U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

62–681 PDF 2010

IMPLEMENTATION OF HIGHER FHA LOAN FEES 

AND PENDING LEGISLATIVE PROPOSALS TO 

STRENGTHEN THE FHA MMIF FUND AND 

IMPROVE LENDER OVERSIGHT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 22, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–156 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 22, 2010 .......................................................................................... 1 

Appendix: 

September 22, 2010 .......................................................................................... 31 

WITNESSES 

WEDNESDAY, SEPTEMBER 22, 2010 

Stevens, Hon. David H., Assistant Secretary for Housing/FHA Commissioner 

U.S. Department of Housing and Urban Development ..................................... 6 

APPENDIX 

Prepared statements: 

Towns, Hon. Edolphus ..................................................................................... 32 

Stevens, Hon. David H. .................................................................................... 36 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Stevens, Hon. David H.: 

Written responses to questions submitted by Representative Miller ........... 44 

(1) 

IMPLEMENTATION OF HIGHER FHA LOAN 

FEES AND PENDING LEGISLATIVE 

PROPOSALS TO STRENGTHEN THE 

FHA MMIF FUND AND IMPROVE 

LENDER OVERSIGHT 

Wednesday, September 22, 2010 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Members present: Representatives Frank, Waters, Sherman, 

Moore of Kansas, Scott, Green, Klein, Carson, Adler; Bachus, 

Royce, Capito, Hensarling, Garrett, Posey, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. I want to apologize to the absent members. We originally scheduled this hearing 

at the request of the gentlewoman from West Virginia, Mrs. Capito, 

when the House acted, and the Senate followed our lead and accommodated some requests from the Administration to give them 

some of the tools. And I am pleased that those things have happened. There is a better and broader set of provisions still over 

there. 

The gentlewoman from West Virginia at the time asked quite appropriately for there to be a hearing. Obviously, when we set the 

hearing, we did not—we thought it was going to be on a day when 

there had been votes the night before. So I apologize for the fact 

that we are scheduling this at a time when there aren’t a lot of 

members around. 

I said, I apologize to the members. I was going to apologize to 

Mr. Stevens, but let’s be honest, very few witnesses testifying miss 

members. I was once out in Hollywood at a tour they give you at 

the studios, and they were making some movie with panthers. I 

think Nastassja Kinski was in it. And when we got to this one 

place, they apologized to me because the panthers were at lunch. 

And I said, you never have to apologize to me for the absence of 

panthers. I have never missed them. And I suspect that may be 

somewhat the way the witness feels. 

But it is an important subject. 

Mr. BACHUS. Some of the panthers are filing in. 

The CHAIRMAN. Okay. We will proceed with this. 

Let me just say—and I am not going to take a lot of time—that 

I have found the Commissioner to be responsive and effective. The 

2 

FHA plays a very important role. I think we all agree, including 

the Commissioner, and I know Secretary Donovan, that it is playing a bigger role now than we would like it to be. The percentage 

that the FHA has right now is not what it ought to be for the 

longer term. It is good that it is there for now. 

Examining how housing finance should be structured, what happens after the demise of the GSEs, what is the role of the FHA and 

the home loan banks and the private entities that will deal with 

this are the number one set of topics for this committee. We will 

be dealing with the question of what does the world look like after 

the GSEs next week. But the FHA’s role is a part of it. So this is 

a very important hearing from that standpoint, and I welcome the 

Commissioner. 

The gentleman from Alabama is now recognized for how long? 

Mr. BACHUS. Does anyone else wish to speak on our side? And 

how much time do we have? 

The CHAIRMAN. Ten minutes. 

Mr. BACHUS. Ten minutes. I will take 3 minutes. 

The CHAIRMAN. The gentleman from Alabama is recognized for 

3 minutes. Well, just talk as long as you want. 

Mr. BACHUS. Thank you, Chairman Frank, and thank, you Commissioner Stevens, for appearing before us this morning to provide 

us an update on the fiscal and management performance of the 

FHA. 

I also want to thank Mrs. Capito for her leadership on FHA 

issues and for requesting this hearing. 

The release of last year’s annual independent audit of the FHA 

Insurance Fund and continued weakness in the housing market 

have sparked a lot of anxiety on Capitol Hill and in the financial 

markets as to whether the FHA program is viable, and whether it 

can meet the many management and market challenges that lie 

ahead. Last November’s annual independent audit indicated that 

the FHA fund had dropped to less than—to a less-than-expected 

.53 percent capital ratio substantially below the statutory 2 percent 

requirement. 

The report also stated that the economic value of the fund declined over 75 percent from the previous year to approximately 

$2.73 billion. A new audit of the fund is expected in less than 2 

months, and given the many statutory and regulatory changes that 

have been implemented over the past year, it should serve as a 

useful barometer of whether the policies are working. 

Beyond the health of the fund, however, there are other policy 

questions this committee needs to address. For example, there are 

current estimates that the Federal Government is responsible for 

more than 95 percent of all new mortgages, with FHA carrying a 

30 percent market share. This undeniably strong presence in the 

market coupled with government guarantees for loans up to 

$729,750 raises serious questions regarding the impact of Federal 

policies and how we can assure that the private sector reenters the 

market to decrease taxpayers’ exposure. 

In assisting struggling homeowners, FHA has implemented several new programs to assist families facing foreclosures and borrowers whose mortgage principal exceeds the value of their home. 

My understanding is that TARP and Neighborhood Stabilization 

3 

Program funds have been used; however, I am not clear how these 

initiatives have helped a substantial number of families and 

whether the assistance offered was cost-effective to the taxpayer or 

fair to the homeowner. 

And regarding efforts to dispose of real estate owned by the FHA, 

there are concerns the agency is marketing programs that encourage the same types of fraud, abuse and poor underwriting standards that led to the current housing crisis, which also increased 

taxpayer exposure. And I add to that the fact that there are literally millions of homes on the market, many millions owned by 

banks, those being in foreclosure or facing foreclosure, which is an 

additional challenge. 

In closing, I commend Ranking Member Capito again for her 

work on the preservation and reform of the FHA program. Her legislation, H.R. 4811, the FHA Safety and Soundness and Taxpayer 

Protection Act of 2010, includes important enforcement, fiscal, and 

risk assessment tools necessary to adequately administer the program, detect fraud and abuse, strengthen underwriting standards, 

and protect the taxpayer. We believe these are worthy reforms that 

deserve the Administration’s support. 

Commissioner Stevens, thank you again for being here. We look 

forward to your testimony. 

The CHAIRMAN. The gentlewoman from West Virginia, the ranking member of the subcommittee, is recognized. 

Mrs. CAPITO. Thank you, Mr. Chairman. I would like to thank 

you and the ranking member for—well, first of all, thank Chairman 

Frank for the debate that we had in July, and for honoring my request that we have this meeting here with Commissioner Stevens 

today. So thank you, Commissioner, for coming. 

Without repeating a lot of what we already know, almost a year 

ago, the FHA presented to Congress an independent actuarial report on the health of the Mutual Mortgage Insurance Fund. I think 

we were all a little stunned. We were surprised to learn that the 

reserves had fallen well below the mandated 2 percent. But since 

that hearing, we have worked in good faith, I think, together to 

present commonsense ideas to help reform the FHA. 

As we know, the result of this was the introduction of H.R. 4811, 

the FHA Safety and Soundness and Taxpayer Protection Act of 

2010, which includes a lot of the reforms, much-needed reforms: enforcement, fiscal, and risk assessment tools; detection of fraud and 

abuse; and strengthening underwriting standards. A majority of 

these reforms were included in H.R. 5072, which passed overwhelmingly in the House. One of the centerpieces of this was the 

ability for FHA to increase the annual premium, which was then 

signed into law, taken out separately and signed into law in July. 

But I would urge my colleagues in the Senate to move forward with 

further consideration of the reforms that we have. 

I look forward to hearing from Commissioner Stevens today 

about the progress of the changes FHA has already implemented 

to shore up the fund and to begin reducing FHA’s market share. 

Some estimates show that the Federal Government accounts for 

over 95 percent of the mortgage market, with FHA making up 30 

percent of that on its own. We must find solutions to restore a 

healthy and vibrant private market if our economy is going to funcVerDate Nov 24 2008 17:47 Dec 14, 2010 Jkt 062681 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\62681.TXT TERRIE
4 

tion properly. FHA does have a role to play in the mortgage market, but its presence should not be this large. 

What steps should we take to encourage private capital back into the market? FHA is currently able to insure loans up to $729,000; 

$750,000 in high-cost areas. The limits for conforming loans are 

similar. Are higher loan limits an impediment to private market 

participation? I hope that is a question we can get into today. 

Finally, as Ranking Member Bachus mentioned in his statement, 

FHA has implemented several new programs designed to assist 

homeowners facing foreclosure and borrowers whose mortgage 

principal exceeds the value of their homes, and to reduce the number of foreclosed properties in the FHA portfolio. These use TARP 

funds in neighborhood stabilization programs. Concerns have been 

raised. I have raised concerns as well. But these new programs will 

invite the same types of fraud, abuse, and poor underwriting practices that led to the current housing crisis, while also increasing 

taxpayer exposure. It would be interesting to hear your thoughts 

on these new programs, specifically on the concerns that have been 

raised. 

Additionally, I would like to say that one of the reasons I felt this 

hearing was so important is because in July when we moved forward with the reforms on the premium—on how to—FHA to assess 

the premiums, I had the feeling that our backs were up against the 

wall. We were in a situation where we needed to act in July, because waiting until September or October was going to put FHA in 

a bit of a precarious position. And that raised a major red flag for 

me, because if in 2 months, we are going to reach that level of, I 

don’t want to say crisis, but concern, that concerns me as to what 

the status of this is and where we are moving forward. 

