mortgage in the program and so we believe that the program in markets such as california other high cost markets is having a closely at the data and we talk about it and look at look at the markets very carefully and others who are testifying here today will have their own opinion we believe that the higher the higher limits have had a direct impact and with the absence of capital  conforming loans we believe there could be an impact if the private market capital is not readily available online and that's over the traditional conforming loan limits so we do think at this point it's had an impact and we'll look to see what what the results  are of that extension as a relates to the first time homebuyer tax credit there's a variety of data that we have been looking at both in our own data the national association of realtors has published data about it we do know that there's been a large number of first time home buyers we do know that go have a profound impact i think it's going to be very important to conduct which is a highly contentious roll that's been put out in the industry primarily by freddie macin fannie mae the most important thing that it did to help the industry was separated in the transaction from a commission earning sales person to the individual examining that collateral and to that extent having that separation i will tell you from my professional experience of almost three decades in this question from western new york where we never really had a housing boom to bust and it's a very conservative area where people have are careful of how they spend their money and one of the concerns i hear over and over again is what i would what i would strongly articulate for everybody who has concerns about this housing finance system is that without a strong and well managed this housing recovery would not be occurring or any signs of recovery would not be occurring and first time homebuyers would be literally i believe locked out of the market in a broadway and minorities would be a lot doesn't market in a broad way in order for to remain strong it must have risk management and fraud tools in place that are state of the art and today we have an exceptional group that does counter party risk management inspector general as well as audits we work very closely in communicating information back and forth  review institutions based on data that comes in on a monthly basis through our system and we act on those institutions i do believe that support for expanding our technology our systems and our personnel is critical to long term performance of that and particularly critical to ensuring that we have enough resource capacity to weed out fraud in the marketplace let me just real briefly we're running out of time but through that analysis and you found through analysis that you have a lender that is less than scrupulous we want to remove them what specific steps are taken then to get them out of this program it will depend on the nature of what we uncover with these companies i'd like to back up and i think the safe that in tandem with fraud and fraud tools is going to be a valuable tool because what happens oftentimes it's a rogue loan officer working for an institution perpetrate the fraud and when we go after the institution which we often do that loan officer can simply walk across the street and start looking for another university and an undergraduate degree from louisiana state university thank you for inviting us to this hearing i have been asked to discuss global housing outlook with a focus on housing prices and the tax credit intervals over the period from two thousand through two thousand and six inflation adjusted housing prices rose about thirty three percent peaking in march two thousand and six since then real prices have dropped fourteen percent and are now thirteen percent above their average value in two thousand nominal housing prices which are not adjusted for inflation rose sixty three percent over the same period two thousand two thousand and six and have dropped about eleven percent from their peak the f a f a house price index bottomed out in april two thousand prices increase in seventeen of the twenty cities that case shiller covers nine cities prices rise for the third straight month less vegas was the only city reporting a steep decline the key reason for this recent stabilization which i would characterize as occurring much sooner than expected is a decline in long term interest rate my third chart plots the yield on the ten year treasury note which as you can see is near its lowest level since one thousand nine hundred sixty the fourth chart tracks long term fixed mortgage rates which are also near historical lows stimulated i would like to briefly discuss this factor because it plays an important role in a will and housing outlook for two thousand and nine and two thousand and ten according to recent surveys a real estate agent campbell surveys about one point six million of the three point nine million homes sold temper went to first time home buyers if one extrapolates numbers first time home buyers will total about two million in two thousand and nine and about four hundred thousand of according to the survey's methodology will be incremental buyers that is buyers who would not of bought a home would not have bought a home without the tax credit the impact of the tax credit  is not trivial the main effect of the tax credit is from two thousand and ten two thousand and nine therefore once the tax credit expires demand will take a hit home sales will drop and house prices will resume their downward course depressed by the way to rising foreclosures and rising unemployment rates our view is that home prices will drop another five percent from current levels hitting bottom in tw is the forecast for home sales as you can see the pace has accelerated since bottoming out in the first quarter of this year and we expected to reach about a six million units in the fourth quarter of two thousand and nine the drop  for a major bear market to begin and since we judge economy inflation too just in a thread markets appear to have taken this view and yields are now below three point five percent and we expect them to remain below four percent in two thousand and ten and most of tw chairman chairman waters ranking member thank you for the opportunity to testify today i have thirty five years experience in all facets of housing finance i'm here to advise you of the growing crisis at f h a so that this subcommittee will not be able to say point four percent in two thousand and nine this is a thirty five fold increase and increase would have been much greater if it were not but for the massive recent growth of f h a this trend will continue as millions of recently ensured high risk loans start for closing in greater numbers f h a s