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[Senate Hearing 113-81]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 113-81

                      THE FHA SOLVENCY ACT OF 2013

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING LEGISLATION RECENTLY RELEASED BY CHAIRMAN JOHNSON AND RANKING 
 MEMBER CRAPO INTENDED TO STABILIZE THE MUTUAL MORTGAGE INSURANCE FUND

                               __________

                             JULY 24, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 Available at: http: //www.fdsys.gov /

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

              Erin Barry Fuher, Professional Staff Member

                 William Fields, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 24, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Kirk
        Prepared statement.......................................    22

                                WITNESS

Carol J. Galante, Assistant Secretary for Housing/Federal Housing 
  Administration Commissioner, Department of Housing and Urban 
  Development....................................................     3
    Prepared statement...........................................    23
    Responses to written questions of:
        Senator Kirk.............................................    27
        Senator Coburn...........................................    28

              Additional Material Supplied for the Record

Statement submitted by Enrique Lopezlira, Senior Policy Advisor, 
  Economic and Employment Policy Project, Office of Research, 
  Advocacy, and Legislation, National Council of La Raza.........    32

                                 (iii)

 
                      THE FHA SOLVENCY ACT OF 2013

                              ----------                              

                        WEDNESDAY, JULY 24, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Thank you, Commissioner Galante, for joining us today to 
provide your insights and reaction to the FHA Solvency Act 
discussion draft Ranking Member Crapo and I have released. I 
want to thank Ranking Member Crapo and his staff for working 
with me and my staff on this bipartisan legislation. I would 
also like to thank Senator Brown, Senator Menendez, and Senator 
Vitter for their earlier efforts to provide the FHA with 
additional tools and flexibility.
    Earlier this year, Ranking Member Crapo and I agreed that 
addressing the stability of the FHA's finances would be first 
on our housing agenda, followed closely by a broader housing 
finance reform effort. Like our FHA bill, we will seek the 
input of all the Members of the Committee to reach a similar 
bipartisan agreement on housing finance reform legislation in 
the coming weeks and months. To that end, I would encourage the 
Committee to focus on the stability of the FHA during today's 
hearing.
    The FHA serves a critical role in our housing market by 
insuring affordable, well-documented and underwritten mortgages 
for families across the country. That insurance maintains 
liquidity in the mortgage market during a recession, fulfilling 
the FHA's countercyclical mission. Without the FHA, the housing 
crisis would have been much deeper--by as much as 25 percent--
because mortgage credit would not have been available to most 
qualified borrowers.
    While the fiscal year 2012 Actuarial Report projected a 
negative capital ratio for the MMI Fund, recent data show the 
weakest books of business--the years 2006 through 2009--are 
stabilizing, and the most recent data show serious delinquency 
rates falling since the report was released. These improving 
trends contribute to the future stability of the FHA, and the 
bill that Senator Crapo and I have drafted would provide the 
FHA with tools to strengthen its finances and maintain 
stability into the future.
    The FHA Solvency Act of 2013 would provide the FHA with 
many of the tools Secretary Donovan requested in HUD's 2012 
Report to Congress and in his testimony before this Committee. 
Our discussion draft would better equip the FHA to hold lenders 
accountable for fraud or inappropriate loans. The bill would 
also require annual reviews of loan performance and premium 
levels to ensure that pricing and underwriting standards are 
appropriate.
    Commissioner Galante, I would like you to give us greater 
insight into how these tools and other provisions of the bill 
will help stabilize the MMI Fund and strengthen the program for 
current and future homeowners. I look forward to continuing to 
work with you, Senator Crapo, Members of the Committee, and all 
stakeholders as we proceed to a markup of this important bill 
next week. I am encouraged by the positive response the bill 
has received from the National Association of Realtors, the 
Mortgage Bankers Association, and the Mortgage Insurance 
Companies of America, and I hope the Committee can move swiftly 
to approve this legislation.
    With that, I will turn to Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    The Federal Housing Administration, or FHA, has helped 
millions of Americans achieve the dream of owning a home. 
Unfortunately, the FHA has also experienced higher than 
expected default rates over the last several years. In addition 
to placing severe financial stress on the Insurance Fund, these 
defaults have caused hardships for the very people the FHA was 
designed to help.
    Concerns about the solvency of the FHA have been building 
for quite some time. The capital reserve ratio has been 
declining since 2006, and the FHA Fund has been in violation of 
statutory mandates for minimum capital levels for the last 4 
years.
    The last independent Actuarial showed a negative economic 
value of more than $16 billion and a capital reserve ratio of 
negative 1.44 percent. Therefore, Chairman Johnson and I have 
released the discussion draft before us today.
    This draft attempts to address a number of the problems 
facing the FHA through three overarching approaches:
    First, it gives the FHA the tools it needs to better 
protect the Fund from participants who do not follow the FHA 
guidelines or who consistently do not perform to appropriate 
standards;
    Second, it ensures that personnel and experts with the 
appropriate backgrounds will review, revise, and annually 
reevaluate the FHA standards to make its lending more 
sustainable;
    And, third, it will increase the FHA's capital allocation 
and better incentivize leadership to meet those capital 
requirements so that the taxpayer is better protected in the 
future.
    This bill is intended to put the FHA in a better position 
to function as an actual insurance fund. It will also place a 
renewed emphasis on the FHA ensuring sustainability mortgages. 
When the FHA helps people obtain a mortgage which they actually 
have the ability to repay, it is helpful to the solvency of the 
FHA.
    We should also be clear that the bill is not the last 
discussion this Committee will have on the reform of FHA. The 
Chairman and I have indicated that, upon completion of the 
Committee action on this bill, we plan to immediately turn our 
attention to broader housing finance reform legislation. It 
will be necessary to address many of the broader questions 
surrounding the scope and mission of the FHA as a part of that 
effort as well.
    I look forward to working with the Chairman and all of my 
colleagues on the Committee regarding both the FHA and the 
broader housing market. However, before us today is a bill that 
we can consider now, one that would take many needed steps 
toward changing the disturbing negative trends the FHA has 
experienced through the last several years.
    I thank HUD for being here today to discuss this draft with 
us. I also thank the number of industry, consumer, and taxpayer 
advocate groups who have reviewed this draft and taken the time 
to get back to us directly with their thoughts and comments. I 
encourage continued public comment aimed toward further 
strengthening this bill as we move forward.
    As I previously noted, nearly every American has a stake in 
our actions. Whether they are looking to buy or sell a home or 
they are simply taxpayers who are weary of seeing news about 
another bailout, our decisions today and beyond will impact 
them. I hope that we can take this much needed first step soon.
    Thank you very much, Mr. Chairman.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who wish to make a brief 
opening statement?
    [No response.]
    Chairman Johnson. Thank you all.
    I want to remind my colleagues that the record will be open 
for the next 7 days for opening statements and any other 
materials you would like to submit. Now I will briefly 
introduce our witness.
    The Honorable Carol Galante is the Commissioner of the 
Federal Housing Administration. She has been at HUD since May 
2009, first serving as Deputy Assistant Secretary for Multi-
Family Housing.
    Commissioner Galante, please begin your testimony.

STATEMENT OF CAROL J. GALANTE, ASSISTANT SECRETARY FOR HOUSING/
  FEDERAL HOUSING ADMINISTRATION COMMISSIONER, DEPARTMENT OF 
                 HOUSING AND URBAN DEVELOPMENT