So I appreciate you coming today, and I again thank the chairman for calling this meeting. Thank you. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Mr. Commissioner, it is good to see you. Again, today, as I recall, 

this is your fourth time up to testify before either the full Financial 

Services Committee or my subcommittee since you were appointed 

last year. We appreciate all the hard work you have undertaken at 

FHA to root out the bad actors and improve the financial health 

of the agency during the most devastating economic housing crisis 

in a generation. 

As you know, the House passed my bill, the FHA Reform Act of 

2010, H.R. 5072, in June of this year. That bill contained many important reforms, including providing FHA with the ability to adjust 

their premium structure and giving new powers to FHA to crack 

down on lenders that use fraud or misrepresentation, don’t originate or don’t underwrite loans according to FHA requirements. In 

addition, my bill would give FHA the ability to withdraw originating and underwriting approval for a lender nationwide based on 

the performance of one or more of its regional branches, and would 

improve the reporting tools available to FHA to monitor risks. 

Unfortunately, the Senate did not take action on that bill, so 

many critical aspects of the reform we proposed have not been 

made law. However, I was pleased that both the House and Senate 

took action shortly before the August recess to pass a pared-down 

5 

bill to simply give FHA the authority to increase the annual mortgage insurance premium. 

I am eager to hear from the Commissioner today on the continued need for the other provisions in the FHA Reform Act. Additionally, I am interested in hearing from the Commissioner about the 

implementation of the annual mortgage insurance premium increase which will become effective on October 4th and how FHA’s 

new proposed premium structure change will impact the size of the 

agency’s capital reserves. 

Finally, while I know that the new FHA actuarial study is not 

yet available, I would like to hear more from the Commissioner 

about his take on the state of the housing market and how that is 

impacting current FHA borrowers, individuals looking to purchase 

FHA-insured homes and the health of the Mutual Mortgage Insurance Fund. So, Mr. Commissioner, I look forward to your testimony. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

As you noted, Mr. Chairman, the private sector lenders have 

really scaled back their activities during the last 2 years, and the 

FHA has significantly stepped in and gone from probably less than 

5 percent to more than 30 percent of the mortgage market. And if 

you include Fannie Mae and Freddie Mac in that, it is now over 

90 percent of new mortgages in the United States. 

It would be misguided, however, I think, to claim that this 

amount of government involvement in the mortgage market following a crisis would be proof that the market would not be able 

to function without the government going forward into the future. 

It was largely through these government entities that we saw the 

erosion of lending standards, the elimination of downpayment requirements, and the proliferation of subprime and Alt-A loans. 

Since the government was complicit in inflating the housing bubble 

and causing many of the problems we are dealing with today, to 

turn around and to say then, see, you need us forevermore, would 

be nonsensical. 

So there is broad agreement that this much government support 

is unsustainable. At least at the margin, it appears the private 

market is ready and willing to step in, but in many ways is being 

priced out of the market by the FHA. 

The government has been and remains ill-equipped to evaluate 

and price mortgage default risk. If we hope to build a more resilient, less bubble-prone mortgage market, I would say now is the 

time to at least begin to look at scaling back the level of government support. Mr. Stevens, I look forward to hearing from you on 

these topics and questioning you. 

And I yield back, Mr. Chairman. 

The CHAIRMAN. And with that, Mr. Stevens, we will take your 

statement. Any material you want to submit in addition—I am 

sorry, Mr. Hensarling is recognized. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I do not believe that we will ultimately have a housing recovery 

until we have a job recovery. I think one thing that many members 

heard over the August recess was that there was too much uncerVerDate Nov 24 2008 17:47 Dec 14, 2010 Jkt 062681 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\62681.TXT TERRIE
6 

tainty in this economy. And we know that the Federal Reserve has 

reported that there is at least $2 trillion, roughly $2 trillion, of capital that public companies are sitting on that are on the sidelines 

that have not come into this market to create jobs. 

Over and over you hear questions about the cost and uncertainty 

of health care. Unfortunately, people don’t even know what their 

effective tax rate is going to be beginning January 1st. After two 

over $1 trillion deficits in a row, businesses don’t know how they 

are going to be called upon to pay for that. Under the Dodd-Frank 

bill with, I believe, 342 rulemakings, more uncertainty in this economy, all of this has an impact ultimately on the FHA. 

I do want to thank the Commissioner. I think a number of solid 

steps have been taken under his stewardship. I want to thank the 

ranking member from West Virginia and the chairwoman from 

California for the legislation that they proffered that we passed in 

the House. Solid steps have been made. But people still are concerned, and rightfully so, about whether the FHA prove to be the 

next great American taxpayer bailout. 

I look forward to hearing the Commissioner’s testimony, and not 

unlike the gentleman from California, once you have the government dominate 95 percent of the market, I do not believe that to 

be a good thing, a sustainable thing. I do not think it is something 

that the taxpayers of America want. And until we see a program 

that will allow the competitive market to once again come back into 

place, I fear for the future of the FHA’s fund. 

Mr. Chairman, I thank you for calling this hearing. I yield back. 

The CHAIRMAN. The Commissioner is now recognized for such 

time as he needs. 

STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT SECRETARY FOR HOUSING/FHA COMMISSIONER U.S. 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. STEVENS. Thank you, Mr. Chairman. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, thank you for the opportunity to testify on the financial 

condition of the Federal Housing Administration. 

With Congress’ help over the last year, FHA has made significant reforms that have put the agency on stronger financial footing. 

I would like to discuss those reforms today and explain why our 

ability to protect the taxpayer for the future depends on Congress 

enacting a broader, more comprehensive set of reforms that we 

have proposed. 

As you know, last year we informed Congress of the independent 

actuary’s findings that FHA’s secondary reserves had fallen 

below—had fallen to .53 percent of the total insurance in force 

below the required 2 percent level. I told you then that Secretary 

Donovan and I would do everything in our power to ensure that the 

taxpayer was protected. And today, while we are by no means out 

of the woods, we have made significant headway toward stabilizing 

that portfolio. 

In fact, according to our third quarter report to Congress, instead 

of losing $2.6 billion in funds as the actuary predicted, FHA has 

generated an additional $1.3 billion in capital resources through 

the third fiscal quarter and continues to earn more funds for the 

7 

taxpayer. Furthermore, actual foreclosures of FHA-insured homes 

have been 20 percent less than predicted, which is why we have 

paid $3.7 billion less in claims than projected. This was only possible because the Administration had already begun implementing 

the most sweeping set of reforms to FHA credit policy, risk management, lender enforcement, and consumer protections in the 

agency’s history. 

Mr. Chairman, we said last year that we would hire the first 

Chief Risk Officer in the organization’s history, and with congressional approval we have formally established a permanent risk 

management office within FHA, headed by a Deputy Assistant Secretary, allowing us to assess and annualize risk more actively and 

more proactively. 

We also said that FHA would strengthen its lender enforcement 

policies, and we have, eliminating FHA approval for loan correspondents and increasing net worth requirements for lenders. We 

have also suspended some well-known FHA-approved lenders and 

withdrawn FHA approval for over 1,500 other lenders, and have 

imposed over $41⁄4 million in civil penalties and administrative 

payments to noncompliant institutions. We are sending a very clear 

message that if you don’t operate ethically and transparently, we 

will not do business with you. 

We said that we would restructure our mortgage insurance premiums, and we have. In April, we raised our premiums from 175 

basis points to 225 basis points across all product types. In early 

October, thanks to legislation passed by Congress, FHA reduced 

that premium up front to 100 basis points, offset by an increase in 

the annual premium from 85 to 90 basis points depending on the 

loan’s loan-to-value ratio. On behalf of Secretary Donovan and myself, I want to thank the House, particularly you, Chairman Frank, 

and Ranking Member Bachus for your leadership in passing that 

important legislation. I also want to thank Chairwoman Waters 

and Ranking Member Capito as well. 

In addition, we also said that we would improve the quality of 

loans we were making, and we have. We are strengthening credit, 

risk controls, and we have implemented a two-step FICO floor for 

FHA purchase borrowers. Purchase borrowers with credit scores 

below 580 are now required to make a minimum of 10 percent 

downpayment. Only those with stronger credit scores can make a 

minimum of 31⁄2 percent downpayment. 

We also promised to reduce seller concessions, which often create 

incentives to inflate appraised value and are significantly more 

likely to go into default. That is why we have proposed a rule to 

reduce the maximum seller concessions from 6 percent to 3 percent. 

Lastly, we said we would modernize technology within the FHA, 

and with your help we have made great strides towards improving 

technical capacity to handle increased volume, delivering our first 

comprehensive technology transformation plan to Congress and 

modernizing FHA’s technology infrastructure. 

We have also awarded contracts to upgrade our risk and fraud 

tools and are building staff capacity through hiring and training. 

The early results of these efforts are encouraging. I mentioned 

earlier that our capital reserves are growing faster than projected, 

and that claim payments are less than forecasted. Loan quality is 

8 

improving as well. Our third-quarter report shows that loan performance, as measured by serious delinquencies and early payment 

delinquency rates, has improved significantly with the first yearover-year decline in new 90-day delinquencies in years. The average credit score on current insurance endorsements has risen from 

634 in 2007 to 700 today. Going forward, the President’s budget 

projects these actions will produce an additional $4.1 billion in 

FHA receipts in Fiscal Year 2011, funds that FHA earns for the 

taxpayer. 