lending practices negatively impact each and every neighborhood in all of your district the reduction down payments over the past decade has helped payment loans i have seen dozens of cases where market share expanded into a vacuum created by exiting players and all ended badly too f h a dollar volume has exploded and is running four times it volume in two thousand and six three top dollar limit is now seven hundred twenty nine thousand dollars double last year's limit and it's just was raised in time as the high end of the home market comes under increasing stress about equals fannie and freddie spike zero average of six ninety five on their combined four hundred billion dollars portfolio of loans low downpayment fixed rate loans that were owner occupied generally full doc many of the characteristics that f h a has this portfolio is performing extremely poorly ferrite the corporation producer if i call scores reports that a six ninety five on mortgages originate in october two thousand and eight performs like a six thirty three years since three years ago if volume had grown so rapidly it would have gone up even more which cure rate has dropped from fifty percent three years ago to one hundred percent today last month's changes such as an increase in lender net worth a little more than band aids the issue was moved beyond that were two business being concentrated among four too big to fail lenders in august two thousand and nine wells fargo bank of america chase home finance and citi mortgage were responsible for eighty five percent of all f h a loans added f h a has two reserve funds you've heard that reported earlier i estimate that the losses embedded in f h a seven hundred twenty five billion dollars in single family risk in force at seventy billion dollars interestingly commissioner stevens had some of the same numbers i came up with about a twenty percent loss rate default rate and i use a fifty percent loss rate on those i'm showing i believe there are some really overly optimistic both as to the loss mitigation benefits of loan modifications and recent proposed underwriting changes in my prepared remarks i talk about the problems that their loan modification  prepared remarks a specific program on how to help homebuyers save the requisite ten percent downpayment over a five year plan and i'd ask that you look at that also thank you very much partner and associate broker for century twenty one home center in lanham maryland i serve on the maryland association of realtors executive committee and as a member of the national association of realtors presidential advisory board on government sponsored enterprises i worked extensively with consumers who would not be able to purchase a home without i testified today on behalf of one point two million members of the national association of realtors federal housing administration is more important than ever to market f h a is serving a vital source of liquidity during the current downturn and it was this committee working on a truly bipartisan basis that helped pave the way with the passage of last year's landmark housing and economic recover  act today and it's much good news about it there is also cause for concern which is what brings us here this afternoon capital reserve ratio has dropped to a dangerous new low and some are starting to wonder whether it taxpayers will be required to step in and dare i say bailout so i think it would be beneficial to first examine why it is at a crossroads like the rest of the mortgage finance industry has not been immune from the economic with a foreclosure rate of just under as more loans mature and if this current trends in and in him in employment and home prices are not quickly reversed we anticipate both of those figures to increase placing at an even greater peril so what do we do about it we can sit back and hope for the best or we can be proactive and take the necessary steps to build a more solid foundation so f h a can continue to important mission of opening doors to affordable homeownership m b a s put forward a comprehensive agenda that will build on the important reforms contained in here our first congress to appropriate the funding and authorized under her a staffing and technology allowing us to hire additional staff to keep up with its growing loan volume is good management and it's a step we can take right away makes money for the federal i want to commend this committee for shepherding through the h r thirty one the twenty first century f h a housing act which authorizes up to seventy two million annually we need to redouble our efforts to make certain this money is appropriated we need to improve the quality of f h a origination the soundness of that one way to protect it is to ensure that the mortgage lenders in mortgage brokers who participate in the program and originate f h a insured mortgages have the competence and wherewithal to protect consumers and taxpayers from under the law we believe that rigorous licensing and registration requirements as well as network minimum bonding requirements are essential components of any protective framework we continue to support increase net worth in bonding requirements for mortgage bankers and net worth requirement to assure that an originator has a stake in the industry third congress needs to make permanent higher loan limits that would otherwise expire and while it may seem counterintuitive at first higher loan balances actually perform better than those at the lower end they require higher down payment and bring in higher premiums include primarily taking a second loan but ultimately finding out that they cannot sustain the costs associated with living in the home particularly taxes and insurance and then being forced to move out by having an effective network of comp higher interest or a decline in property values to manage the program grade of caution has taken steps to mitigate risk by reducing the funds available through a reverse mortgage had recently implemented a reduction in what's known as the program principal limit and this is the gated than the credit subsidy returning the program's operating on a neutral basis the head can program has operated on a self sustaining basis throughout the duration requiring no taxpayer subsidy income f exception since its inception accordingly the program has not played a role in f a recent capital reserve account losses the question of whether the program will require a positive a negative credit subsidy after two thousand comes great cost to some seniors in some cases the end result is that seniors will not be able to utilize reserve their ability to continue living in their homes forcing them to move out how does also implementing a more sophisticated information system to better monitor a second program performance to reduce operating costs if