    Ms. Galante. Chairman Johnson, Ranking Member Crapo, thank 
you for having me here to testify today. The Secretary and I 
greatly appreciate the work you and your staffs have done on 
this bipartisan bill intended to give HUD many of the tools 
necessary to ensure that we have a fiscally sound and vibrant 
FHA that continues to support responsible home ownership and 
maintains access to affordable mortgage credit for future 
generations of homeowners.
    Keeping the Mutual Mortgage Insurance Fund on the road to 
full fiscal health is critical to this mission. So before I 
discuss how this bill helps achieve our shared goals of 
improved risk management and replenishing the capital reserve 
account, as well as the sections HUD feels require additional 
discussion, I want to provide the Committee with a update on 
the status of the Fund.
    Our latest data shows that the Fund is continuing its 
positive trajectory, experiencing significant improvements in 
the forward loan portfolio in particular, as a result of both 
the economic recovery and decisive actions taken by this 
Administration. In the June 2013, the percentage of seriously 
delinquent loans--that is, loans past due 90 days or more or in 
foreclosure or bankruptcy--was down to 8.38 percent from a peak 
of 9.83 percent in January 2012, a 15-percent improvement in 
less than 18 months. This is also a nearly 1\1/4\-point 
improvement since the November 12 Actuarial Report.
    Early payment delinquencies have fallen to 0.25 percent, 
their lowest level in 26 months, down from a historic high of 
2.6 percent in July 2007. Meanwhile, real estate loss 
severities have dropped 27 percent since their peak in 2011, 
and average loss severities across all disposition methods are 
down 10 percent since 2011, and this figure does not account 
for the impact of FHA's new streamlined short sale program, 
which we formally announced this month.
    But we know our work is not done, and these encourage 
trends can be accelerated if we are given the tools we have 
requested from Congress. We are grateful for the inclusion of 
these tools, some of them which were first brought to this 
Committee in 2010 by Senators Brown, Begich, and Vitter, and 
more recently Mr. Menendez, since they are critical to the 
responsible management of the Fund. Expanding indemnification 
to include direct endorsement lenders gives FHA the ability to 
treat all lenders who fail to comply with FHA guidelines 
equally, ensuring compliance and strengthening the financial 
position of the Fund.
    Other tools provided by the bill would improve FHA's 
ability to identify and mitigate risk, helping us to better 
protect the Fund. These tools include broader authority to 
terminate lenders, a revised compare ratio, institutionalizing 
the position of a chief risk officer, and the ability to 
quickly make structural changes to the HECM or reverse mortgage 
program. All of these tools are vital to the responsible 
stewardship of the Fund, and we thank Chairman Johnson and 
Ranking Member Crapo for their inclusion.
    In particular, the ability to make necessary changes to the 
HECM program will not only help secure the Fund and support 
Americans who choose to age in place, but it also supports 
HUD's mission of creating and preserving affordable, inclusive 
communities.
    That said, I would also like to take this opportunity to 
say that if we are unable to obtain statutory authority to make 
these immediate changes to the HECM program by August 1st, FHA 
will have to take further blunt changes to the program which 
will not properly address the identified risks and harm access 
and effectiveness of the product for consumers. For that 
reason, I do urge the Senate to pass H.R. 2167.
    Now, while FHA is looking forward to working with the 
Committee to achieve our shared goals of continuing to 
strengthen the Fund and better manage risk, there are several 
areas where additional conversations with Members of this 
Committee will be important to producing the most effective 
legislation possible.
    For instance, Section 7 outlines the plan for 
recapitalization, which relies exclusively on mortgage 
insurance premium increases. While FHA shares the Committee's 
desire to return the Fund to full fiscal health, I would point 
out that premium increases are just one of many methods to 
achieve that recapitalization. I am concerned that relying on 
an inflexible approach here could actually hurt the Fund under 
certain economic conditions and would unduly penalize future 
homeowners.
    For this reason, I would ask that we continue to work with 
the Committee to craft language that best facilitates 
recapitalization using the full range of options available.
    To better mitigate risk, FHA also requested authority to 
ensure that servicers of FHA-insured loans are being held 
accountable for their performance. The authority to transfer 
the active servicing would allow FHA to direct servicing to a 
specialized sub-servicer when the original servicer is not 
fulfilling its obligation under the contract of insurance. The 
addition of this authority would improve loss mitigation 
outcomes.
    Finally, given an increasingly complex mortgage market, 
aging FHA systems and infrastructure, a need for additional 
skills and expertise, and difficulty responding quickly to 
major risk issues as a result of contractual and statutory 
limitations, FHA would benefit from additional statutory 
changes to provide new risk management and operational tools to 
the Fund. Therefore, we look forward to discussing the 
inclusion of additional operational authorities that would best 
position FHA to carry out its mission.
    We remain committed to continuously improving our 
stewardship of the Fund and look forward to working together to 
create a 21st century FHA, one best able to serve the American 
people.
    Again, I want to thank the Committee for their hard work 
and look forward to partnering with you on this legislation. I 
look forward to your questions.
    Chairman Johnson. Thank you, Commissioner Galante, for your 
testimony.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    Commissioner Galante, with the changes to the compare ratio 
and the national termination authority proposed in the 
discussion draft, will the FHA have the tools necessary to 
identify and suspend noncompliant lenders?
    Ms. Galante. Yes, thank you for the question, Chairman 
Johnson. The changes in the compare ratio as well as the 
additional indemnification authority for direct endorsement 
lenders will certainly give us increased capability to both 
terminate and hold lenders accountable for defects in the 
manufacturing of these loans.
    Chairman Johnson. How will the expanded repurchase 
authority granted to the FHA in the bill better protect the MMI 
Fund from fraudulent lending practices going forward?
    Ms. Galante. Yes, thank you. Today we have a situation 
where the lenders that participate in our lender insurance 
program, which is--they do about 70 percent of the FHA 
business, but the direct endorsement lenders that do about 30 
percent of the FHA business do not--we do not have the same 
authority over those lenders. And if we want to seek a 
repurchase, as you put it, or an indemnification, we actually 
need to negotiate with them over that repurchase or 
indemnification as opposed to having the direct authority to 
require indemnification from those lenders.
    And so this will give us additional authority over a 
significant portion of our business that right now is a long 
negotiation process that is very difficult to achieve on an 
ongoing, regular basis. So that will substantially improve the 
enforcement of lenders.
    Chairman Johnson. In your testimony you raised concerns 
regarding the premium increases that are required if the Fund 
is undercapitalized. What alternatives would you recommend that 
will give us confidence that the FHA has taken action to 
achieve the required capital ratio?
    Ms. Galante. Yes, so this is a challenging issue. I fully 
appreciate that Section 7 is trying to ensure that future 
Administrations' feet are held to the fire in terms of 
increasing premiums when they are necessary to be increased, 
and so we certainly support that general direction.
    The concern that we have is that sometimes in a 
countercyclical situation, if you took the situation today, if 
this were in effect, we have already increased premiums five 
times very significantly, and we clearly are at a tipping point 
here, that if we increase them more, we would actually both 
shut out additional home buyers. But we also would lose those 
future homeowners from FHA, and, therefore, we would lose 
volume, which would also hurt our activities.
    So the kinds of things that I think could be added are, 
one, some flexibility in how those premium increases happen. So 
maybe it is not just annual but also up front, so there are 
some changes there. We made changes in policy, for example, 
last year on how we treated cancellation of future premium 
increase, so that was not an actual premium increase, but that 
policy change actually generates more money to the Fund over 
the long term than a simple premium increase would.
    So that plus other ideas around how we deal with 
recoveries, for example, I think would be examples.
    Chairman Johnson. Can you comment on how requiring the FHA 
to initiate a risk-sharing program with private market 
participants would impact the MMI Fund?
    Ms. Galante. Yeah, so I would simply say this about risk 
share: FHA does not have a great history doing a risk-share 
program. We had a program in Multi-Family in the 1980s that 
actually ended up costing the Fund significant dollars.
    So one of the challenges with thinking about a risk-share 
program is ensuring that FHA has the right analytic capability, 
the right staffing capability to deal with what is, frankly, a 
counterparty risk here of the private mortgage insurer.
    So I would say that, you know, we can look at it seriously 
as we go down the road, but we are concerned that how one 
structures a risk-share program, you know, we could have some 
very unintended consequences that actually could have FHA 
coming out on the wrong side of such a program, and we would 
want to be very cautious about how one might proceed to do 
that.
    The last thing I would say on this question is, as you 
know, under the existing private mortgage insurance model with 
the GSEs, there were some serious challenges during the crisis 
with that model, and FHFA is working on new kinds of risk-share 
ideas with the GSEs today. I certainly think looking at how 
they resolve some of those issues would be very helpful for 
FHA, you know, who would be tackling this kind of anew.
    Chairman Johnson. Thank you.
    Senator Crapo.
    Senator Crapo. Thank you Mr. Chairman.
    Commissioner, I just want to cover a couple of preliminary 
matters. Some in the industry have expressed concerns that the 
changes we make to HUD's authority around indemnification on a 
prospective basis might be used by HUD to justify that same 
treatment on a retroactive basis. Section 3 of the text quite 
clearly states that that authority shall only apply to 
mortgages insured under this title that were originated on or 
after the date of enactment of this bill.
    I just want to allay any remaining fears out there with 
regard to that understanding and get your confirmation for the 
record that you understand that HUD understands this authority 
is prospective and that Congress would not be granting 
retroactive indemnification authority.
    Ms. Galante. Yes, we do understand that.
    Senator Crapo. Thank you. And I want to follow up a little 
on the Chairman's questions about your question about the need 
for mandatory premium surcharges. And as I understand your 
point, you indicate that there are other ways and other actions 
that can be undertaken to deal with the issue.
    The concern or the question that I have is that, as I 
understand it, nothing in this bill prohibits the FHA from 
undertaking any number of the alternatives that I heard you 
suggest when the FHA is meeting its capital obligations to 
ensure that it continues to do so. And so to me the question 
becomes this--it really relates to the point in time that you 
are addressing the circumstance. When the capital levels of the 
FHA are in violation of Federal law and Congress needs 
assurances that actions will be taken, it would seem to me that 
the actions you are talking about should have already been 
undertaken before we get to that point. But that when we are at 
the point where literally the law is being violated, is not 
that a reason to have a mandatory surcharge? Or are you 
suggesting that there should be no requirement for a surcharge 
even in that circumstance?
    Ms. Galante. Yes, so, again, I think we have to look at 
when we are certain that we are going to be below the capital 
ratio, whatever that is, whether it is 2 or 3 percent, 
depending on where we are in time in the bill.
    Senator Crapo. Yes.
    Ms. Galante. You know, that will be calculated by the 
Actuarial each year, maybe more often as we go down the road 
here. But as we see that happening, it is going to take time to 
institute policy changes.
    So some of the policy changes at the moment in time that we 
hit that capital ratio or being below it will take some time to 
implement policy changes that could include some things that 
are not specifically a premium increase. And if we do that at a 
time--if we just simply go right to the premium increase at 
that point in time, again, we could be cutting off borrowers at 
the wrong time and, you know, worsening the economic situation 
for them and for the market.
    So we want to be careful about when and how we, you know, 
add premium increases, and we certainly--you know, just to be 
clear, we get that that is a very important tool, and this 
Administration, to the chagrin of many, you know, we have 
increased premiums five times, and very significantly, during 
this crisis to get us back to a point where we are 
appropriately pricing for the risk that we are taking on.
    Senator Crapo. Thank you. It seems to me there is a 
tension, because I understand your point that the premium 
increases can have an impact on volume and could actually have 
an impact on the ability of the FHA to manage with the 
flexibility that it needs.
    I also see the point, though, that at some point, if the 
other actions that you are talking about are not working, at 
some point there needs to be the assurance that the capital in 
the Fund will be protected, and the premium increases seem to 
be that final assurance.
    And so although I can see the need for the flexibility, I 
can also see a concern if we simply have no point at which we 
have an assurance that the capital in the Fund will be 
protected. We will need to visit with you and others further 
about that, I assume, as we move forward.
    One other quick question. I hope we will have a couple of 
rounds here today, Mr. Chairman. You have asked the Committee 
to give the FHA broad authority to transfer servicing rights, 
and some have suggested that even if we make it part of the 
evaluation for termination from the program. Some industry 
participants and experts have suggested that this authority 
could in some scenarios drastically reduce the value of these 
servicing rights.
    Understanding why you want this authority, do you 
acknowledge the possibility that this could impact the value of 
servicing rights?
    Ms. Galante. So I would say we are asking for authority 
when servicers are not meeting their obligations, their 
performance obligations, as outlined in our servicing 
requirements; we would do this through a rulemaking process 
where we would lay out very clearly what the benchmarks are 
before this type of activity would be triggered. And I do 
believe that we can have this authority without having it in a 
way that will impact the value of servicing rights. What we are 
really talking about is getting servicers who are not 
performing to say--you know, bring in a sub-servicer. You know, 
we are looking for the tools to kind of force the activity to 
be what it needs to be. We are not trying to impact the value 
of servicing rights here.
    Senator Crapo. Thank you. My time has expired. I may come 
back and visit with you a little further about that.
    Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, Commissioner.
    I first want to commend Senator Johnson and Senator Crapo 
for their proposal and for moving very thoughtfully and very 
aggressively on this issue; what is alarming is the capital 
situation of FHA; and although there appears to be improvement, 
this is an issue that has to be addressed; and I commend both 
of them for doing it.
    Let me follow up on Senator Crapo's question about 
servicing. Have you done some analysis suggesting how much you 
could save or avoid in terms of cost if you have the authority 
to essentially redeploy servicing rights from a nonperforming 
entity to a performing entity?
    Ms. Galante. So, let me say this and I want to be clear. We 
are not talking about transferring the actual servicing rights. 
We are talking about, you know, the act of servicing could be 
subserviced, could move pools of loans that need specialized 
attention; and, you know, lenders are doing this today, some of 
them on their own, so just to be clear about what we are trying 
to help people get to here.
    We have done some analysis. I do not have the numbers in 
front of me but I would say it varies by servicer substantially 
and that what we do see is those servicers who deploy these 
specialized techniques, subservicers, specialized servicers for 
defaulted loans. Higher touch servicers actually see much 
better loss mitigation helping borrowers stay in their home, 
for example, and then protecting losses to the fund.
    Senator Reed. And again, I do not want to present a 
conclusion, but it seems to be that this practice is being used 
by commercial lenders rather frequently of, you know, 
compelling or advising or suggesting that servicers find 
qualified subservicers; and you are simply asking for what 