Of course, despite the progress we have made, Mr. Chairman, 

the job is far from over. Secretary Donovan and I remain committed to comprehensive FHA reform legislation. And I would like 

to thank the House of Representatives for recognizing the urgency 

of this issue by passing the FHA Reform Act. Here again, I want 

to thank this committee, and particularly the leaders from both 

parties, for bringing this bill to passage in the House. Tomorrow 

when I testify on the same set of issues in front of the Senate 

Banking Committee, I will be urging the panel members to follow 

the House’s lead in passing comprehensive FHA legislation before 

the end of the year. 

In addition to strengthening FHA’s lender enforcement ability, 

the bill will allow for third-party loan originators to close FHA-insured loans in their name and extend FHA’s ability to hold all 

lenders to the same standard by permitting us to recoup losses 

through required indemnification for loans that were improperly 

eliminated or in which fraud or misrepresentation was involved. 

Building a stronger foundation for the future requires us to pass 

this legislation, and I hope the Senate will follow your lead and 

pass it by the end of the year. 

Mr. Chairman, these reforms are important not only because we 

still have a long way to go, because home prices may still decline 

further, and conditions may get worse before they get better; they 

are also important because we know the critical role FHA is playing in our housing market right now. Mr. Chairman, this makes it 

even more important that we continue to deliver on the commitments to strengthen the FHA and assist responsible borrowers who 

need a helping hand, while working to facilitate the return of private capital to the housing market. We look forward to working 

with Congress closely on all these issues as we further reduce risk 

to the American taxpayer and ensure FHA can continue to provide 

stability in the housing market at the moment we need it most. 

So thank you again for the opportunity to testify, and with that, 

I would be happy to answer any of your questions. 

[The prepared statement of Commissioner Stevens can be found 

on page 36 of the appendix.] 

The CHAIRMAN. Thank you, Commissioner Stevens. 

Let me say first, I am going to say to my Republican colleagues, 

I know if we have a lame duck session, there will be questions 

about what should and shouldn’t be done, but I would hope that 

this FHA bill, which went through the House with virtual unanimity, would be considered sufficiently noncontroversial and bipartisan so that we would join those of us here with the Administration in asking the Senate to pass the rest of the bill. We got 

them to pass some pieces of it which you said were particularly imVerDate Nov 24 2008 17:47 Dec 14, 2010 Jkt 062681 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\62681.TXT TERRIE
9 

portant. But especially after what you said, I would hope that 

would be something, and I would think it would be, that we could 

jointly approach the Senate and say, whatever the fights are, set 

them aside. 

I know there are some people who argue that in a lame duck session, you don’t do anything that is terribly controversial, although 

by Republican standards, apparently impeaching the President of 

the United States doesn’t count as controversial, since the Republicans did that in the lame duck session of 1998. That would seem 

to be a pretty high bar under which we could get other legislation. 

But leaving that aside, we, I think, could get some agreement on 

this. 

The other thing I just wanted to say is to thank you, Commissioner. But I want to take some credit on a bipartisan basis for this 

committee. You mentioned the debarment and the failure. We had 

during the transition between the Obama and Bush Administrations, the outgoing Bush Administration officials came and testified 

and mentioned—in fact, it was not even the Presidential appointees, they were the civil servants who ran the place—and told 

us—this would have been late 2008 early 2009—that they did not 

have these powers of debarment; that the FHA would know there 

were bad actors, but would still have to give those bad actors a 

fifth, sixth, seventh, eighth bite at the apple, and maybe they 

would succeed in getting some things through. And this committee 

on a bipartisan basis initiated that grant after listening to the people running it in the last day’s of the Bush Administration, and 

then the Obama Administration came in and we worked with 

them. 

And so, again, I think we will have our disagreements, and we 

will have the criticisms that people make, but I take some pride 

in that, and I was very pleased to have you tell us that, and we 

agree, the role that the public sector entities are now playing in the 

mortgage market is greater than it should be. But I take some comfort from the fact that while it is there, we have given you the tools 

to deal with it in an effective way. So I appreciate that. And that 

is really all I wanted to say, but I am through. 

Mr. BACHUS. Mr. Chairman, I agree with a lot of what you said 

and would like Mrs. Capito, the chairman of the subcommittee, to 

respond further. 

The CHAIRMAN. I will yield to the gentlewoman. 

Mr. BACHUS. If she would. 

Mrs. CAPITO. Well— 

The CHAIRMAN. I am through. 

Mrs. CAPITO. Oh, okay. Could I ask a question? 

The CHAIRMAN. Yes. 

Mrs. CAPITO. Okay. Great. Thank you. 

Commissioner Stevens, am I correct in assuming that the next 

independent review will be then coming out in November like the 

previous one? 

Mr. STEVENS. Yes. 

Mrs. CAPITO. Do you have a sense of where you are there? I did 

miss the very beginning of your statement, so I apologize for that. 

Mr. STEVENS. The actuary is done at the end of the fiscal year 

by an independent firm, I think as we all know, and the fiscal year 

10 

obviously ends at the end of September. So at the end of the year, 

the actuarial firm will take the full year’s data and produce a report. We intend to have that report in early November. 

Mrs. CAPITO. So you don’t have a real—I am sure you have your 

month-to-months and those kind of things. 

Mr. STEVENS. Here is what I would say. As we have said in our 

third-quarter report that we released to Congress, there are so 

many performance indicators that show that the strength of the 

portfolio is much stronger than it was a year ago. The variables, 

obviously, are what is the home price forecast. And that is the single biggest impact of putting out an actuarial forecast that could 

ultimately be the determinant of where the capital reserve will end 

up. And so that is one of the big variants. There are a variety of 

other things that we can talk through, but I would not want to assume what this independent firm will come out with when they release the actuarial study. 

Mrs. CAPITO. I raised an issue in my opening statement about 

the loan limits and the conforming limits. How many loans is the 

FHA making in that larger—say, over a half million up to whatever, the 700-and-some thousand? And do you see this a place 

where FHA should be playing, or is it time to pull back on that? 

Your comments? 

Mr. STEVENS. I think you ask an important question, and I know 

it is one that you all are going to take up in debate here in the 

near term. 

There is absolutely no doubt that FHA should not be playing as 

large a role as it is playing in the market. It also was a sign of 

unhealthiness in the market when it was only 5 percent of the 

market. Traditionally over time, in my 3 decades in this industry, 

FHA has always played a role on sort of average terms in the low 

teens as a percent of the overall market, that being said as it relates specifically to loan limits. 

The thing that I think we all need to understand clearly about 

the FHA loan limits as it stands is that it is not about the cap. 

Less than 3 percent of FHA’s loans are over $417,000, less than 3 

percent. 

Mrs. CAPITO. So that would be the 3 percent of the actual numbers of the loans. But then what does that account—do you have 

a different figure that accounts for how much that is? 

Mr. STEVENS. How much volume? 

Mrs. CAPITO. Yes. 

Mr. STEVENS. I don’t have a number I could give you, but since 

they are larger loans, it would be a slightly, but not significant difference between the numbers themselves. 

Mrs. CAPITO. So only 3 percent of those are in the category I am 

talking about? 

Mr. STEVENS. Right. 

And if I could, I just want to clarify, for those of you who understand how FHA is set, and I know you do, it is based on median 

sales price, median home value, across the entire Nation. And the 

way that temporary limits provide for today is it provides for the 

FHA loan amount to be 125 percent of median home price in every 

MSA across the country. So it is a very detailed schedule. 

11 

Very few MSAs—the majority of MSAs actually would never go 

anywhere near the cap based on the 125 percent. The concern we 

have is if that was not extended for another year, that would drop 

to 115 percent as was passed under HERA. So it is 115 percent of 

median sales price, but the median sales prices will also be adjusted to current median sales prices, which are also going to be 

dropping. So there would be, in essence, a double hit to communities across the country that are really nowhere near these high 

loan limits. But it is the formula itself that is at the core of the 

necessity for the availability of FHA financing in communities 

across districts across the country. 

Mrs. CAPITO. And the other thing I raised, and I have one quick 

other question, was the Neighborhood Stabilization Program. As 

you know, we have put billions of dollars into this program, and 

it sort of morphed into a little bit different program through the 

FHA, or through HUD. How do you respond to accountability, 

transparency, and all the issues that I think are raised in a program such as this? 

Mr. STEVENS. I think the key question that has been raised 

around FHA’s role in the Neighborhood Stabilization Program has 

been around something called First Look, which provides an opportunity through the Stabilization Trust and their grantees to in 

many cases have a 14-day prelook period at FHA foreclosure in inventory before it goes to the open market. 

Now, the reason for that, and the reason why the Secretary has 

been so supportive of that and we supported that policy, is twofold. 

One, it actually—I think it protects FHA ultimately from a financial standpoint, and I will explain that. But first and foremost, it 

also protects communities. If by allowing in select communities, 

with the grantees’ participation, to identify homes in those communities that would be best served by letting the grantee be involved 

and get a first look and potentially buy that home for potentially 

a homeowner, or potentially just to return that home back to the 

community that could be converted into other use, it allows for 

broader community stabilization. 

That is what Secretary Donovan has been so focused on is the 

broader impacts. But more importantly, please keep in mind that 

the 14-day period that the trust gets a look at these properties is 

preforeclosure, before we take control of that property for resale. 

And what we find is on the properties that ultimately are sold, 

they go much faster off our portfolio than they would otherwise, 

and so we actually reduce our carrying costs in FHA’s REO space. 