such systems have been in place previously we believe analysis of the program would have revealed that the seven hundred ninety eight million a credit subsidy in additional projections might not have been warranted based on our financial modeling of the program and consistent with home price appreciation assumptions and reports put out by global insights and other key observers normal sales that reject that subsidy need one would program operating on a self sustaining basis however we also believe that there are other options for achieving this objective changes that would have seen your homeowners and reduce the amount of money what we have found and looking at the impact of the insurance companies of america this afternoon i would like to make a point first mortgage private mortgage insurance or ammo plays an important role in stabilizing the current housing market and will play a key role in the market's recovery enables responsible borrowers to buy homes with less than a twenty percent downpayment many of these are first time for lower income home buyers since nine hundred fifty seven mortgage insurance has helped over twenty five million families homes throughout the country today about nine percent of all mortgages held by financial institutions have mortgage insurance mortgage insurance is important to the housing recovery with today's low housing prices and mortgage rates there is a real opportunity for mortgage insurance to help first time home buyers and help homeowners attempting to refinance and by doing so we also enable existing homeowners to trade up to purchase a larger home i would also note that because mortgage insurance companies have their own capital at risk we have very clear incentive to mitigate our losses by taking action to help borrow foreclosure if at all possible we understand that one of the worst challenges that a family can experience is the loss of their home through foreclosure in addition to implementing the government modification programs in the requested timeframe mortgage insurance companies have implemented a number of programs such as free counseling services and advanced partial claim payments to assist borrowers over the last eighteen months mortgages were able to save almost two hundred thousand people from losing their homes my second point is that the industry has the resources to pay claims on existing loans and insure new loans because of the rigorous state imposed capital and reserve requirement these requirements have been in place since the industry's inception over fifty years ago and near the recommendations made at the recent g twenty summit to reform the mortgage secur market in two thousand two thousand and seven and private mortgage insurance paid over fifteen billion in losses and have continued to pay billions of dollars more in two thousand and nine the backbone of the industry's financial strength is that state imposed reserve requirements and specifically the contingency reserve half of each premium dollar earned goes into the contingency reserve and generally cannot be touched by the mortgage insurer for ten years this ensures that a significant reserves are accumulated during good times to handle claims in bad times this reserve structure has proven its ability to absorb significant risk in the regional recessions in the nineteen eighties and nineties mortgage insurance paid out over fourteen billion in claims after each recession we've built up capital and were able to meet the next stress period mortgage insurance and the banks that make  mortgage default risk but only mortgage insurers raise capital in this countercyclical manner in fact only now our federal bank regulators working to construct a similar system for my third and final point is that several of the features of private mortgage insurance and the way mortgage insurance to manage their risk differ from f h a congress might want to consider these differences as they consider ways to strengthen f h a with private mortgage insurance there with private capital  risk in a foreclosure situation mortgage insurance take the first dollar of loss and typically cover twenty to twenty five percent of the loan amount but this does not always cover the entire loss so lenders and investors are on the hook as that if it's true that private mortgage insurance or requiring different down payments depending on location is happening that has happened in the past the focus has been on making sure that negative amortization etc it only included the loans that they list as low downpayment loans ninety three percent i believe are fixed they're all virtually at regular rate much  the average fica score on this group was six hundred ninety five and it was interesting that commissioner stevens and i believe that subcommittee should really think about what he said he said in two thousand and seven book the actuaries are estimating that twenty four percent or one in four of their loans that had all these positive characteristics everyone's talking about will go to  default and event in two thousand and twenty percent of all of the loans originated in that year will go to default he didn't talk about two thousand and six i would estimate somewhere sixteen seventeen eighteen percent you'll note that it's a billion dollars in the bailout how did you get to that number got to it basically by computing what i believe the losses will be on their book business which at the end of september thirtieth this year was seven hundred twenty five billion dollars in loans and then i froze that book of business which is what the actuaries would be doing and then look for a good proxy for it which i've described in my testimony loss commissioner stevens didn't mention a loss rate but he did mention it's been going up quite rapidly and i believe fifty percent is a reasonable number you have to remember that unlike the private mortgage insurance business where the loss is broken up into  the chairman mentioned that's in the ninety six percent range something on that order and therefore a fifty percent losses is reasonable that yields a seventy billion dollar loss on the requirements we would like to see preemption which would really help lower the cost and have one set of licensing requirements for everybody instead of state by state we think education requirements are necessary clearly when you have what the term is now being out there in  the game then you take a higher sense of duty to originate the loans properly so we fully support even on on that effect i don't know to answer specifically to your question of any mortgage bankers or brokers  losses so that you can correlate that foreclosures if you don't if you don't add the job losses and know that the person whether it was a job loss or whether it was just a bad loan how do you distinguish between the two then you