appears to be the commercial, prevailing commercial practice 
right now. Is that fair?
    Ms. Galante. That is correct. This is a common practice 
outside of FHA right now.
    Senator Reed. Very good. In your testimony, you allude to 
many factors; and one of the aspects is the FHA's aging systems 
and infrastructure that you mentioned which would require, you 
know, investment improvement.
    Can you talk about that? Is that contributing to some of 
the difficulties you are having?
    Ms. Galante. Yes, indeed it is. There are really two 
aspects of the aging infrastructure system that I would 
mention. One is just we literally are operating a 1970s 
technology and the inability to have people give us electronic 
file applications or just the ease of doing business needs to 
be, you know, brought up to the 21st Century.
    But, I would say more importantly, you know, given how 
complex that mortgage market has become, we need much better 
internal risk analysis, you know, your own models, you know, to 
be able to monitor the portfolio in a very detailed way, better 
electronic tools to detect fraud. We have made some progress in 
that area.
    So, we do have a project called the FHA Transformation 
that, you know, was funded partially a couple of years ago, and 
we have been working to change systems. But, we have a long way 
to go here and it will be very important, you know, in the 
future to have these kind of systematic tools and have the 
staffing capabilities and the, you know, the strength to really 
be able to analyze this portfolio in a much more detailed way 
than we have had in the past.
    Senator Reed. So in the context of the proposed 
legislation, you would need some authority or support for these 
efforts is that within your current authority and now you just 
lack resources?
    Ms. Galante. Well, certainly resources would be great but 
understanding the difficulty in this budget environment--a HUD 
Bill is being discussed today as well--I think there are some 
changes in legislation that could help get us there.
    So, enabling us, for example, to actually, you know, tap 
into FHA receipts before they go into the general budget for 
certain kinds of critical investments is an example.
    You know, changing the pay scale for at least a subclass of 
FHA employees that deal with the risk management. FHFA, FDIC, 
all of these institutions are on a different pay scale than our 
economists are, for example.
    Senator Reed. Just following up your point which is the 
budget environment, it would be extremely helpful to myself if 
you could quantify the savings, the increased efficiencies, you 
know, if we are going to invest in modernization of FHA. We 
want to make sure that the return is several multiples of the 
investment. That is the nature of our environment. That is the 
nature of good business practice everywhere.
    Ms. Galante. Absolutely, I agree with you.
    Senator Reed. Thank you, Commissioner.
    Ms. Galante. Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Mr. Chairman, thank you and thank you and 
the Ranking Member for producing a piece of legislation. I 
think all of us came here to solve problems and we know we have 
a major housing finance problem. We know this is a piece of 
that. We thank you again for having this hearing.
    Ms. Galante, I appreciate your service and glad you are in 
the position you are in, and I know that in April, the FHA 
suspended a fixed-rate, full-draw HECM product, reverse 
mortgage. It was by far the biggest money loser by volume. It 
is my understanding you all have no intentions whatsoever of 
reinstating that product. Is that correct?
    Ms. Galante. That is absolutely correct.
    Senator Corker. And I assume that if we were to try to add 
up an amendment to this piece of legislation that ensured that 
that was the case from the FHA standpoint anyway, that would be 
not objectionable. Is that correct?
    Ms. Galante. That is correct. I just want to say we are 
really looking for authorities as quickly as possible to make 
additional changes to the overall HECM program that would help 
that situation even more and, you know, be able to have a 
financial assessment of borrowers so they understand what, you 
know, what they can afford and have better limitations on what 
they can take out.
    Senator Corker. Listen, thank you for that.
    I was interested in your testimony toward the end where I 
guess this piece of legislation gives you some abilities to 
deal with some solvency issues but you talked about additional 
considerations and the fact is that there are other things with 
this highly complex housing finance system that we have in this 
country that you need to have the ability to do. So, the bill 
we are looking at deals with an important piece of housing 
finance but there are other pieces that FHA would like to 
discuss with this and have the authority to do just to better 
manage risk. Is that correct?
    Ms. Galante. That is absolutely correct.
    Senator Corker. Let me ask you the question. I assume that 
whatever Congress happens to do relative to GSEs because of 
guarantee fees and those kinds of things, all of those things 
work together. Is that correct? In other words, if we do 
something with GSEs that, you know, drives a bunch of volume to 
FHA, that could be good or that could be bad or vice versa. So, 
the two very much work hand-in-hand. Is that correct?
    Ms. Galante. Absolutely, Senator. I have said in multiple 
testimonies at the end of the day, these things that we are 
talking about here today are just things that we need in any 
event under any circumstances, right, to ensure that we can 
manage our risk better.
    But as we move into discussions of housing, finance reform 
more broadly which I know you are quite involved in, you know, 
we need to be sure that FHA's role, that we do not leave a void 
in the market that we have, you know, a new system doing this 
and FHA doing that and there is some gap in the middle. You 
know, that we need to be sure that these efforts are synced up 
at the end of the day.
    Senator Corker. Well, I think everybody in the industry has 
said that. I know the House is taking up all of this in a 
combined way, and I would just say, Mr. Chairman, I was 
interested in Ranking Member Crapo's comments about coming back 
to deal with some of the other FHA issues.
    I think it would be real important for the Committee to 
know before the markup next week, look, I appreciate this 
effort taking place, but I think we all know this is just one 
component. All of this has to tie together well for it to be 
successful, and I think all of us want to deal with this issue 
that has been 5 years in the making.
    So, I would hope that we get some direction from the 
leadership of the Committee as to what we are going to do on 
the floor. I would assume there is no effort or thought that we 
would try to take up one piece on the floor but that we would 
do housing finance in general on the floor to deal with the 
complications that the FHA Director is laying out right now.
    In other words, if we just deal with one component, we can 
grate tremendous weaknesses in other components of housing 
finance, especially those components that the Federal 
Government is involved in.
    So, I appreciate the effort. I thank you. I always like it 
when the Chairman and Ranking Member work together and we have 
bipartisan consensus on something. I believe there is a way to 
develop bipartisan consensus not just on this piece but also on 
GSEs and some of the other pieces that Carol needs to have 
implemented, and I hope as a Committee we will be committed to 
doing all of it at once so we do it the right way, because 
again one piece can really get another piece greatly out of 
sync.
    So, I thank you very much for this and I look forward 
additional testimony.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and Mr. Chairman 
and Ranking Member Crapo, thanks for holding this hearing today 
and thank you for the work on this bill.
    Even as our housing markets continue to recover, the FHA is 
under severe capital strain. During the crisis, the FHA played 
an important role in maintaining our housing market liquidity 
but the funds capital ratio has taken a significant hit.
    The FHA solvency legislation is an important way to provide 
the agency with greater authority to manage and price for the 
risk it is assuming to mitigate losses on its current book 
business and to hold lenders accountable for proper 
underwriting and it is important that it is done while ensuring 
that the FHA can play an ongoing role in supporting housing for 
underserved markets.
    So, Mr. Chairman and Ranking Member Crapo, thanks for 
taking this issue up. I also want to say just briefly that it 
is my hope that after we finish this bill, we can turn to other 
piece of the puzzle and that is GSE reform in a similarly 
balanced, thoughtful, and bipartisan way. I think the issues 
fit closely together and the interplay between each is very 
important to the housing market.
    Assistant Secretary Galante, in recent years FHA's single 
family business shows a high average FICO scores and lower 
delinquency rates which is positive for the health of the 
insurance fund. However, concerns have been raised that some 
deserving borrowers are being shut out of FHA because lenders 
are imposing overly strict credit overlays to avoid 
indemnification risk.
    As Commissioner, what legislative safeguards do you think 
need to be included in this legislation to ensure an 
appropriate balance?
    Ms. Galante. Thank you for that question. That is the 
question that we struggle with everyday particularly through 
this crisis which is ensuring continued access to credit for 
creditworthy borrowers and at the same time ensuring that we 
are rebuilding our capital reserves after, you know, the worst 
recession the country has had since the Great Depression. So, 
that is a balancing act we do everyday.
    I would say the kinds of authorities that we are talking 
about in this bill in terms of indemnification and repurchase 
are very reasonable in terms of the lender's side of the 
equation.
    I think the changes to the compare ratio or there is some 
flexibility. The compare ratio is how we measure lenders 
against each other. The changes we are asking for here would 
help us really be able to hone in on and target what I would 
call things that are the manufacturing era of the lender as 
opposed to the credit box of FHA.
    As lenders can feel more comfortable that we are not going 
to go after them because they lend to the whole range of the 
credit box but we are going to, you know, deal with their 
challenges when they make errors that they should not make or 
skip steps that they should not skip in doing underwriting of 
these loans.
    The new compare ratio will give us a better ability to look 
at that and compare lenders on that basis. So, that is 
something that we are hoping will both, you know, decrease the, 
quote, lender overlays that we are seeing today.
    Senator Hagan. The past FHA solvency legislation has 
included a programmatic review of early period delinquency. 
What has been done to investigate and review these 
delinquencies that become 90 days or more delinquent in the 
first 24 months since the origination?
    Ms. Galante. Yes. So, we now partly as a recommendation 
from the IG and the GAO and partly because we got some systems 
help through this FHA Transformation, we actually do monitor 
all early payment delinquencies, any loan that, you know, 
claims or is 90 days down in the first 6 months is reviewed on 
an ongoing basis; and then we also have an algorithm where we 
are looking at a percentage of all loans on an ongoing basis to 
ensure that we are catching earlier patterns or problems we are 
seeing from----
    Senator Hagan. Then what action do you take if you notice 
the ongoing delinquencies?
    Ms. Galante. Yes. So again we can require indemnification 
from certain lenders. We can not require indemnification from 
other lenders which is part of the authority we are asking for 
here.
    So, in those other situations, we are essentially in a 
negotiation with them on whether we are going to, you know, 
come after them with a big hammer of lawsuits versus being able 
to deal with this on a ongoing, one-by-one way.
    Senator Hagan. In your testimony, you mentioned that the 
FHA plans to launch a large scale, proactive marketing campaign 
to promote the modification in short sale strategies for 
delinquent borrowers. Can you describe that program in a little 
more detail and when and where do you expect to focus your 
efforts in these programs?
    Ms. Galante. Yes, thank you. So, now that we have spent 
some significant time. I think having the right programs in 
place like an expedited short sale process and changed our loss 
mitigation waterfall, we really want to make sure that our 
servicers are actively seeking out borrowers for those tools 
and not just doing this on automatic pilot.
    And so, the strategy is designed to take some of the, pilot 
it with one or two particular servicers where we think could 
use some additional encouragement in this area and work with 
them to see how much more uptake we can get on these loss 
mitigation tools and the short sale tools.
    So, that is what we are embarking upon.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Moran.
    Senator Moran. Mr. Chairman, thank you. Thank you and the 
Ranking Member for this hearing and thank you for working 
together to produce a bill. I hope that the stories that I have 
read that GSE reform is the next step in this Committee are 
accurate and I look forward to working with both of you to 
accomplish a change in the current circumstance we find 
ourselves in in trying to make certain that housing markets 
continue to recover.
    I have always thought that in the absence of a housing 
recovery, our ability to have an economic recovery is 
significantly diminished and I am pleased to see our Committee 
focusing the attention that it is on this topic.
    Ms. Galante, the FHA at least according to the President's 
budget request could potentially draw down up to a billion 
dollars in Federal dollars to solve the solvency problems of 
FHA. Does this legislation reduce the probability of the need 
for that to occur.
    Ms. Galante. So, let me say this just to frame. The 
President's budget, you know, is an estimate. There is a 
reestimate that happens every year; and then based on both 
volume and policy changes, there is an estimate of how much we 
might need to draw from the Treasury.
    That budget reestimate was set when the budget came out and 
so these policies will not actually directly impact today, 
whether we need to draw or not draw, but what it will do is 
ensure that the next time the reestimate is done when these 
tools are in place and we will be able to employ them, that, 
you know, you will see the results of it down the road.
    So, it will help the FHA's long term financial health. 
Whether or not there is a draw which again is to not a cash 
need, it is to, quote, I like to use the term top off our 
reserves, that is a time, you know, if we need to draw that 
that will be what it is for.
    But this bill absolutely will help ensure that as we 
continue down the pike, we are, you know, getting the 
indemnifications and those kind of activities from lenders that 
we need to ensure that we are properly being compensated for 
the risk that we are taking.
    Senator Moran. When does that next estimate occur?
    Ms. Galante. It will occur with the 2015 President's budget 
which normally comes out in February.
    Senator Moran. What factors, what circumstances have arisen 
since the last estimate, since the estimate that is in the 
President's current budget that are favorable or unfavorable to 
the solvency of the FHA?
    In broader terms than just this piece of legislation, what 
else is occurring?
    Ms. Galante. Sure. A lot of different things are occurring. 
One is you have seen house price appreciation significantly 
more than was estimated both at the budget reestimate and the 
actuarial that was done last November. So, that is a positive.
    So, there are things happening in the economy that are 
positive that will help the long term trajectory of the fund. 
And then, all the policy actions that we have been taking 
including particularly the change in loss severities. When you 
go from, you know, losing 70 cents on the dollar to, you know, 
losing closer to, you know, 55 or 57 cents on the dollar and 
that continues to improve both as a result of the economy but 
also as a result of policy changes that we have made. Those 
kinds of things will impact ultimate results down the road.
    Senator Moran. Are you aware of any factors, circumstances 
moving us in the other direction creating greater challenges 
for the FHA?
    Ms. Galante. I am not at the moment. I mean, interest rates 
have a big impact, you know, interest rates going up, you know, 
hurts some access to credit. It helps the FHA in other ways.
    Senator Moran. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman and Ranking Member Crapo.
    I am very impressed by the FHA reforms you have put 
together and very much admire your having come out and put 
something to try to solve this very difficult problem. I just 
want to ask about some other areas that relate to this.
    Ms. Galante, one of the things we have learned in the 2008 
financial crisis is how important it is for different 
institutions, public and private, to have an accurate 
assessment of their risk exposure, and as part of them, to be 
able to aggregate reliable data about the loans they issue or 
insure.
    Now, the FHA faces particularly big challenges in assessing 
risks because of the decentralized program. As you know, the 
FHA's knowledge about its insurance exposure is only as good as 
the quality and consistency of the data given to it by approved 
banks along with the work it does to audit then, after the 
fact, the information that it receives.
    So, as you may know, the FHFA and the Consumer Financial 
Protection Bureau have been working to put together a uniform 
mortgage data base program to track more loan level data about 