So we don’t—the overall impact of the First Look program in 

terms of the total REO portfolio will not be a significant number, 

but we do believe it will have value to the strength of the FHA 

while also stabilizing communities. 

The CHAIRMAN. Thank you. 

If I could get agreement, I gave up most of my time, but I had 

1 minute of questions, if there is no objection. And that is there has 

been a lot of concern about the foreclosure process. You called it 

to mind when you talked about foreclosure. Now, I understand you 

have a pilot project with Wells Fargo where you and Wells were 

partnered in terms of third-party notification to try and diminish 

foreclosures, and I am told that worked well. And if that is the 

12 

case, could we get it expanded? I do think we have learned one of 

the problems is inadequate notice, people weren’t used to all this, 

and we are trying to improve this in a number of ways. You had 

some concerns about how Fannie Mae and Freddie Mac are doing. 

Is it correct that your experiment with Wells worked well, and if 

so, is that a basis for expanding it? 

Mr. STEVENS. It is correct, Mr. Chairman, that Wells Fargo was 

experimenting with a third-party firm that would actually go door 

knocking in an attempt to try to mitigate, problem solve at-risk 

properties in the foreclosure process and make sure that those 

homeowners were aware of any option available. It had some success. We support any effort that would help mitigate that process. 

Please do keep in mind with FHA, we are a little different than 

other portfolios in the country that we require, mandate for all our 

servicers that they engage in loss mitigation in the early period of 

default, which these third-party firms could help. But our process 

is far more extensive than many other processes. 

The CHAIRMAN. But does it include some requirement that there 

be contact before foreclosure? 

Mr. STEVENS. It does include, absolutely, a requirement that they 

contact the borrower pre-foreclosure, and that is mandated. And we 

are now at a point we are much more robust in our tracking of 

servicers and engaging with them much more— 

The CHAIRMAN. Could you, because we have heard a lot of complaints from members, it has been written about in the press, and 

there are some concerns in Florida about it that hit the New York 

Times, if you could respond in writing and tell us what you are 

doing and maybe some basis on which we might improve it, I thank 

you. 

Mr. STEVENS. Absolutely. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

There are a number of issues here that I would like to spend just 

a little bit of time on. It is not going to be possible to go through 

all of these. But the loss mitigation process that he is talking about 

is, I guess, similar to what we are attempting to do in our legislation in mandating loss mitigation prior to foreclosure. So I would 

be interested also, as the chairman is, in seeing exactly the way 

that you are handling this. 

Let me just say on NSP, Mrs. Capito just asked some questions. 

I think it is about time that we hold hearings, and I think we had 

planned on holding some hearings, on NSP to see exactly what is 

happening. In some of the areas, they were a little slow getting 

started, and we need to find out whether or not we have provided 

the technical assistance to some of those entities to make sure they 

have NSP programs operating in the way that we intended them 

to operate. 

You also mentioned something about the 14-day period that you 

give to the grantees in order to access the REOs. And we have been 

holding some meetings out in my area about REOs, all of the REOs 

from everywhere. And we have discovered that FHA just didn’t 

have that many that they were dealing with. But I want to make 

sure that in whatever way we dispose of them, that the local Realtors and realtists have an opportunity to do business. So when the 

13 

14-day period—if a grantee is interested in the REO, does that cut 

out the Realtor or the realtist? How does that work; do you know? 

Mr. STEVENS. They would get a look through the contractors that 

are managing REO inventory for us. But you have made very clear 

to me in separate conversations about the need to utilize local Realtors in the markets where that REO exists. And you are absolutely right, Ms. Waters, that in California, obviously, we don’t 

have a lot of loans in your State, so it is not as big a volume of 

numbers. 

I will tell you it is something that the Secretary is also interested 

in, and in the First Look rollout that we just announced, FHA was 

ahead of the curve, we announced it first. We then, both Assistant 

Secretary Mercedes Marquez and I, called every bank in the Nation, including Freddie Mac and Fannie Mae, every major servicer, 

and asked them to participate in First Look as well. 

So I do believe, to your concern, particularly in California, there 

is an opportunity to more broadly engage. And we could take that 

back also as a discussion item to follow up on to make sure, now 

that we have all the banks signed on with Freddie Mac and Fannie 

Mae and First Look, that obviously will cover every market in the 

Nation. And we can go through that dialogue also about making 

sure that local service providers are given the opportunity to participate in this process, if that is the core to your concern. 

Ms. WATERS. Yes, that is part of my concern, not only the Realtors. But one of the things I want to take a closer look at is the 

management of these properties, because one of the complaints 

are—ongoing complaints we have is that you have a national management service, and the way that they work, you may end up with 

people providing services from one State to the other State, which 

cuts out the locals in some way. So I do want to talk about that 

more. Not today. 

Mr. STEVENS. I understand. 

Ms. WATERS. But in the future to see how we make sure that the 

local service providers, whatever services they are providing, have 

an opportunity to really participate, because this goes to the whole 

question of jobs in the communities, etc. 

Now, having said all that, what about the PTFA? This is, as I 

am told, the program protecting tenants in foreclosed properties. 

The Protecting Tenants in Foreclosed Property Act passed as part 

of the Helping Families Save Their Homes Act of 2009. Under 

PTFA, in the event of a foreclosure, bona fide tenants have the 

right to stay in their property for 90 days or the remainder of their 

lease, whichever is longer. According to advocates working on this 

issue, they are not sure about what FHA is doing at this time. Are 

you familiar with this at all? 

Mr. STEVENS. I am briefly familiar of it, and I went through a 

briefing on this yesterday. 

We are in complete compliance with the Protecting Families/Save 

Their Homes Act, and I would be glad to follow up with more detailed information on that for you. 

Ms. WATERS. Okay. Thank you. I would be interested to see how 

that is working. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Alabama. 

14 

Mr. BACHUS. Commissioner, in my opening statement, I commented that certain estimates are that the government, the Federal Government, is responsible for 95 percent of new mortgages. 

I am not sure that is—you may have a little different figure. But 

the FHA is carrying more than 30 percent of the market. I have 

heard both you and Secretary Donovan express concern that the 

FHA’s current market share is unsustainable, and I would like 

your comment on that. And also, what steps should Congress take 

to encourage private capital back into the market? 

Mr. STEVENS. Thank you for that question, and it is something 

that we spend a significant amount of time concerned with. 

As I said earlier, I have been in this industry for 3 decades, and 

I started at a time when private banks and savings and loans did 

much of the mortgage finance in America, and the GSEs were just 

a small part of the market. Clearly, that has changed as our markets have become more sophisticated over the past decades. 

There is also no doubt that there is a significant absence of capital. And I do not believe that there would be an avenue for private 

capital to emerge right now, given concerns about home price futures and volatility in terms of available capital, regulatory oversight, and the risk experience that many of the banks have from 

their previous years. 

As you can appreciate, many of the more interesting products 

that emerged over the last decade, many of those were bank portfolios, as well as the private sector that engaged in things like option ARMs, the home equity—HELOC—market, those kinds of 

things, which ultimately had performance rates that may cause 

some resistance to reemerging. That being said, we know markets 

are cyclical, and as the housing market recovers, which it will, albeit perhaps slowly, there will be interest for private capital to reemerge. 

Now, the way FHA needs to shrink its market share back and 

create an opportunity for private capital to reemerge is being undertaken right now in what I think are significant steps. We have 

made two mortgage insurance premium changes to price our credit 

risk in a way that is more safe and sound, and by doing so it is 

creating an entree for the private mortgage insurance industry 

combined with private capital on the first mortgage to reemerge. 

And I am sure your staff, if not you yourselves, have heard the 

mortgage insurance industry applaud at many of our recent 

changes, because we are clearly creating an opportunity for private 

capital to reengage. 

The changing of seller concessions—FHA has rules that are just 

frankly more lenient than the private markets allow and more lenient than should have been allowed at FHA, and we are trying 

to change those things as well. Requiring bigger downpayments for 

lower FICO scores, which we have just implemented, prior to my 

coming here, there was no FICO floor at all, prior to my being 

sworn in in July of last year. And now, we are saying for scores 

of 580 and below, you have to have a 10 percent downpayment. 

That is the biggest single change in downpayments in FHA’s history in terms of requiring sort of more skin in the game to create 

a more level playing field. 

15 

I think as we go forward, as financial stability begins to take 

hold, the future of the housing finance system decisions that need 

to be made, the White Paper that will be submitted to Congress in 

January on that subject, that will begin to create the rules of the 

road that I believe will create an environment for private capital 

to reengage. But without question, FHA needs to shrink its share 

of the market, but it needs to do so in a balanced way so that we 

are not just creating a vacuum where still no capital would come 

in regardless of our participation or the lack thereof. 

Mr. BACHUS. And I agree that it has to be done in a reasonable 

manner. I think the housing market is really addicted to the government assistance now in this subsidy. 

How can we reduce the government’s involvement and limit taxpayer exposure? You mentioned downpayments is one important 

thing and also requiring a sound credit history. Are there others? 

Mr. STEVENS. And I think the way—perhaps a healthy way to 

look at this is to begin to reflect back on the environment we are 

in. Obviously, we are still very much in the thick of the worst housing crisis in our Nation’s history. It was brought on by an excessive 

amount of speculation in terms of too many products that created 

an enthusiasm for homebuying that was far from rational. And one 

thing we have learned is clearly not everybody should own a home 

in the go-forward market, and this Administration understands 

that clearly as well. 

By all estimates by independents, the homeownership rate will 

begin to decline. The big void here at this point is to make certain 

that we don’t create an additional tipping point by an aberrant action in the absence of any other capital provider in the market. 

And so having gone through market cycles, I believe that private 

capital will emerge as markets stabilize, and as we move into that 

scenario, the necessity for FHA to play this size of a role, I believe, 

will shrink. And I believe it will be the same for both—obviously 

for whatever the future of the financial system is—for Freddie Mac 

and Fannie Mae. Collectively, there is a commitment that private 

capital needs to emerge, and I believe it will emerge as markets 

begin to stabilize over time. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

My questions will build to some extent on those of Mrs. Capito. 

One way to get a—perhaps the most likely way we are going to get 

a double-dip recession is to see another sudden decline in housing 

prices, particularly in the 12 largest metropolitan areas, high-cost 

areas, in this country. Representing one of those areas, home sales 

are going forward, and every single home sale other than Malibu 

is Fannie, Freddie or FHA. And it is critical that we maintain the 

$729,000 limit, or we are going to see a sudden crash in home 

prices. Not only will the $800,000 home not be able to get financed 

and perhaps sell for $500,000, but the $500,000 then crashes commensurately. 

If we don’t act soon, then how do you open escrow on November 

1st, knowing that if the escrow doesn’t get to close in January, you 

can’t get financing, and it all falls through? The private sector, 

therefore, needs to know before November that we are going to 

16 

maintain this limit at least for the foreseeable future. But it is also 

the public sector that needs to know you are running one of these 

agencies. 

It is my understanding that FHA will soon begin recalculating its 

loan limits to prepare for the scheduled December 31st expiration 

of the temporary higher limit that has been in place since 2008. I 

understand that it takes some time to recalibrate the underwriting 

programs after the loan limit changes. So if Congress decides to extend these higher levels, and I hope they will, we should act sooner, I believe, rather than later, or else there may be some lag time 

in implementation of the loan agreements. 

When will the FHA begin the process of recalculating loan limits? That is to say, what is the deadline for Congress to act to avoid 

any dislocation in the mortgage market and to ensure continued access to affordable markets in important places like Los Angeles? 

Mr. STEVENS. I would support your statement that extending the 

loan limits for another year is important. The Administration does 

support extending the loan limits both for Freddie Mac, Fannie 

Mae, and FHA for an additional year for the reasons you describe. 

I also do want to as well reemphasize the point that for FHA, 

it is less about the high loan limit, since a very small number of 

loans actually go to that level. It is more how reverting back to the 

permanent policies from the temporary policies would affect every 

market area, every city in America by collapsing the formula of 

how the limits are calculated in every single market. So to that extent, the Administration is behind both the extension of the FHA 

and GSE loan limits. 

And beyond that, to your point, you are absolutely right as well, 

is that lenders are going to begin committing people at lower loan 

limits much sooner than in previous years because the processing 

times are longer, and portfolios and backlogs and mortgage applications are high in their operation. So getting that done quickly is 

going to be even more important in order to avoid people from not 

being able to get the high loan limits in the near term. 

We are in the process right now of looking at the median sales 

price data, and I don’t have a specific timeline of when we would 

have the new policy. I would be glad to get that information back 

to this committee as to when we would announce our policy change, 

but it would be effective as of January 1st. 

Mr. SHERMAN. And would your life be a lot easier if we told you 

by the end of September what the rules were for January? 

Mr. STEVENS. Clearly, getting this done sooner rather than later 

is important. And it is not about—with the FHA, this is really 

about how everybody associated with homeownership in America in 

every community across America will be impacted. 

Mr. SHERMAN. Let me sneak in one more question. When you 

and Secretary Donovan appeared before the committee last December, I asked whether you could quantify the benefits that accrue to 

the FHA reserves from the larger loan limits since they appear to 

perform better. The Secretary testified that it was too early to 

make such an estimate. We are a little later now. To what extent 

is the ability to ensure those somewhat larger home values in higher or—larger loans in high-cost areas benefiting your reserves? 

17 

Mr. STEVENS. The simple way to look at this is those higher 

loans, generally speaking, are a very small percentage of our portfolio, less than 3 percent. They perform no worse than any other 

loan in the portfolio; in some cases, they perform perhaps a little 

better on the recent portfolio. But it is not a huge income generator 

in that context for FHA. It is more about providing that level of 

opportunity for people to have access to the mortgage finance system, again, across the country. 

Mr. SHERMAN. Thank you. 

Ms. WATERS. [presiding] Thank you. 

Mr. Royce? 

Mr. ROYCE. Thank you, Madam Chairwoman. 

I was going to ask you, Commissioner Stevens, we had an opportunity every couple of weeks, due to the work of Mr. Garrett and 

Mr. Kanjorski, to sit down in a private setting with Secretary 

Geithner, Paul Volcker, our former Federal Reserve Chairman 

Greenspan, Comptroller John Dugan of the OCC, and to listen to 

them give us their analysis of some of the actions that have been 

taken that put us into the crisis, as well as some of the recommendations going forward. And one of the comments that Paul 

Volcker made, and subsequently was reiterated in meetings when 

this was brought up, was just the real problem with overleverage 

in the system, that it was a great failing, and in particular, as explained, the overleveraging combined with some of the moral hazard that we had created with these quasi public-private entities 

that had an implied public backstop. And as a consequence they 

said that Fannie Mae and Freddie Mac, for example, were overleveraged 100 to 1, involved in arbitri. 

Last year, we went through some of the numbers that were presented, which, if I understand it, meant that your capital reserve 

ratio had fallen to .53 percent, which would be a lot less than the 

2 percent mandated. The 2 percent mandated itself would be a 50- 

to-1 ratio. So that would mean that the overleveraging was somewhere in the area—something less than 200 to 1. 

Now, I remember in 2004, the arguments—those of us who were 

critics of Fannie and Freddie—the arguments we were making 

about the extent of the overleveraging. And, of course, we were told 

at the time that they would not need a taxpayer bailout. And I 

guess in essence, since it is all off balance sheet, we have losses 

of $145 billion now, but eventually, that is going to be on the 

books. That loss is going to be something that we are going to have 

to absorb, that the taxpayers will directly absorb. 

So the question I have for you is, can you say with any level of 

certainty, and I know the President—I read your remarks. We 

know that we have to see the actuarial study this year. We know 

it is—in a couple of months it will be prepared, but last year’s 

number was very, very troubling. You had less than a fourth of the 

minimum capital requirements which you are required to hold. Is 

the capital level now going to take us out of the woods, and can 

you say with any level of certainty that FHA will not need to be 

bailed out? Let me just ask you that question. 

Mr. STEVENS. This requires a little precision, but let me just try 

to explain this as succinctly as possible. 

18 

I was sworn into this job in July of last year. When I testified 

in April, I was running a large company as president and COO, 

and I came in during testimony and said FHA was taking on risks 

it should not be taking, and the 2006, 2007, and 2008 portfolios 

that were originated with very little control and very little scrutiny 

over the institutions that originated them are going to cost FHA a 

significant amount of money, and that is literally the—it is those 

book years that had the greatest impact on the portfolio. As a result, the capital reserve did drop below the 2 percent but it isn’t 

the total capital. 

Mr. ROYCE. That is secondary capital? 

Mr. STEVENS. That is secondary capital. What happened is we reduced what is in the capital reserve and shifted into what is called 

the financing account, because the financing account has to hold all 

reserves required to pay all forecasted losses. 

Mr. ROYCE. That is the 4.5 percent today? 

Mr. STEVENS. That is correct. And so to just give you an example, 

last year when I reported the capital reserves, the combined accounts were $31.8 billion. In the third quarter report, we are at 

$33.1 billion. So we are $1.3 billion higher than we were. 

Mr. ROYCE. I understand. But the part that was extrapolated off 

of the poor position then was that it could be a loss of $1.6 billion 

in 2012, right? So what you are saying is that when the new analysis comes in, that projection is going to probably be significantly 

lower; or do you know? 

Mr. STEVENS. Here is what I would strongly caution for any of 

us who have been in financial forecasting on financial institutional 

balance sheets. The most significant driver in the forecast is ultimately going to be the projected forecast of home prices, forecasted 

projection of interest rates. Those are going to be two significant 

drivers on the performance of the balance sheet. 

I am not going to answer with any certainty where I think the 

capital reserve will finish at the end of the year. Again, this is an 

independent actuarial firm that is reviewing our portfolio and running their models on the portfolio. I will tell you this: that if the 

fund has not gone negative and continues to remain positive, it will 

be thanks to the quick actions of this committee and Congress giving us more authority and actions of this Administration taking 

it— 

Mr. ROYCE. And you did imply that private capital was currently 

being priced out of the market by FHA as well? I think you implied 

that. 

Ms. WATERS. Mr. Moore. 

Mr. MOORE OF KANSAS. Thank you. Mr. Stevens, in June of 2009, 

the Oversight Subcommittee I chair held a hearing on the need to 

strengthen fraud prevention efforts in FHA and other HUD programs. HUD’s Inspector General Kenneth Donohue listed several 

traditional fraud schemes—namely, appraisal fraud, identity theft, 

and loan origination fraud—that remained a concern with respect 

to FHA as well as other kinds of fraud, such as foreclosure fraud, 

bankruptcy fraud, and reverse mortgage fraud that he was concerned about. 

19 

It has been more than a year since that hearing. What steps has 

FHA taken to combat both the traditional and new forms of fraud, 

and is there a particular kind of fraud that is of most concern? 