origination and performance. And if it succeeds, I think it 
could be very helpful in mortgage insurance pricing and 
increasing general market efficiency by making it easier to 
evaluate the riskiness and profitability of different pools of 
mortgages.
    So, I just wanted to ask about the FHA's role in that? Have 
you been participating in that?
    Ms. Galante. We are very interested in this issue and I 
will just mention two items. One is that Ginnie Mae, which is, 
you know, the securitizer, so go speak, for FHA, it is working 
on making much more loan level data available to their 
servicers, to their investors of those loans. I think that 
additional data availability is imminent and that will be 
extremely helpful for people evaluating the risk of FHA, VA, 
and rural loans that are in those.
    Senator Warren. Have you considered participating along 
with FHFA and CFPB so that we, it helps us get apples to apples 
comparisons all the way through.
    Ms. Galante. Yes. So, we are very interested in 
participating.
    Senator Warren. Good.
    Ms. Galante. I do not want to continue to whine about money 
and systems.
    Senator Warren. Go ahead.
    Ms. Galante. But that is a challenge for us right now. We 
are actually, you know, trying to work on, we need some 
contractual help in order to participate in that actively. But 
we are very interested.
    Senator Warren. Good. But you feel like you have adequate 
authority. You do not need any additional authority to do it. 
You just need the resources.
    Ms. Galante. Correct.
    Senator Warren. OK. Good. I want to ask about another part 
two. Under a recent FHA guideline, it is Mortgagee Letter 2012-
22, it appears that homeowners must be currently employed in 
order to be eligible for certain loss mitigation options, in 
other words, helping people who are in trouble on their 
mortgages.
    This concerns me because it seems to arbitrarily 
discriminate against people who live on unearned income like 
Social Security, veterans benefits, child support. Am I missing 
something here or what is going on with this policy from FHA?
    Ms. Galante. Yes, I appreciate the concern here. I would 
just say I have just recently been made aware of this 
particular issue and I am looking into it. I do agree that what 
we are, you know, the intent of what we are looking for here in 
order to be eligible for some loss mitigation activities 
including modifications, we do need to see that there is a 
stream of income that supports that obligation.
    Senator Warren. I certainly understand.
    Ms. Galante. I do think this is a reasonable concern for us 
to go back and look at the employment versus source of income 
but we will look at that.
    Senator Warren. Excellent. Thank you very much.
    Just in the few minutes I have left, the few seconds I have 
left, I just want to ask you a brief question about the FHA's 
role in being countercyclical in the housing market, and we had 
some discussion. I heard you talking about the tension with 
premium increases that as the market goes down is the time you 
may need to rachet up premiums but then you are behaving in a 
way that is procyclical, that is, making the booms higher and 
the busts lower.
    So, if you could just speak very briefly to the question of 
how the proposed legislation would affect your ability to be 
countercyclical and thus help us both tamp down a little on 
booms and help us even out a bit on busts.
    Ms. Galante. Yes, I appreciate the question, and it is 
wide. I think the current Section 7 is pretty inflexible about 
when that premium increases must be put in place, and we think 
that will hurt in the countercyclical situation if we are at a 
place where we have already, for example, raised those enough 
to be covering our risk and we have other tools to get to the 
same place, that we should be looking to those other tools as 
much as possible.
    Senator Warren. Because you would like to see more 
flexibility there?
    Ms. Galante. Yes.
    Senator Warren. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thank you for 
being here, Ms. Galante.
    As you know, last week, on July 17th, I wrote to you about 
a stress test that was conducted but not disclosed to Congress 
or the American people, and I have not gotten anything back in 
response, so I want to ask you about that.
    It is really troubling to a lot of us that the only reason 
we know about it is the Wall Street Journal happened to report 
on it. The Wall Street Journal wrote that it was a, ``hidden 
report based off of annual tests done by the Federal Reserve 
Board, and it projected losses over 30 years that could reach 
as high as $115 billion.''
    First of all, will you submit the full, unredacted stress 
test report for the record of this hearing in the next few 
days?
    Ms. Galante. Senator, let me say first thank you for the 
question and also say that there is no, quote--and I am going 
to use the quotation marks here for the transcriber, there is 
no ``hidden report.'' If I could give you the background on, I 
believe, what the Wall Street Journal article was referring to, 
the annual actuarial review is an 8-month-long process, and 
there is substantial conversation back and forth between FHA 
staff and the independent Actuary performing the Actuarial on 
our behalf and one that we, you know, submit to Congress and 
also write a report on. That back-and-forth includes data 
collection, data analysis, conversations of what model changes 
we might want to deploy this year from their perspectives, what 
model changes FHA might want to deploy from our perspective. 
You know, they have got IG input, GAO input into what happens 
to the--what goes into the Actuarial each year. And I think 
what this report is referring to is the Actuary at one point in 
an early draft did provide an economic scenario that included a 
Fed stress test. By the way, it is not a report. It is a line 
or a column in a chart with a variety of other economic range 
of factors.
    Senator Vitter. Let me back up. Is there a Fed stress test?
    Ms. Galante. Again, the independent Actuary, in an early 
draft of the report, showed two FHA staff a chart that had a 
``Fed stress test'' as one of the scenarios in that report. As 
conversation----
    Senator Vitter. Will you submit for the record all of the 
information regarding that Fed stress test that FHA has?
    Ms. Galante. So, again, I would say we have--you know that 
the Wall Street Journal article that you are referring to is 
subject to Congressman Issa's Oversight Committee. We have been 
very cooperative with his Committee in providing all of that 
data that they have asked for, and so anything that, you know, 
we have provided that--you know, I defer to him in terms of----
    Senator Vitter. I will defer to him, too, and he tells me 
that they have not gotten the Fed stress test and everything 
regarding it that they have asked for. Will you make everything 
FHA has with regard to that Fed stress test part of the record 
of this hearing?
    Ms. Galante. So, again, all I can say is we have given them 
everything that we have around this----
    Senator Vitter. Forget about them. Will you make part of 
this record that Fed stress test and any material you have 
regarding it?
    Ms. Galante. I do not--you know, we have been responsive to 
every request that they have asked for. We do not have any 
additional----
    Senator Vitter. I am making a request. Forget about them. 
Will you make the Fed stress test and any information you have 
regarding it part of this record?
    Ms. Galante. Again, I would defer to Congressman Issa on 
that.
    Senator Vitter. So if he says you will, you will?
    Ms. Galante. We have given them everything that we have.
    Senator Vitter. I am not asking about his request. I am 
making a request to make part of this Senate Committee record 
the Fed stress test and material you have regarding it. I think 
that is a reasonable request for the oversight Committee of 
FHA.
    Ms. Galante. Senator, what I am trying to say is that I do 
not have that information. I have what was given to us in a 
draft report with a chart----
    Senator Vitter. Whatever you have regarding the Fed stress 
test, whatever that is, whatever universe that is, will you 
make it part of the record of this hearing?
    Ms. Galante. We can do that.
    Senator Vitter. Thank you. OK. I would also note with 
regard to this, a senior FHA official was quoted in this 
article as saying, ``While the agency still wanted to present 
the results of the Fed stress test to other Government 
agencies, we just do not want that analysis to be in the 
Actuarial Review Report. In congressional hearings, it is quite 
possible that we will be required to present this information 
on the record, but that will be well after the Actuarial Review 
is released and the initial media coverage takes place.
    Again, my time is up, but let me just say that is very 
concerning. Did you approve this strategy, this decision, the 
decision that is reflected in that quote?
    Ms. Galante. So, again, I cannot speak to the quote. I am 
not even sure who it was from. But I can say that, you know, 
there was back-and-forth between FHA staff and the Actuarial, 
not just on this but on many, many items about what would 
ultimately be included in the report. It is an independent 
Actuary. It is their decision at the end of the day what 
information they are going to include in that report.
    Senator Vitter. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Commissioner, 
welcome.
    Let me start off with HECM. I heard your comments. I read 
your testimony. I appreciate your acknowledging our work in 
this regard on making sure that seniors can stay in their homes 
as they get old, thereby borrowing against their equity. But I 
get a sense when you say that your support moving the House 
bill that has been sent over here is primarily because for you 
time is essential. Is that a fair statement? Because there are 
elements of our bill that I think are better, with all due 
respect to our House colleagues, and I think give you some 
greater tools to try to achieve the goal. But when you say move 
the House bill, I get the sense that you are saying that 
because time is of the essence. Or is that an unfair 
characterization?
    Ms. Galante. Senator, that is a very fair characterization. 
The elements in your bill are quite good, and we appreciate 
them greatly. But time is of the essence here. It is 
unfortunate, but if we cannot make these more nuanced changes 
that, you know, get to the core problems of the reverse 
mortgage program through mortgagee letter before the beginning 
of the next fiscal year when we have a new calculation of how 
the reestimate will work or how the budget subsidy for this 
program will work, we are going to have to make some really 
radical changes to the program that I do not think ultimately 
get to the core of the problem.
    Senator Menendez. So while I appreciate the Chairman and 
the Ranking Member looking at our provisions in the context of 
this, if I were to take the House bill, substitute it with mine 
and send it back to the House, assuming I could get that done, 
you would not be opposed, you would be supportive of that?
    Ms. Galante. Yes, sir.
    Senator Menendez. All right. So understanding the urgency, 
can you elaborate on some of the factors that are driving the 
program's current financial situation so people understand and 
what the consequences of inaction would be? You say you would 
have to make some pretty dramatic changes. Maybe you could give 
us a sense of that.
    Ms. Galante. Sure. There are a couple of major things.
    First of all, you know, the economy, both for the forward 
mortgage and the reverse mortgage program, house price changes, 
for example, certainly have hurt the performance of the reverse 
mortgage program, in some ways more than the forward program 
because it looks at--long-term house prices are more important 
than shorter-term house prices. But we cannot change that fact.
    But the biggest challenge is that the program has allowed 
people to frankly draw more up front--and I am not talking 
about how much they ultimately can take out on their reverse 
mortgage, but take more money out than they really need to live 
on or to pay their obligations. The program, the way it is 
currently structured, encourages them to take more out up front 
than they should. And, frankly, lenders are encouraging them to 
take more out up front than they should.
    So the changes that we are trying to make are to put in 
financial assessments to make it much more clear and require 
that you can only take out, you know, what you need for what 
you are going to need over the projected life. And if we cannot 
make those nuanced changes, we are just going to have to say 
the entire amount that you can take out on this reverse 
mortgage is going to be just lowered substantially for 
everybody across the board, which is going to make it a much 
less effective program and much less useful for far fewer 
people. So we would rather try to make the more nuanced changes 
to get at the right problem than to take that blunt across-the-
board cut in how much you can take out in a reverse mortgage.
    Senator Menendez. OK. And then just moving for a moment to 
FHA, you know, preserving the opportunity for affordable 
ownership for American families is, in my mind, one of the 
critical roles of the FHA. And another critical role of the FHA 
has had is as a countercyclical stabilizer for the housing 
market during times of economic stress.
    So I have heard you generally testified favorable as to the 
bill that is proposed here. What provisions that are included 
in the current bill--what elements of the program, I should 
say, are essential to preserve? And what changes should we not 
make in order to allow FHA to continue serving those important 
market roles?
    Ms. Galante. A very good question. I appreciate that.
    Senator Menendez. I only ask good questions.
    [Laughter.]
    Senator Menendez. I am just kidding.
    Ms. Galante. So I would say this: I think the core mission 
of FHA is both to be able to play a countercyclical role when 
necessary, but when that is not necessary, to be serving lower-
wealth borrowers. So it means, you know, we want to be able to 
keep the ability to do lower downpayments, for example. We 
think that is an important element of providing access to home 
ownership in this country, as long as it is done well and the 
downpayment is considered along with other factors in ability 
to repay. We certainly want people who, you know, can afford to 
repay their mortgages. But we would not want severe 
programmatic restrictions on who we can serve, you know, 
literally put into legislation and not allow us to look at the 
compensating factors that make a good borrower.
    So I do not think that bill--I do not think this bill 
damages our ability to do any of that, so we support the 
changes that are being requested here. But that countercyclical 
element with the, you know, kind of automatic premium increase 
I think is something that we do need to work on.
    Senator Menendez. All right. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you very much, Mr. Chairman, and 
mine is more basically philosophical, where we are going, and 
we have talked about this before, the high-end loans are being 
made when it had changed, I think back in 2008; 217 to 729 I 
think is where the loan range.
    Ms. Galante. So, again, for high-cost markets, we go up to 
729. That is correct.
    Senator Manchin. 729. The only thing, when you look at 
basically nationally, the figures of 2011, borrowers with an 
income of over $75,000 made up 32 percent of your loans, I 
think. And in West Virginia, that number is about 28 percent. 
But that is substantially higher than it was in 2006. It looks 
like we are moving away from the mission that FHA had, which 
was basically in the 1940s it was helping the veterans; in the 
1950s, 1960s, and 1970s helping the elderly, handicapped, and 
lower-income Americans. it seems that we are more focused on a 
target that is much higher. And I know everything has moved, 
but perceptually, we are not there for that person on that 
lower end, but we are of more help to the higher end.
    Ms. Galante. Yes, so----
    Senator Manchin. Do you find that troublesome?
    Ms. Galante. Senator, I do not for this reason, and it goes 
back to the conversation we were just having on 
countercyclical. When FHA stepped in, there was literally no 
place to get a mortgage in 2008, 2009, and Congress gave us 
authority to go to higher loan limits. They also gave the GSEs 
authority to go to higher loan limits. So that was an important 
countercyclical role that we were playing.
    I fully expect--and as we, you know, continue down this 
path, those higher loan limits do expire at the end of this 
fiscal year. They were extended once. But, you know, as we are 
coming out of the crisis, we should dial back to playing the 
more traditional role. But that said, I think having the 
ability for FHA to play the countercyclical role is an 
important one for the country.
    Senator Manchin. The other thing I would say, based on that 
reply and the other replies I have heard, are we relying on the 
pure hope that the housing market is going to recover? Or do 
you think we need to be taking steps in the event that the 
downturn continues based on the financial condition of FHA?
    Ms. Galante. So, again, I would just say that the playing 
of the countercyclical role here in terms of particularly the 
larger loans, you know, they were not particularly problematic 
loans for us. I mean, the loans that were problematic are the 
loans that were made in the early part of the crisis, 
regardless of where they were on the loan spectrum, right? 
People lost their jobs, house prices declined significantly, 
and that is what caused by stress at FHA but certainly stress 
in other parts of the market.
    But I would say decreasing the loan limits at the 
appropriate point in time--and I think given that they are 
expiring at the end of this calendar year, by the time we would 
go through that process, I do not think it will be necessary. 