Mr. STEVENS. Well, thanks to observers like the Inspector General and others that have looked at fraud in the FHA, and with the 

help of Congress and the budget that was provided to FHA, we 

have taken a variety of significant actions, and I will try to outline 

a few of them very briefly. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. STEVENS. First, we went after institutions that were behaving improperly, and we established a much more frequent regimen 

of mortgagee review board meetings which, in the last year alone, 

we have eliminated 1,500 institutions that we believe were acting 

improperly in the FHA portfolio, some of which became very visible 

stories in the media—such as Lend America and Taylor, Bean & 

Whitaker and others—where those announcements culminated 

even further legal action. That is our first line of defense. 

The second is we submitted a technology plan, and we have already to date awarded three contracts for fraud tools that are going 

to be developed within the FHA portfolio. We just announced our 

last contract a couple of days ago through appropriations to fight 

fraud and misrepresentation in the market at the loan level. 

There is institutional fraud that has existed in our industry, and 

it typically involves some form of collusion between multiple participants in the market. An appraiser, a loan officer, a title agent, 

perhaps a real estate agent, will work together to try to commit 

fraud. And we believe while there will always be these risks in the 

market, the implementation of the SAFE Act, our technology enhancements that we are making at FHA have significantly increased scrutiny on lenders. The additional authority we received 

from Congress and the additional authority we are asking for in 

the FHA Reform Act will help ensure that gets reduced to as small 

a number as possible on a going-forward basis. 

Mr. MOORE OF KANSAS. Thank you, sir. 

And, Mr. Stevens, on page 4 of your testimony, you noted that 

last October you hired the organization’s first Chief Risk Officer. 

Reflecting on the recent financial crisis, it was clear that many financial firms, Lehman Brothers and others, may have had risk officers in their organization, but they were often overruled for other 

priorities. Obviously, the government doesn’t have the same profit 

motive as Lehman Brothers, but I believe that taxpayer resources 

should be carefully managed to minimize waste, fraud, and abuse. 

Since establishing this new risk management position, has this 

officer been influential in better managing FHA’s risk profile, and 

going forward, how do you make sure the Chief Risk Officer’s recommendations are fully considered and not disregarded for other 

FHA priorities? 

Mr. STEVENS. The question you ask was one that was actually 

expressed by both parties here in the committee, and it is one that 

is a significant concern to me. 

In the entire history of FHA, there has never been a risk officer, 

a risk office; and quite frankly, when I walked into my position, 

there wasn’t a risk report of information being provided. The risk 

officer now is an independent office reporting directly to the ComVerDate Nov 24 2008 17:47 Dec 14, 2010 Jkt 062681 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\62681.TXT TERRIE
20 

missioner as a Deputy Assistant Secretary on par with the heads 

of the multifamily business, the single family business, and the 

health care business. 

We are right now working on a regimen to change policies and 

procedures so that any recommended change to policy will actually 

go through the risk officer, where they can agree or disagree with 

that policy; and if they disagree, it will stop the process at that 

point, ultimately could result in things having to be escalated to a 

Secretary in the event of disagreement, but at least to the Commissioner for decision-making. 

So I agree strongly with the concerns that you expressed and 

others have expressed here in the room, that at a bare minimum 

on a go-for-the-long-term, we need to make sure that that risk officer and that risk office has the procedures in place to support them 

regardless of who may be in the leadership chairs within the organization down the road. 

My risk officer is here with me today, Bob Ryan, who is behind 

me, and he has a strong, significant reputation in the industry for 

being thoughtful and focused on risk management. And I can assure you, under this Administration, no one will override the risk 

officer to be more lenient. As a matter of fact, we are clearly by 

our actions, if anything, going the other way. 

Mr. MOORE. Thank you so very much. I yield back. 

Ms. WATERS. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Madam Chairwoman. 

Commissioner Stevens, under the FHA, this first look sales program, the neighborhood stabilization groups, this can be both individual 501(c)(3)s and municipalities, is that correct, ultimately can 

qualify for the first loan program? 

Mr. STEVENS. Yes. 

Mr. HENSARLING. And as I understand it, you will sell these 

properties, I think is it within a 14-day window of putting it on the 

market? 

Mr. STEVENS. That is correct. 

Mr. HENSARLING. At a 10 percent discount to their appraised 

value, correct? 

Mr. STEVENS. That is incorrect. 

Mr. HENSARLING. That is incorrect? 

Mr. STEVENS. Yes. 

Mr. HENSARLING. FHA properties at a discount of 10 percent 

below their appraised value. Okay. What do you offer them at if 

this information is incorrect? 

Mr. STEVENS. The minimum discount required for NSP through 

the trust is a 1 percent discount, and part of that is the grantee 

also must pay a fee. They must pay some of the fees that are incurred in the settlement of that transaction. 

Mr. HENSARLING. Okay. They do receive a discount, and now we 

are debating perhaps what that discount is. 

Mr. STEVENS. I have gone through extensive discussions on that 

particular issue, both in the development of the program and as recently as this morning, talking about the process that NSP grantees go through and what, if any, price advantage may be given. 

They get a bid process. 

21 

Mr. HENSARLING. Let me see if I am hearing what I think I am 

hearing. You are saying that the price advantage is 1 percent? 

Mr. STEVENS. The price advantage as guaranteed is 1 percent. 

Mr. HENSARLING. Guaranteed at 1 percent. So you can make it 

larger? And your interpretation— 

Mr. STEVENS. That is correct. 

Mr. HENSARLING. —of the statute—and just how large can you 

make the discount? What is your interpretation? 

Mr. STEVENS. We have programs in FHA that have existed for 

years that allow discounts to communities for as high as 50 percent, depending on the condition of the property and what it does 

for the community. They are done as a very small percentage over 

time. I have actually not found that many that have been done. 

Mr. HENSARLING. Commissioner Stevens, let me ask this question. 

Again, we know that in the last 2 years, our Nation has experienced deficits, over $1 trillion, and we have the single largest debt 

we have ever had in America’s history. Debt held by the public is 

going to double in 5 years under the President’s budget, triple over 

10. It is an unsustainable path that even the Administration has 

admitted, and so I am concerned with any discount with these 

properties that are provided. 

I guess my question here is this: If a municipality receives a 

property at some discount, it is my understanding that there is 

nothing that prevents them from turning around and perhaps flipping that at a profit, so that ultimately the Federal taxpayer who 

is going broke may subsidize a municipal taxpayer who may or 

may not also be going broke. 

Can you disabuse me of this notion, or is it possible under the 

program that the properties can be flipped? 

Mr. STEVENS. First of all, there are restrictions on the resale 

through the Neighborhood Stabilization Program, but I want to emphasize your primary point. I hope it is your primary point. FHA 

is estimated by the President’s budget to produce over $5 billion in 

net positive receipts to the taxpayer in the next year. This Administration— 

Mr. HENSARLING. Again, that is a good thing, but it was not responsive to the question. 

Mr. STEVENS. Well, excuse me, I apologize. I thought it was the 

beginning of the point that was being made. 

There are restrictions on the resale of properties, and from our 

perspective, we view actually this program on the REO sales where 

virtually all REO that is sold in America by us and virtually everybody else, ultimately is sold at whatever the market will bear. 

Mr. HENSARLING. So the grantees conceivably can flip it at a 

profit, correct? 

Mr. STEVENS. It is limited. It is capped in terms of the profit. 

Mr. HENSARLING. My time is running out here, Mr. Stevens. Let 

me try to get in another question. 

As I look at the kind of the broad swath of the Administration’s 

foreclosure mitigation plans that haven’t seemed terribly successful 

to me, and that according to MVA stats that I think with the exception of one quarter, delinquencies have continued to climb. 

22 

I am particularly concerned about certain aspects of the HEMP 

program. I think this summer I saw a report that the average 

back-end ratio and the debt-to-income for HEMP modifications is 

631⁄2 percent, which I believe most people would not believe to be 

a sustainable debt burden on American households. So I am curious. Of the FHA HEMP modifications, what assumption are you 

making on default rates going forward, and explain to me why 

risky borrowers are not being allowed to refinance into an already 

fiscally precarious insurance— 

Mr. STEVENS. So the FHA HEMP refinance program takes an existing FHA loan and refinances them into another FHA loan at the 

same balance. So from a risk standpoint to the taxpayer and to the 

portfolio, it doesn’t add any incremental increased risk. We already 

own the risk on that mortgage when we do the HEMP modification, 

where there is absolutely no incremental risk on that program. 

There is absolutely no doubt that back-end ratios are going to be 

a driver of performance on any of the HEMP programs. And that 

is why as an example in our FHA short refinance program, which 

will cause actual principal write-down, we have capped the backend ratio for people to be eligible for that program. But I want to 

restate that there is no incremental risk. 

Mr. HENSARLING. Incremental being the operative term? 

Mr. STEVENS. Well, the risk is already on the loan, right? 

Ms. WATERS. Thank you very much. Mr. Carson? 

Mr. CARSON. Thank you, Madam Chairwoman. 

When you testified before the Subcommittee on Housing and 

Community Opportunity in March of this year, you proposed that 

the Secretary be allowed to hold all investment lenders to the same 

standard of accountability. Provisions in the FHA Reform Act of 

2010 permit the Secretary to require indemnity to all such lenders. 

Do you believe that there is a need for more oversight or stricter 

qualifications as to which lenders are approved as direct endorsement lenders? 

Mr. STEVENS. I do, and we did ask for that; and I appreciate the 

question. 

In the FHA reform bill that the House passed and this committee 

put forth, it allowed us to expand our indemnification capabilities 

from what is called LI lenders to direct endorsement lenders. That 

bill has not been through the Senate, and so at this point we still 

operate in a world where we have stronger indemnification rights 

with LI lenders than we do direct endorsement lenders. So that 

being said, I will tell you a couple of things we are doing. 

We increased the minimum capital standards required of all 

lenders, direct endorsement or otherwise, so that we are making 

sure that there at least is enough capital for these institutions to 

bear their obligations in the event of fraud or misrepresentation, 

which they all bear regardless of whether they are DE or LI. 

In addition to that, our mortgagee review board has stepped up 

our enforcement activities on all lenders where we are scrutinizing 

institutions with high compare ratios that are outside of the norm 

and taking them under a closer look than past organizations within 

FHA have done previously. But without question, the ability to get 

the remaining terms that were in the FHA Reform Act through the 

23 

Senate and into law will give us the broader enforcement capabilities that we clearly need. 

Mr. CARSON. One last question. Protecting the mortgage insurance fund and capital reserves and, in turn, the American taxpayers are major reasons for congressional support of FHA reform. 

Do you agree that the legislation appropriately addresses the concerns for current and future states of these funds? 

Mr. STEVENS. Yes, I do. 

Mr. CARSON. Thank you. I yield back my time. 

Ms. WATERS. Mr. Posey? 

Mr. POSEY. Thank you, Madam Chairwoman. 

Mr. Stevens, do you think the housing market has hit bottom? 

I notice you indicate that equities are up in your written testimony. 

Do you think the market has bottomed out? 

Mr. STEVENS. I am not an economist. I do believe that the market is clearly in a better place than it was a year ago. 

Mr. POSEY. Just give me a yes or no. Do you think the market 

has bottomed out? 

Mr. STEVENS. I honestly—and I am not trying to be evasive— 

don’t have a yes or no answer. I think we are near bottom. Whether there is a few percentage points further down— 

Mr. POSEY. So that is no, you don’t think it has bottomed out yet; 

you think we are near bottom? 

Mr. STEVENS. I wouldn’t be surprised— 

Mr. POSEY. That has to be in your vocabulary. Gut reaction. Do 

you think we hit bottom yet or not? You are the second top guy. 

You ought to know this. 

Mr. STEVENS. And I am not trying to be evasive. I am just going 

to tell you I think we are, at minimum, near bottom and we may 

be at bottom. To be honest— 

Mr. POSEY. I can’t believe you just can’t say yes or no. 

Mr. STEVENS. I review the same data that you have. 

Mr. POSEY. I can’t believe you are giving me a song and dance. 

I just want to know, do you think we have hit bottom yet? You say 

we are near bottom. That means we are past bottom and on the 

way down? Just tell me this straight: Do you think we have hit bottom yet? 

Mr. STEVENS. I apologize if you are assuming I am trying to give 

you a song and dance. I am trying to give a statement that doesn’t 

indicate that I have an absolute answer to— 

Mr. POSEY. I don’t want your absolute answer. I want your personal opinion. Do you think we have hit bottom yet? 

Mr. STEVENS. I think we are, at minimum, near bottom. 

Mr. POSEY. How many loans does FHA insure? 

Mr. STEVENS. We are going to do about 1.7 million loans this 

year. 

Mr. POSEY. No, how many total do you have insured? 

Mr. STEVENS. Six million. 

Mr. POSEY. How many of those are current? 

Mr. STEVENS. If you give me just a moment, I will tell you the 

exact numbers, but about 91 percent are current. 

Mr. POSEY. Okay. Of the 90 percent that aren’t current, how 

many are 30 days, 60 days, 90 days or worse? 

Mr. STEVENS. If you give me just one moment I want to pull— 

24 

Mr. POSEY. You can be looking at those while I ask you some 

more questions. 

Mr. STEVENS. Okay. 

Mr. POSEY. Original estimates for the HOPE for Homeowners 

Program would be that it would assist up to 400,000 troubled 

homeowners, and to date, there have only been 1,355 applications 

when these notes were taken. What do you think the reason is for 

people not to participate? 

Mr. STEVENS. I apologize; which specific program was this? 

Mr. POSEY. HOPE for Homeowners. 

Mr. STEVENS. The challenge with the HOPE for Homeowners, I 

think it was a program built on good intent, but the processes in 

place, as we have heard with a lot of these programs, the paperwork required, the fact that there is still not a clear liquid takeup, there is not a securitization market for that on the back end, 

puts some natural limitations into the program. 

Mr. POSEY. Okay. Under the HEMP program, what do you think the status of that is? In other words, there was $14 billion provided 

for incentives to support write-downs and second liens. What percentage of that has been spent and what percentage is still 

unspent? 

Mr. STEVENS. Well, HEMP has a variety of types of the program. 

One is obviously the modification of the first mortgage. There is a 

2MP program which provides for second lien write-down which was 

just rolled out midyear this year, and I don’t have the specific data 

for that. I would have to get that from Treasury, but it is a very 

minimum number that has utilized the second lien write-down. 

Mr. POSEY. I would like you to get that for us in writing if you 

would. 

Mr. STEVENS. Yes. 

Mr. POSEY. I guess from TARP, that was $14 billion. I just wonder what portion has been utilized, and for what purpose, and what 

portion has still been unutilized. I hear from an awful lot of constituents who are in trouble, and you have quite a good Representative in central Florida, by the way, who does quite an effective job 

of helping people out; but there is still such a large amount of paperwork. They have such a difficulty, FHA and non-FHA loans, and 

being able to talk to anybody who is in a position of making the 

decisions, and not FHA-specific problem, but I think a problem that 

could largely mostly help turn this economy around. 

And just to re-ask another question that has already been asked, 

to what extent, if any, do you think FHA would be looking for a 

bailout in the future? 

Mr. STEVENS. At this point, based on the reserves of FHA, it is 

running on its own. It is financially sound. It is below the minimum capital requirements. We need to increase that capital, but 

it is requiring a bailout. We will know more when the actuarial 

study is complete. 

Mr. POSEY. Can I take that as a tentative no? 

Ms. WATERS. Thank you. Mr. Klein? 

Mr. KLEIN. Thank you, Madam Chairwoman. 

I just want to pick up on, Mr. Stevens, what Chairman Frank 

brought up before. We passed an FHA reform bill earlier in the 

House, and the Senate sort of stalled on it. One of the things that 

25 

I had worked on was this pilot program which—an outreach in 

terms of dealing with foreclosures and things like that. Wells 

Fargo, I think, had partnered in doing face-to-face outreach with 

troubled borrowers and it seems to have worked fairly well. This 

whole issue of informed borrowers, understand what their choices 

are, not just getting a foreclosure notice, and sort of face-to-face approach for more information. 

Since the bill didn’t pass, I worked on this with Mr. Marchant, 

but this is something that you have the authority to consider and 

push it out there a little bit in terms of more information and 

working with these organizations or some third-party professionals 

that do this. The more information borrowers can have about their 

choices, the better off we will be. 

A lot of it is they just don’t know. People leave, they come, they 

go. The posting doesn’t always work. The issue here is making 

more information available. So I want to encourage you, is that 

something you have the authority to do without the full legislation? 

Mr. STEVENS. We are looking at precisely what our authority is 

for third-party outreach. We completely agree with you that it can 

be impactful. We have spoken to Wells Fargo in terms of the responsiveness of their pilot program they have been utilizing. They 

pay anywhere from $70 to $100 per door-knocker to go out. But we 

agree that early contact is critical and we completely support any 

effort that would be successful and we are looking to see how much 

authority we have and, more importantly, if we have the funds to 

deploy the door-knockers. 

I do want to restate, and Chairman Frank asked this question 

earlier, that FHA is a little different, that we require contact—loss 

mitigation actions within that early period of delinquency in all 

loans within the FHA portfolio as a part of our services. So we already have a broad set of interventions that are required of all 

services. We already have a broad set of interventions that are required, but if the door-knocking, third-party intervention would 

add value in improving performance and helping these homeowners 

who are so desperately in need, we would absolutely support that. 

Mr. KLEIN. If I can, just to continue on this, I think what we 

found is the face-to-face contact is very meaningful. People are 

stressed. They don’t know where to turn. They don’t know what 

their choices are. They hear about this program and that program, 

that some local not-for-profit in the community or city is doing 

something. It is a matter of getting good information to them, having someone they can look in the eye and say, ‘‘Hey, here is what 

the choices are.’’ 

Again, the goal here is if someone can stay—and one of the 

points, we help them, we want them to stay. It is good for the community. It is good for that person. Sometimes it is deferring some 

of the principal to the back. There are a lot of things that can be 

done. It is a disconnect that sometimes makes people just lose it 

all. 

So I think it is a good investment. If you can get back to me and 

let me know what your position is on whether you have the authority, and if you do, what you are going to do. Certainly, I would just 

suggest Florida as a good case study for as much of this that can 

be done as possible. We would appreciate it. 

26 

Mr. STEVENS. We will do so. 

Mr. KLEIN. Thank you. 

Ms. WATERS. Thank you very much. Mr. Garrett. 

Mr. GARRETT. Thank you. And in 5 minutes, you are done and 

you can go home. 

Just to follow up on the gentleman from Texas, one question. The 

reason why I guess there was, I felt, confusion there as far as 

whether it is 1 point or 10 points with regard to the first loan program was because—and he didn’t have that right then, but I do 

now—is that it is in the Department’s press release, and I will just 

read the sentence. 

It says: ‘‘Furthermore, first look would provide NSE purchasers 

with the opportunity to purchase FHA property at a discount of 10 

percent below their appraised value. It is better.’’ So he was going 

by your press release, so let’s just clarify. 