Certainly not extending them would make sense given where we 
are in the market recovery.
    Senator Manchin. But the mandated 2-percent line, you have 
been below that since 2009, right?
    Ms. Galante. Yes, but we have taken, again, a large number 
of steps to increase our capital, five premium increases, major 
changes in our loss mitigation activities, major improvement in 
our recovery rate. So we are moving in the right direction.
    The 2-percent capital ratio, I think just to make a point, 
I know that the bill talks about going to a 3-percent capital 
ratio over time. I think that is a recognition that the 2-
percent ratio was not meant to withstand the most severe 
recession we have had since the Great Depression. It was meant 
to give us a cushion for a mild or a moderate recession.
    So we, like other financial institutions, did not make it 
through this very severe period with a 2-percent capital ratio. 
So for more cushion, for more security in the future, you know, 
having a larger capital reserve ratio is certainly a reasonable 
thing that we can do.
    Senator Manchin. Well, the legislation, I know that both 
our Chairman and our Ranking Member, the minority Ranking 
Member, have legislation which they are leading. You have a 
House piece of legislation. Do you as the agency believe that 
there is need for legislation for corrections to prevent what 
has happened? Are you supportive of change?
    Ms. Galante. I have expressed I am supportive of a number 
of the measures here in this bill, and I think they will be 
very helpful to us in ensuring that we both can rebuild capital 
and hold lenders accountable and what-not moving forward. And I 
think that is, you know, a very important change. So we welcome 
that.
    We also do see that, as we move with housing finance reform 
more largely, we need to be sure that we understand FHA's role 
in the larger housing finance system.
    Senator Manchin. Thank you.
    Chairman Johnson. I would like to thank Commissioner 
Galante for being here with us today. I look forward to 
continuing working with the Ranking Member and Members of the 
Committee to move this legislation quickly.
    This hearing is adjourned.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF SENATOR MARK KIRK
    I want to first thank Chairman Johnson and Ranking Member Crapo for 
holding such an important hearing on the solvency of the Federal 
Housing Administration (FHA).
    Since the National Housing Act was signed into law in 1934, the 
Federal Housing Administration (FHA) has helped millions of Americans 
achieve home ownership. Like most creations of the Government, the 
FHA's mission and statutory obligations have been muddled with 
increased demands over the decades, often by Congress, which have led 
to loosened lender underwriting demands and other negligent policies 
all in the pursuit to achieve higher and higher rates of home 
ownership.
    While the goal of home ownership is laudable and does help promote 
financial stability, we have all seen the adverse effects of an over-
stimulated housing market. We've also felt the pain caused when loans 
are not underwritten properly and when consumers who are not 
financially ready to have a mortgage are incented through Government 
programs to buy rather than rent.
    We also know all too well that when private market participants 
know the Federal Government stands behind the risk, moral hazard is 
created and private market participants take more risk than they 
otherwise would if the Government didn't insure their loans. We have 
seen the disasters that occur from private shareholder gains that too 
often spell disaster for homeowners and the American taxpayer. We saw 
this with Fannie Mae, with Freddie Mac, and we are now on the brink of 
seeing this with FHA.
    HUD promotes that, ``FHA is the only Government agency that 
operates entirely from its self-generated income and costs the 
taxpayers nothing.'' However, with a more than $16 billion negative 
economic value, \1\ the Federal Government is now faced with trying to 
make reforms to FHA to ensure that the taxpayer is not in fact on the 
hook to bailout the FHA.
---------------------------------------------------------------------------
     \1\ Based on the last independent actuarial showed a negative 
economic value.
---------------------------------------------------------------------------
    Over the years and decades, new programs have been created and more 
mandates have been made for FHA to relax underwriting standards. One 
such program creation was the Home Equity Conversion Mortgage, or HECM 
program. The HECM program is the Government-insured reverse mortgage 
program. Again, while a laudable program that was designed to be a 
valuable financial tool for seniors, the HECM program is dangerously 
underwater, with nearly one in ten HECMs defaulting last year.
    During the latest financial crisis, seniors around the country 
watched the equity in their homes plummet and saw their retirement 
plans--including their 401(k)s--devalued. Many retired seniors were 
forced out of retirement and back into the workforce. With limited 
options, many seniors turned to the largest asset they had, their home, 
and took out a reverse mortgage.
    While I think that the FHA has done a poor job to date of managing 
the HECM program, it is not my intention to get rid of the FHA reverse 
mortgage program.
    My rationale for examining the FHA program is simply this: if the 
FHA HECM program were designed to best meet the needs of and protect 
seniors, the rate of defaults and losses under the HECM program would 
be far less. Put simply; make a program that works for seniors--that is 
safe and fiscally sound--and the program will thrive and the risk to 
the American taxpayer will be far less.
    American seniors have worked their entire lives to improve this 
country and pave a more promising path for future generations. We owe 
it to them to provide safe, reliable tools so they too can meet their 
financial needs.
    I look forward to continuing to work with my Banking Committee 
colleagues to legislatively enhance the safeguards and protections for 
seniors under the HECM program and to holding FHA's feet to the fire to 
ensure the program returns to solvency.
                 PREPARED STATEMENT OF CAROL J. GALANTE
    Assistant Secretary for Housing/Federal Housing Administration 
       Commissioner, Department of Housing and Urban Development
                             July 24, 2013
    Thank you, Chairman Johnson and Ranking Member Crapo, for this 
opportunity to discuss the proposed FHA Solvency Act of 2013. First, I 
would like to thank the Committee, particularly the Chairman, Ranking 
Member, and their staffs, for all their hard work on this bill. This 
effort addresses many longstanding legislative requests of the Federal 
Housing Administration (FHA) in an evenhanded and forward-looking 
manner. The Secretary and I greatly appreciate the introduction of a 
bipartisan bill that will give HUD the tools to ensure a fiscally sound 
and vibrant FHA continues to support responsible home ownership and 
affordable housing for generations to come. We look forward to working 
with the Committee to help FHA better respond to current and future 
challenges.
    As the Administration has said consistently, a strong FHA is vital 
to the success of our Nation's housing market and critical to its 
ongoing recovery. As we see signs of recovery, this bill represents an 
important step forward, turning our collective focus away from 
responding to the immediate crisis to strengthening the market by 
applying lessons learned from that experience and giving FHA the 
necessary tools to better protect the Fund and the market in the 
future.
    Historically, FHA's role has been to provide access to mortgage 
credit for creditworthy borrowers not otherwise served by the market 
and play a necessary countercyclical role during times of economic 
stress. As recently as my testimony before your colleagues on the 
Senate Appropriations committee in May, I have articulated the steps we 
have taken, and continue to take, to ensure that FHA, and particularly 
the MMI Fund, would be able to continue to play that role in a 
responsible fashion while reducing risk to taxpayers and borrowers 
alike. I can now report that these steps have had a significant 
positive impact on the fund, and that major indicators show strong, 
encouraging trends. However, our work is far from finished and we look 
forward to partnering with this Committee to ensure that these trends 
continue.
Changes to FHA Already Resulting in Positive Trends
    FHA, along with the Government National Mortgage Association 
(GNMA), continues to have a significant impact on the Nation's housing 
market and economic recovery. The activities of the Federal Government 
are critical to both supporting the market in the short term and 
providing access to home ownership opportunities over the long term, 
and doing both in a way that minimizes risks to taxpayers.
    As has been true throughout its history, FHA is particularly 
important to borrowers that the conventional market does not adequately 
serve, including qualified first time homebuyers and minority borrowers 
who historically have been underserved. According to the latest Home 
Mortgage Disclosure Act data, half of all African Americans and 49 
percent of Hispanics who purchased a home in 2011 did so with FHA 
insured financing. Seventy-eight percent of the home-purchase loans 
insured by FHA go to first time homebuyers.
    Despite ongoing stress from legacy loans, FHA has made significant 
progress and is on a positive trajectory moving forward as a result of 
numerous policy changes by this Administration. The housing market, and 
thus the performance of the Mutual Mortgage Insurance (MMI) Fund, is 
closely linked to the state of the economy and improvements in the 
housing market combined with these policy changes have placed FHA in a 
stronger position.
    Recently implemented changes continue to have their desired 
effects--improving loss mitigation, increasing recoveries and 
decreasing FHA's share of the market. Of the changes made since 2009, 
FHA's lender oversight and credit policies have yielded substantial 
improvements in the quality of new loans endorsed by FHA, and premium 
flexibility given to us by Congress has allowed us to price 
appropriately for future risk. Today, our newest books of forward loan 
originations are the most profitable in Agency history.
Improving Loss Mitigation and Increasing Recoveries
    FHA has always had mandatory loss mitigation requirements for its 
lenders, designed to protect borrowers and taxpayers alike, but we 
implemented substantial improvements in recent years to enhance the 
effectiveness of this program. Serious delinquencies continue to fall, 
declining from 9.59 percent in December 2012 to 8.27 percent in May 
2013. Based on data from April 2013, cures--loans that reperform--are 
surpassing new serious delinquencies. Our efforts to provide effective 
and efficient loss mitigation, in combination with improving economic 
conditions, are working--reducing loses to the Fund.
    A Mortgagee Letter published on November 16, 2012, outlined changes 
to FHA's loss mitigation home retention options. One of the key 
elements of this update was moving FHA's Home Affordable Modification 
Program (HAMP) product up in FHA's loss mitigation waterfall so 
servicers could more quickly offer deeper payment relief to struggling 
FHA borrowers, resulting in an increase in the number of borrowers 
being able to retain their homes. FHA has also targeted deeper levels 
of payment relief for borrowers earlier in the delinquency cycle and 
provided greater clarity for servicers.
    In addition to improving FHA loss mitigation procedures, housing 
counseling plays an important role in reducing losses to the Fund. A 
2011 study by the Urban Institute revealed that borrowers counseled by 
HUD-approved agencies through the National Foreclosure Counseling 
Mitigation program were 89 percent more likely to receive a 
modification cure compared to similar, noncounseled borrowers. In 
addition, counseled homeowners were at least 67 percent more likely to 
remain current on their mortgage 9 months after receiving a loan 
modification cure. HUD-approved housing counseling agencies provided 
foreclosure prevention services to 774,000 families in fiscal year 
2012. Looking forward, the Homeowners Armed With Knowledge (HAWK) 
initiative seeks ways to embed housing counseling in FHA origination 
and servicing in order to reduce losses to the MMI Fund and improve 
household economic and social well-being.
    Although FHA is deeply committed to providing loss mitigation 
alternatives to borrowers which permit them to retain their homes, home 
retention is simply not an option for some borrowers. For these 
borrowers, preforeclosure sales, also called short sales, offer an 
opportunity to transition out of their homes. This enables both FHA and 
borrowers to avoid the costs and damage of the foreclosure process. 
Just this month, FHA introduced a streamlined preforeclosure sale 
policy which removes certain barriers for borrowers in obtaining a 
short sale on an FHA-insured mortgage. Because losses from short-sales 
are substantially lower than from the traditional FHA Real Estate Owned 
(REO) process, the shift of greater numbers of distressed homeowners to 
short-sale dispositions rather than foreclosures is anticipated to 
yield better results for the MMI Fund while allowing distressed 
borrowers to start anew without having to go through the difficult and 
costly foreclosure process.
    Throughout the past fiscal year, FHA has been executing an overall 
asset management strategy aimed at ramping up REO alternatives. FHA is 
expanding a pilot in which properties secured by nonperforming FHA-
insured loans are offered for sale by the lender who has completed the 
foreclosure process and sold to third party purchasers without ever 
being conveyed to FHA. This method of disposing of these properties is 
expected to yield lower losses for the MMI Fund than selling them 
through FHA's normal REO disposition process, as carrying costs 
associated with preserving, managing, and marketing an REO property are 
eliminated.
    The Distressed Asset Stabilization Program, another REO alternative 
that improves Fund performance, has successfully scaled up operations 
and is now selling approximately 10,000 loans per quarter. FHA is able 
to dispose of the nonperforming loans, while recouping as much or more 
than would be recovered from REO disposition and contributing to 
community stabilization initiatives in cities hit hardest by the 
recession.
    Beginning in 2013, FHA plans to launch a large-scale proactive 
marketing campaign to promote modification and short-sale strategies 
for delinquent borrowers. This effort is expected to increase 
utilization of these programs, which will permit more borrowers to 
become aware of and take advantage of these opportunities, while 
reducing foreclosures and decreasing associated losses for FHA.
    Again, in combination with improved market conditions, our efforts 
are producing better results. Loss severity across PFS and REO are down 
from their historic highs of 48 and 72 percent, respectively, in 2011, 
to 45 and 61 percent today.
    And while we have taken aggressive steps to reduce losses on legacy 
loans, we have also taken measures to ensure that future books are 
appropriately priced, so that if there is a default, FHA will have 
sufficient reserves on hand. These policies include raising mortgage 
insurance premiums five times since 2009 and reversing a policy that 
canceled mortgage insurance premium (MIP) collections when the 
principal balance of an FHA-backed mortgage reached 78 percent of the 
original home value.
Improvements in Early Loan Performance
    Our most recent monthly and quarterly data shows the combined 
results of the housing market recovery and FHA's efforts. The 60-day 
Early Payment Default (EPDs) rate continues to trend down--to .25 
percent--the lowest it has been since 2007. Compared to 2012, EPDs have 
fallen 9 basis points, demonstrating that the credit policy changes 
made since 2009 are improving the quality of loans endorsed by FHA.
    FHA has also made significant changes to credit policy, including 
establishing a minimum credit score, as well as a two tiered down 
payment/credit score requirement wherein borrowers with scores less 
than 580 are required to have a larger downpayment. In addition, we now 
require manual underwriting for borrowers with credit scores below 620 
and debt to income (DTI) ratios over 43 percent, have enhanced FHA's 
TOTAL Scorecard, and have increased both downpayments and premiums for 
borrowers seeking loans in excess of $625,500.
    These steps, as seen through the reduction in EPDs, ensure that 
home buyers using FHA-insured financing are capable of meeting their 
mortgage obligations and will not put undue stress on the Fund.
    Simultaneously, our portfolio growth continues to slow, resulting 
in a declining market share, encouraging the return of private sources 
of mortgage capital to the market.
    In fact, the number of FHA single family loan endorsements by loan 
count, has declined to levels comparable to those seen in fiscal years 
2002 and 2003, when FHA's market share was lower than it is today, 
indicating that FHA's current market share is primarily due to a 
substantial decrease in the size of the total mortgage market rather 
than exceptionally high FHA loan volumes. As the market continues to 
recover, FHA's role will naturally recede further.
Tools for Management of the Fund and Additional Considerations
Tools for FHA
    The FHA Solvency Act of 2013 provides many tools and changes that 
FHA has requested to better manage the Fund--and we thank the Committee 
for its commitment to their inclusion. FHA has long believed them to be 
necessary in order to create a more responsive business model, better 
able to react to stress in the market. The Committee's support for 
these tools will provide flexibility, resources, and enforcement 
mechanisms that will result in a stronger, more secure MMI Fund.