This is an error, then; is that what you are saying? 

Mr. STEVENS. If it would be permissible, I would like to respond 

in writing and make sure that we clarify what was stated in the 

press release versus our specific policy. 

Mr. GARRETT. Okay. That would be very helpful. Thank you. 

I appreciate the fact the opening comment was that you have 

about what, 20 or 30 years in the industry, and coming to hear it 

was actually in private industry, and that is good in my book. 

Some people say that is what we are sort of lacking here in Washington in the Administration. So I appreciate your background in 

this. 

So I am going to put you on the spot in that respect. I know you 

don’t want to give a specific number with regard to Ed’s question 

to the capital levels, where we were before, at one quarter. I know 

your answer is we do not want to go below zero. That is a yes, 

right? 

Mr. STEVENS. Correct. 

Mr. GARRETT. But can you give me this answer? When the report 

comes out, will we be higher or lower than—I don’t want a firm 

number from you—but can you give us your best estimate, with all 

your years of experience, of whether we will be higher or lower 

than that number? 

Mr. STEVENS. A little of that is also trying to predict what home 

prices will be. 

Mr. GARRETT. I understand that. 

Mr. STEVENS. And to relate that to the previous question, let me 

just—and I want to be clear in the answer. I can’t give you that 

answer. And the reason is that the firm that does the actuarial 

study will incorporate a home-price forecast that is a new model 

that is being used which takes local markets and looks at the exact 

rating of the FHA portfolio. It is much improved. We don’t have the 

data of all the specific markets, so I just don’t want to predict when 

the capital reserve that is such a small number ultimately will be 

in the actual study itself. So I do not have— 

Mr. GARRETT. Is that something that you as the new guy in 

charge, new guy in town, sort of would want to have in your position that you would be able to—maybe not today, maybe not tomorrow, to quote a line from Casablanca—but is that not a line today 

that you would want to be able to do that yourself? Because that 

27 

seems to be an important number you need to know so you can 

gauge the rest of your activities, right? 

Mr. STEVENS. We would like to have the ability to do that and 

we are— 

Mr. GARRETT. So you can’t do it now; is what you are saying? 

Mr. STEVENS. The resources required to be able to bring in third 

parties to be able to do the analytics— 

Mr. GARRETT. Internally you can’t do it? 

Mr. STEVENS. The FHA Reform Act that you all voted and 

pushed through has that ability in there. So here is what we do 

do, and you have it in your third quarterly report to Congress 

which we just submitted. We give you a lot of data about the portfolio, which is clearly a lot stronger than anybody predicted. 

Mr. GARRETT. So the short answer is you can’t do it now; you 

want to do it; in the future you may be able to do it? 

Mr. STEVENS. That is correct. 

Mr. GARRETT. On the home loan prices, so your notes or notes 

I took was, okay, the larger loans are around—under 3 percent of 

your portfolio, right? They are not a significant income generator 

for the FHA, right? 

Mr. STEVENS. Right. 

Mr. GARRETT. So here is the issue. Right now, we are in town 

very quickly trying to decide whether we should pass a tax cut for 

people—not tax cut—extend the tax breaks for those people making 

over $250,000. Should we be subsidizing those people on the revenue side, right? That is what the issue is in town right now. 

Here, over here at the FHA, though, we are basically subsidizing 

those people who are the high-income people in their home purchases of people making $200,000 to $250,000. 

Is that consistent that, on the one hand, the Administration does 

not want to subsidize them, but on the other hand, your agency 

says, no, we should be subsidizing, even though it is such a small 

percentage of the portfolio and it is not generating much money? 

Mr. STEVENS. To be clear, the Administration supports the broad 

extension of the loan limits for the next year, and as I stated earlier, Mr. Garrett, is that the FHA high loan limit wouldn’t be the 

most significant impact if they were not extended. The big impact 

would be to even the lower end of communities across the country 

which depend on this formula of whether it is 125 percent of median sales price or or 115— 

Mr. GARRETT. So if we could just fix the formula, maybe then we 

can address this issue and the Administration could be consistent 

then in how we handle this? 

Mr. STEVENS. That would clearly be an alternative if we went 

down the path. The challenge is we have such a short timeline for 

the industry to adopt any changes taking place, is that we would 

be impacting MSAs across the country if we do not extend. 

Mr. GARRETT. Mr. Chairman, I just have one more question. 

The CHAIRMAN. Go ahead. 

Mr. GARRETT. Other than the GSEs—I know we haven’t fixed 

that problem yet, but that is coming. But right now, they have 

something over there called the adverse market fees and loan level 

price adjustments. Okay? 

Mr. STEVENS. Yes. 

28 

Mr. GARRETT. And they charge these fees, and I understand 

when they were here, they explained why they do them. It helps 

the book, that sort of thing. 

But from your perspective, do you see them as actually driving 

away business from the GSEs because that raises the cost of going 

through the GSEs, right? And so if it drives business away from 

the GSEs, that is sort of pushing it into where? The only other 

market that is available and to you folks. 

Mr. STEVENS. There are three markets, and we have seen them 

growing. We are seeing some of the larger financial institutions 

come into the market with jumbo financing, high loan balance financing, which usually has taken the form of adjustable rate mortgages, but we are seeing a growing volume occurring right now 

over recent weeks. 

The other two areas are clearly the loan level price adjustments—what consumers and participants in the industry are ultimately going to make a choice based on the cost of the loan. 

GSEs risk base price so they charge less for the top credit tier, 

and they charge more as the risk increases. FHA has always been 

a flat-priced market over time, and we have talked about this before in terms of this. But the one change we put into place so far, 

obviously, is if you are below 580 we are now adding additional expense to it. But generally speaking, there is no question that the 

cost of the loan is going to reflect consumer behavior in one direction or the other. 

Mr. GARRETT. Say that last line again? 

Mr. STEVENS. There is no question that the price of the loan is 

going to affect the decision the home buyer or borrower makes ultimately and which loan product they select. 

Mr. GARRETT. So, at the end of the day, I will say all other things 

being equal, as far as the price risk and the pricing for that element of concern, if they add the price of the adverse fees into it, 

it is going to be—and as a consumer, that is that going to be higher 

cost for me, so I am going to do the GSE. I know I might go into 

the private market, but right now that really isn’t there, so I am 

going to end up with you folks. 

Mr. STEVENS. And I just say factually that we have had, with our 

recent price change, we have actually made the GSE review mortgage insurance and the loan level price adjustment is actually a 

better option for some home buyers, and so our adjustments have 

actually helped perhaps create a shift back. However, we would describe sort of the private capital entre, but without question, they 

will make a decision based on the price of their mortgage. 

Mr. GARRETT. Just one follow-up on the beginning question, Mr. 

Chairman—where the gentleman from Texas is going. 

I understand I would think that the policy issue rationale behind 

the—what do you call it—the first loan—first look programs. I understand the theory behind that and I understand also where the 

gentleman from Texas is coming. I sort of lean that way, that at 

the end of the day, you want your book to be good; you want a situation that you are not coming back here with the capital level 

below 2 percent, or even below zero, and looking for any bailouts 

or what have you. 

29 

The problem is, I wonder with the default rates that we currently 

see—maybe you can give me the number on that on the default 

rates. I forget what it is right now for the houses that go into it. 

Mr. STEVENS. We have 81⁄2 percent above 90 days late. 

Mr. GARRETT. Okay. I thought it was higher than that. 

The CHAIRMAN. We do want to wind it up. 

Mr. GARRETT. So the question is, don’t you really just sort of kick 

the proverbial can down the road on these; so good for the first 6 

months or 30 days or what have you on these things. But at the 

end of the day, if I am going to still default, the risk was on the 

book before and after; all you did was push it down the road and 

you didn’t really benefit your bottom line at the end of the day anyway. Actually it may be worse because those people have just taken 

advantage of the house for 30 days or 60 days or 90 days and 

haven’t paid on it. 

Mr. STEVENS. Well, actually the performance rate on the FHA 

portfolio is significantly higher than any other portfolio. People actually will go into default, but they will recover at a rate that is 

significantly higher than what I experienced in the private sector 

or at the GSEs over time. A lot of it has to do with our aggressive 

loss mitigation and programs we can put in place to get people 

back on track. 

And I will just tell you, remember, all our loans are owner-occupied, primary residence, and our average loan balance is much 

lower than most other portfolios in the market. So I don’t believe 

there is an alternative lifestyle option for many people if we can 

help them get back into the home. 

The CHAIRMAN. The time has expired. I don’t want to get into too 

much more of a discussion of alternative lifestyle options. That 

would take us along a different path. 

I will say that any members, either those who are here or those 

who couldn’t be here because we understand the schedule had been 

changed for votes, who have additional questions can submit them. 

We can expect the Commissioner, as he always has, to be responsive. And I would ask unanimous consent to insert into the record 

the statement submitted to us by our colleague Mr. Towns, the 

chairman of the Government Reform Committee, on his bill which 

deals with red lining, H.R. 5941, and without objection, that will 

be made a part of the record. 

And the committee will adjourn, to reconvene at 2 p.m. for a 

hearing with the Secretary of the Treasury. 

[Whereupon, at 11:35 a.m., the hearing was adjourned.] 

(31) 

A P P E N D I X 

September 22, 2010 

32 


62681.001
33 


62681.002
34 


62681.003
35 


62681.004
36 


62681.005
37 


62681.006
38 


62681.007
39 


62681.008
40 


62681.009
41 


62681.010
42 


62681.011
43 


62681.012
44 


62681.013