    Indemnification Authority for Direct Endorsement Lenders 
        will allow FHA to seek indemnification from these lenders, 
        which account for 70 percent of all FHA approved lenders. With 
        this authority, FHA will be able to obtain indemnification from 
        all its approved lenders for loans that fail to comply with its 
        guidelines.

    The revised compare ratio will allow comparison on 
        origination and underwriting criteria, defaults and claims, as 
        well as some other factors the Secretary determines increase 
        risk to the MMI Fund--enabling FHA to respond appropriately to 
        changes in the market and mitigate risk.

    The authority to structurally change the Home Equity 
        Conversion Mortgage (HECM) program through Mortgagee Letters 
        will allow FHA to make critical changes quickly, preserving 
        this program, which is a vehicle that allows seniors to age in 
        place. These changes will help FHA ensure that new HECM 
        originations, now limited to three product lines, meet the 
        needs of the target population, reduce risks to the MMI Fund 
        and avoid dramatic actions that would harm the very consumers 
        these loans are intended to help in order to ensure actuarial 
        soundness. Given the high pace of change within the reverse 
        mortgage market and its impact on the MMIF, it is vital that 
        FHA be able to make program improvements quickly.
Points for Further Discussion
    While the bill offers a measured approach that provides tools to 
manage the MMI Fund, there are some topics which warrant further 
discussion and clarification to more directly address our shared 
concerns.

    HECM: We thank the Committee for including the language in 
        Section 13 which will allow FHA to make structural changes to 
        the HECM product through Mortgagee Letter which will stabilize 
        both the product and the Fund. During this work period, we urge 
        the Senate to take up H.R. 2167--which has passed the House and 
        accomplishes the same goals of this section--and the bill 
        introduced earlier this year by Senator Menendez.

    Servicing as a Recovery Tool: As currently drafted, Section 
        4 does not give FHA the tools necessary to ensure servicers are 
        being held accountable for their performance and to allow FHA 
        to shift servicing to a specialized sub-servicer if they cannot 
        fulfill their obligations under the contract of insurance. This 
        additional authority would minimize losses to the Fund by 
        facilitating more effective loss mitigation, yielding better 
        results for both borrowers and FHA.

    Capital Restoration: Section 7 establishes mandatory 
        premium increases during times when the capital reserve ratio 
        falls below required levels. While we share the Committee's 
        desire to ensure that future FHA leadership takes the 
        appropriate steps to protect the Fund and satisfy the capital 
        reserve ratio, as we have shown since 2009, premiums are only 
        one factor to consider in rebuilding that supplemental account.

    As written, the language does not account for the impact increased 
        premiums themselves will have on access to credit, endorsement 
        values, and ultimately the health of the Fund--potentially 
        undermining the goal of increasing the capital reserve. 
        Especially when it is necessary to respond quickly during times 
        of economic uncertainty or stress, this approach will have 
        unintended consequences for the Fund. Therefore, we ask the 
        Committee to continue to work with us in crafting language that 
        best facilitates recapitalization using the full range of 
        options available.
Additional Considerations
    Despite many policy and organizational changes proposed in this 
bill there are a number of statutory constraints which FHA strongly 
feels limit our ability to manage risk appropriately and are having a 
negative impact on FHA's fiscal health. These constraints include an 
increasingly complex mortgage market, aging FHA systems and 
infrastructure, a need for additional skills and expertise, and 
difficulty responding quickly to major risk issues as a result of 
contractual and statutory limitations. For FHA to manage risk and 
maintain operations as 21st century mortgage insurer, these constraints 
must be dealt with appropriately. For that reason, we would like to 
continue to explore with the Committee tools which can be leveraged to 
allow FHA to minimize risk to the Fund and taxpayers while continuing 
to serve consumers.
Conclusion
    Chairman Johnson, Ranking Member Crapo, I would again like to thank 
the Committee, under your joint leadership, for taking up the issue of 
long-term solvency of the FHA MMI Fund. The economic and housing crisis 
and recovery, as well as the new, multidimensional challenges facing 
our urban, suburban, and rural communities require an FHA that is more 
agile and responsive to real-time market dynamics. As such, we remain 
committed to continuously improving our stewardship of FHA. HUD stands 
at the forefront of the Federal response to the national mortgage 
crisis, economic recovery, Hurricane Sandy recovery, and the structural 
gap between household incomes and national housing prices--roles that 
require an agency that is sophisticated and market-savvy, with the 
capacity and expertise necessary to galvanize and direct a vast network 
of partners. Your efforts to ensure that is possible are both timely 
and necessary, and offer a strong start. I look forward to working with 
this Committee to continue to strengthen and preserve FHA for future 
generations.
         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                     FROM CAROL J. GALANTE

Q.1. Part of the FHA Solvency Act of 2013 aims to ensure that 
problems with various FHA lending programs that result in 
negative effects for homeowners and solvency issues for FHA are 
identified early, and that FHA takes the necessary steps to 
ensure that the problems are appropriately diagnosed, reported 
on, and remedial measures are taken to mitigate possible 
affects of these problems. While these requirements are made 
for FHA's MMI fund no similar specific recommendations were 
required under the act for the HECM specific program.
    Do you believe that a similar approach to identify problems 
early, appropriately diagnose and report the problems and 
recommend and implement remedial measures--should also be done 
within the HECM program?

A.1. FHA has worked proactively and aggressively to make 
changes to HECM to ensure program sustainability under its 
existing authority, and under the Reverse Mortgage 
Stabilization Act of 2013. With the support of Congress and 
using the authority of bill, FHA has been able to require a set 
aside for payment of property charges using HECM proceeds. FHA 
also requires a financial assessment, places limitations on the 
allowable draw during the first 12 months, and adds a new 
Initial Lump Sum Draw option. This is an addition consolidating 
the ARM Standard and ARM Saver programs and reducing the 
principal limit factor, which reduced risk by lowering the 
amount of equity that borrowers are able to access. These 
adjustments have helped place the HECM program on a positive 
and sustainable path forward.
    We agree that it is important to identify solvency issues 
early in the process for our programs that impact the MMI Fund. 
The changes FHA has been focusing on achieving involve 
proactive management of its entire portfolio, rather than 
developing separate and specific recommendations for the HECM 
program. FHA is pursuing greater ability to respond to emerging 
needs and changing economic conditions. These tools would help 
FHA better identify risks across FHA programs in the future and 
adjust quickly to prevent the type of scenario which made HECM 
unsustainable.

Q.2. While I think that indemnification is appropriate where 
there are cases of mortgagee fraud and/or misrepresentation by 
the mortgagee, I am concerned that indemnification may have 
unintended consequences. In recent years, FHA's single-family 
business shows high average FICO scores and low delinquency 
rates, which is positive for the health of the insurance fund. 
However, concerns have been expressed that some deserving 
borrowers are being shut out of FHA because lenders are 
imposing overly strict credit overlays to avoid indemnification 
risks. FHA's current average FICO score is 695, while in May 
2012, the OCC defined a prime loan as having a FICO score of 
669. While we want to ensure that FHA does not revert back to 
loose lending standards that are not based on credit 
characteristics of borrowers that will be able to pay the loan 
and that could jeopardize the solvency of the MMI, do you think 
that the current standards are too tight? Do you have concerns 
that overly strict enforcement standards could actually be 
counterproductive to FHA's core mission? What legislative 
safeguards need to be included in this legislation to ensure 
the right balance on enforcement?

A.2. We share concerns about access to credit, and are 
constantly evaluating our policies to ensure that we are 
accomplishing our mission while simultaneously preserving the 
health of the MMI Fund. FHA's mission includes stabilizing 
credit markets in times of economic disruption while 
maintaining access to home ownership opportunities for 
responsible, creditworthy borrowers. Every policy decision made 
by FHA considers the important balance between these goals.
    FHA has been working diligently to revise its quality 
assurance framework to help address concerns about enforcement 
standards and ensure that it incentives behavior that is 
aligned with FHA's mission while minimizing risk to the Fund. 
We have been engaging with various stakeholders in the lending 
industry as well as consumer advocacy groups and Federal 
regulators, on ways to improve the efficiency and effectiveness 
of the quality assurance process. These practices will balance 
the goals of protecting the consumer while creating clarity for 
lenders and mitigating the risk to the MMI Fund. FHA is working 
towards a framework that ensures that loans are reviewed in a 
reasonable time period, allows us to use loan quality findings 
to improve credit policy, and allows lenders to improve their 
FHA origination practices and ensures that access to credit is 
not being constrained for the responsible, creditworthy, 
underserved borrowers FHA is intended to serve.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COBURN
                     FROM CAROL J. GALANTE

Q.1. Many other countries around the world issue mortgages that 
have recourse. If the borrower defaults on the loan, and the 
house is not able to cover the losses, a lender can file a 
claim on the borrower's other assets. What is the Federal 
Housing Administration's (FHA) ability to use recourse to 
recover losses from single-family forward and reverse 
mortgages? In each of the last 5 years, in how many cases has 
FHA pursued recourse? How much did the agency recover in these 
cases? How would FHA benefit from increased pursuit of recourse 
to recover losses?

A.1. FHA has the ability to use recourse to pursue single 
family forward losses in some States, depending on State law. 
Reverse mortgages are nonrecourse.
    Federal law prevents delinquent Federal debtors from 
obtaining Federal loans or loan insurance guarantees. HUD 
developed the Credit Alert Verification System (CAIVRS) to 
assist in these types of situations. It is a shared database of 
defaulted Federal debtors, and allows identification of 
potential borrowers who are in default, or are delinquent on 
Federal loans with any agency. Through the CAIVRS system, 
Federal agencies and financial institutions can prescreen 
applicants for delinquent debts. Using this system, HUD has 
avoided over $12 billion in potential claims and more than $4 
billion in potential losses. The FHA Financial Operations 
Center is responsible for collecting deficiency judgments for 
mortgages that are assigned to HUD in connection with the 
foreclosure of FHA-insured loans. Only a very small number of 
these debts are currently being serviced, in compliance with 
the Debt Collection Improvement Act.
    The Department's position on the pursuit and collection of 
deficiency judgments for recourse FHA-insured mortgage loans 
was outlined in more detail in Housing Notice 94-89. This makes 
it clear that HUD would require mortgagees to obtain a 
deficiency judgment only with ``worst-case offenders'' to deter 
program abuse. This policy focused primarily on investor 
mortgagors, and the majority of FHA single-family programs have 
not permitted investor mortgagors, thus Title II deficiency 
judgments against borrowers are rare. In light of the 
substantial costs incurred in pursing such judgments, the 
likelihood of recovery to FHA to recoup losses would be minimal 
in most cases. Where the likelihood of recoveries is higher, 
the guidelines outlined in the above referenced Housing Notice 
would be followed.

Q.2. In each of the last 5 years, how many times did FHA notify 
the Department of the Treasury about outstanding, legally 
enforceable debt? In how many cases did FHA collect a payment 
from a borrower's Federal income tax overpayment? How much did 
FHA receive?

A.2. HUD alerts all lending Federal agencies about outstanding, 
legally enforceable debt through the Credit Alert Verification 
System (CAIVRS). This Federal Database tracks all Federal 
debtors and notifies them of any Federal liens, judgments, 
Federal loans that are in default and foreclosure, and any 
claims paid by reporting agencies.
    Nearly all collections related to FHA programs come from 
FHA approved lenders and are based on a variety of reasons 
including noncompliance with program rules and indemnification. 
Collection directly from borrowers is costly and generally 
results in little to no recovery to the FHA.

Q.3. The Federal Housing Administration (FHA) currently uses an 
accounting method prescribed by the Federal Credit Reform Act 
(FCRA). FCRA takes into account expected losses from claims and 
gains from premiums, but does not take into account for 
variations in market risk. Using fair-value accounting, for 
example, the Congressional Budget Office previously estimated 
that in 2012, FHA's insurance would cost $3.5 billion. Under 
FCRA, FHA estimated it would essentially save $4.4 billion. 
Fannie Mae and Freddie Mac already use fair-value accounting 
for their budget projects. Would using fair-value accounting 
improve budget projections for FHA, similar to the procedure of 
Fannie Mae and Freddie Mac? Would fair-value accounting help 
FHA better calculate premiums needed to maintain the required 
capital reserve during financial downturns?

A.3. The Federal Credit Reform Act of 1990 (FCRA) greatly 
improved the accuracy of cost estimates for credit programs by 
reflecting the estimated lifetime costs of loans and loan 
guarantees up front on a net present value basis, requiring 
policy makers to budget for those lifetime costs when making 
programmatic decisions.
    While fair-value analysis may offer some useful insights to 
inform decision, fair-value accounting would not be consistent 
with the goals of FCRA--to improve the accuracy of cost 
estimates and resource allocation. In contrast, fair-value 
accounting would include costs that are not relevant to the 
Federal Government and would make it more difficult to compare 
credit programs to each other, or to other Federal spending. 
Fair value would make budgeting less transparent by introducing 
a wedge between the cost estimates and deficit effects of the 
same program, would pose significant implementation challenges, 
and could introduce more distortion into cost estimates than 
valuable information. Thus, fair-value accounting would not 
represent an improvement over FCRA.

Q.4. The Federal Housing Administration (FHA) currently has 
very little risk-based pricing. Someone with a credit score of 
600 would receive the same insurance premium as someone with a 
score of 800 making the same downpayment. FHA has had some 
positive movement toward increased risk-based pricing in the 
last few years. For example, FHA no longer insures people with 
credit scores below 500 and requires a higher downpayment from 
scores 500-579. FHA tried to implement stronger risk-based 
pricing in 2008 but was dissuaded by critics in Congress. How 
would FHA's financial solvency have been impacted if FHA were 
able to implement stronger risk-based pricing, which is used 
other insurance businesses? Would you support providing FHA 
flexibility to use more risk-based pricing methods?

A.4. Today, due to authority provided by Congress, FHA is able 
to appropriately price for the risk of the loans insured in its 
portfolio. The combination of appropriate pricing, revisions in 
FHA's credit and underwriting policies and the development of a 
more robust risk-analytics framework have improved the health 
of the MMIF. At the level of premiums FHA was legally able to 
charge in 2008, it is unlikely risk-based pricing would have 
improved the health of the portfolio. Today, due to the changes 
made since 2009 including a shift to risk-based underwriting, 
risk-based pricing would not be necessary to continue on this 
trajectory. If however in assessing the risk to the Fund and 
access to credit to creditworthy borrowers, FHA felt that risk-
based pricing were appropriate, the agency has sufficient 
authority today to implement such an approach.

Q.5. The Federal Housing Administration (FHA) insures mortgages 
at a 100-percent level of coverage, even though private 
mortgage insurance is often significantly less. Please describe 
the differences in FHA's level of insurance to that of other 
Federal mortgage insurance programs the Departments of Veterans 
Affairs and Agriculture. As housing finance reform moves 
forward and private capital takes a more prominent role in the 
future, should FHA continue to insure the full value of 
mortgages?

A.5. The Department of Veteran Affairs' guaranty program 
insures 25 to 50 percent of the original principal in the case 
of a default. The USDA Section 502 Guaranteed Rural Housing 
Loan Program guarantees loans at 100 percent of the loss for 
the first 35 percent of the original loan and the remaining 65 
percent at 85 percent of the loss. The maximum loss payable 
under the USDA program cannot exceed 90 percent of the original 
loan amount.
    In general, both VA and the Department of Agriculture serve 
a different universe of borrowers than those accessing FHA 
insured mortgage financing. The USDA program only serves rural 
borrowers within certain income guidelines, and the VA loans 
are only available for honorably discharged military, current 
members of the reserves and the National Guard, and spouses of 
the military in certain circumstances. The VA provides 
supplemental servicing to borrowers that have trouble making 
mortgage payments. FHA programs serve a wider array of 
borrowers, and FHA has the critical mission of stabilizing 
credit markets in times of economic disruption. FHA also 
provides access to mortgage financing for underserved 
communities. In order to serve this role effectively, as it did 
before and during the financial crisis and continues to do 
today, FHA should continue to insure the full value of 
mortgages. If FHA scales back the full guaranty, it is likely 
lenders will be less likely to lend to many borrowers and, 
where they do, they will subject borrowers to higher costs of 
borrowing through increased fees and higher interest rates, 
having an adverse impact of credit access across the housing 
market. The increased risk could also further impact 
communities by causing some lenders to exit the market 
entirely, leading to a lack of competition and negatively 
impacting the housing market recovery. These effects would be 
at odds with FHA's mission. Of course, FHA must continue to 
serve this mission while protecting the insurance fund and 
taxpayer interest. To that end, since, FHA has taken 
significant steps to ensure that loans are properly priced, 
that credit policies facilitate access while managing risk and 
that counterparty risk is properly managed and enforcement 
actions taken where there are findings of noncompliance.
              Additional Material Supplied for the Record
   STATEMENT SUBMITTED BY ENRIQUE LOPEZLIRA, SENIOR POLICY ADVISOR, 
 ECONOMIC AND EMPLOYMENT POLICY PROJECT, OFFICE OF RESEARCH, ADVOCACY, 
              AND LEGISLATION, NATIONAL COUNCIL OF LA RAZA
    Chairman Johnson, Ranking Member Crapo, and Honorable Members of 
the Committee, I am pleased to have this opportunity to comment on the 
``FHA Solvency Act of 2013'' (S.1376). I am a Senior Policy Advisor at 
the National Council of La Raza (NCLR) with over 10 years of experience 
conducting research, economic analysis, and policy development in both 
the private and the public sectors, and I have written on policy issues 
in traditional and social media, as well as in academic and nonacademic 
publications. At NCLR, I conduct research, policy analysis, and 
advocacy on issues that are critical to building financial security in 
Latino communities, including home ownership. NCLR--the largest 
national Hispanic civil rights and advocacy organization in the United 
States--works to improve opportunities for Hispanic Americans.
    The NCLR Economic and Employment Policy Project promotes fair and 
accessible markets in which Latino families have the opportunity to 
obtain assets and build wealth sustainably so that they can be shared 
with the next generation. Through this project, NCLR (in partnership 
with the Center for American Progress) recently released Making the 
Mortgage Market Work for America's Families, a report on the need for a 
housing finance system that ensures access and affordability in the 
housing market. The NCLR Homeownership Network provides financial, 
homebuyer, and foreclosure prevention counseling to more than 65,000 
families annually. Our subsidiary, the Raza Development Fund (RDF), is 
the Nation's largest Hispanic community development financial 
institution. Since 1999, RDF has leveraged more than $680 million in 
financing for local development projects throughout the country. This 
work has increased NCLR's institutional knowledge of how Latinos 
interact with the mortgage market, their credit and capital needs, and 
the impact of Government regulation on financial services markets.
    NCLR believes that one of the best opportunities for Latinos to 
build wealth and financial security is through owning a home. The 
Federal Housing Administration (FHA) plays an essential role in making 
home ownership a reality for first-time homebuyers and underserved 
populations, including Latinos. Therefore, NCLR supports legislation to 
reform FHA in order to strengthen its financial condition. However, the 
need for FHA reform must be balanced with the need to ensure access to 
affordable mortgages for creditworthy low- and moderate-income 
homebuyers. My statement will outline key priorities that NCLR believes 
must be part of any effort to strengthen the financial standing of the 
FHA.
Preserve Opportunities for Access to Affordable Credit
    No one can deny the vital role FHA has played in helping the 
housing sector recover from the worst economic downturn since the Great 
Depression. In 2005, FHA had about a 5 percent share of the purchase 
mortgage market. By 2010, FHA's market share had increased to over 40 
percent. As private capital fled, FHA-insured mortgages became the only 
credit option for first-time homebuyers, minorities, and those with 
limited downpayment capabilities. In other words, FHA has been 
fulfilling its mission of providing the Federal backstop to ensure that 
every creditworthy American has access to a stable mortgage product. 
Therefore, it is essential that any reform of FHA maintain an 
appropriate level of Government support to ensure liquidity and 
stability in the housing market, especially for Latinos and other 
minorities.
Do Not Solve the FHA's Fiscal Troubles Only on the Backs of Low- and 
        Middle-Income Families
    Over the past 3 years, FHA-insured mortgages have become more and 
more expensive. Increases in mortgage insurance rates and downpayment 
requirements, along with requirements to carry mortgage insurance 
throughout the life of a loan, are putting FHA loans out of reach for 
creditworthy low- and middle-income borrowers. Further increases in 
insurance premiums and over-tightening of underwriting standards will 
only continue to hurt creditworthy first-time low- and middle-income 
homebuyers.
Protect the 30-Year Fixed-Rate Mortgage
    For nearly eight decades, 30-year fixed-rate mortgages have put 
home ownership within reach for America's middle class and first-time 
homebuyers. Without this flexible financing tool, home ownership would 
become a luxury reserved for the affluent. But this tool is under 
threat. Recent increases in downpayment requirements are already 
pricing out creditworthy first-time and low-income homebuyers. Research 
shows that higher downpayments are not good predictors of loan 
performance, yet downpayment increases are being used to reduce risk to 
the Mutual Mortgage Insurance (MMI) Fund. Research also shows that 
families who lack the cash for a high downpayment can be successful in 
a well-underwritten prime mortgage. Congress must preserve the 30-year 
fixed-rate mortgage by ensuring that FHA continues to provide low 
downpayment mortgages. The private market by itself will not offer a 
30-year fixed-rate mortgage. The credit and interest rate risks for 
private lenders are too high without a Government backstop. Therefore, 
FHA reform must continue to provide a Federal support to ensure that 
the 30-year fixed-rate mortgage remains an available option for 
homebuyers.
Ensure That FHA Continues To Play Its Countercyclical Role
    FHA's financial difficulties stem from loans made during the 
financial crisis. Loans made after the crisis are performing well and 
contributing positively to the MMI fund. It is therefore important that 
Congress does not overcorrect, introducing changes that may have 
unintended negative consequences. For instance, an over-tightening of 
underwriting standards could reduce both FHA's volume and the overall 
size of the mortgage market. This reduction in volume could lead to a 
decrease in home prices, which will limit FHA's ability to play a 
countercyclical role in the housing market and adversely impact FHA's 
financial condition in the long run.
Avoid Imposing Severe Programmatic Restrictions on Who FHA Can Serve
    The FHA was established to promote long-term stability in the 
housing market by assisting first-time low- and middle-income and other 
underserved homebuyers. Reform of FHA must not interfere with this 
mission. The need for financial solvency of FHA must be balanced with 
the need to keep reaching underserved homebuyers, especially Latinos 
and other minorities. FHA programs must not be available only to 
affluent buyers who can afford high downpayments. Insurance premiums, 
home price and income restrictions, and other underwriting standards 
must be flexible enough to ensure liquidity for all creditworthy 
buyers, not just the cream of the crop.
    NCLR believes that FHA plays a significant role in the Nation's 
housing finance system and that its mission of reaching underserved 
populations, especially Latinos and other minorities, must continue. We 
support reform of FHA to address its financial challenges, but we urge 
Congress to balance this need for reform with the need to ensure access 
to affordable mortgage credit for creditworthy low- and moderate-income 
homebuyers. As the process continues, we look forward to working with 
this Committee, other members of Congress, and the Obama administration 
to achieve this goal.
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