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[Senate Hearing 109-994]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-994

 
                        REFORM OF FHA'S TITLE I
                       MANUFACTURED HOUSING LOAN

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

                                HEARING

                               before the

               SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

                                 of the

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

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

  EXAMINATION OF S. 2123, TO MODERNIZE THE MANUFACTURED HOUSING LOAN 
      INSURANCE PROGRAM UNDER TITLE I OF THE NATIONAL HOUSING ACT

                               __________

                             APRIL 4, 2006

                               __________

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

   Available at: http: //www.access.gpo.gov /senate /senate05sh.html

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
37-830                      WASHINGTON : 2007
_____________________________________________________________________________
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

            Mark Calabria, Senior Professional Staff Member

             Jonathan Miller, Democratic Professional Staff

            Sarah Garrett, Democratic Legislative Assistant

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

               Subcommittee on Housing and Transportation

                    WAYNE ALLARD, Colorado, Chairman

                JACK REED, Rhode Island, Ranking Member

RICK SANTORUM, Pennsylvania          DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MICHAEL B. ENZI, Wyoming             CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
MEL MARTINEZ, Florida                CHARLES E. SCHUMER, New York
RICHARD C. SHELBY, Alabama

                    Tewana Wilkerson, Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, APRIL 4, 2006

                                                                   Page

Opening statement of Senator Allard..............................     1

Opening statements, comments, or prepared statements of:
    Senator Reed.................................................     3

                               WITNESSES

Brian D. Montgomery, Assistant Secretary for Housing-Federal 
  Housing Commissioner, U.S. Department of Housing and Urban 
  Development....................................................     4
    Prepared statement...........................................    20
    Response to written questions of Senator Reed................    29
Michael J. Frenz, Executive Vice President and Chief Operating 
  Officer, Government National Mortgage Association, U.S. 
  Department of Housing and Urban Development....................     7
    Prepared statement...........................................    21
Kevin Clayton, President and Chief Executive Officer, Clayton 
  Homes, Inc., on behalf of Manufactured Housing Institute and 
  Manufactured Housing Association for Regulatory Reform.........    8?
    Prepared statement...........................................    23
Kevin Jewell, Consultant, Manufactured Housing Project, on behalf 
  of Consumers Union.............................................    10
    Prepared statement...........................................    27
    Response to written questions of Senator Reed................    29

                                 (iii)

                        REFORM OF FHA'S TITLE I 
                   MANUFACTURED HOUSING LOAN PROGRAMS

                              ----------                              

                         TUESDAY, APRIL 4, 2006

                               U.S. Senate,
        Subcommittee on Housing and Transportation,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met, at 3 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Wayne Allard (Chairman of the 
Subcommittee) presiding.

           OPENING STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. I will call the Subcommittee on Housing and 
Transportation to order. We have a pretty tight schedule for 
most Members today, including my Ranking Member, Senator Reed, 
and so we are going to move the hearing along fairly quickly, 
and I want to get started on time so we can get as much covered 
as we can. When we hit 4 o'clock, we will probably draw the 
hearing to a close, and then if there are any questions that 
remains--and there likely will be--we will submit those to you 
and ask that you get them back to us within 10 days, if you 
would.
    Homeownership has many benefits for communities and 
families, and both Congress and the President have pursued 
policies designed to support and promote homeownership. We have 
been successful, as evidenced by the current record high 
homeownership rates. Manufactured housing represents an 
important component of our homeownership gains.
    According to Harvard's Joint Center for Housing Studies, in 
collaboration with the Neighborhood Reinvestment Corporation 
and the Ford Foundation, manufactured housing represents two-
thirds of affordable housing added to the stock in recent 
years, and it is a growing portion of all new housing. In fact, 
buyers of manufactured housing contributed to a substantial 
share of the growth in low-income homeownership.
    Manufactured housing can also be a particularly critical 
source of homeownership in areas where site-built construction 
can be more difficult or costly, such as in rural areas. 
Similarly, the difficult building conditions and the short 
construction season in many mountain communities can make 
manufactured housing an attractive alternative.
    The manufactured housing industry has evolved from the 
trailers of the past. Consumers can choose from a vast spectrum 
of prebuilt homes, from very affordable mobile homes up to 
multimillion-dollar homes, completely indistinguishable from 
site-built homes. Some manufactured housing is placed on land 
owned by the homeowner; whereas, other homes are placed on lots 
rented or leased by the homeowner. While land ownership can 
offer greater economic benefits and control, home-only 
purchases are often much more affordable.
    Different financing models have evolved for different types 
of manufactured housing. Homebuyers with a real property title 
permanently sited on owned land are often able to access FHA's 
Title II program. To accommodate other homebuyers who have had 
personal property titles, in 1969 FHA's Title I program began 
insuring manufactured housing loans made by private lenders. 
While the Title I program has been important in promoting 
financing of manufactured housing, its usage has significantly 
declined due to key structural flaws. In 1992, the program 
insured 30,000 loans, but in recent years have seen fewer than 
2,000 loans. We must find a way to fix these limitations and 
reinvigorate the program, a recommendation echoed by the Ford 
Foundation, the Neighborhood Reinvestment Corporation, 
Harvard's Joint Center for Housing Studies, the Millennial 
Housing Commission Report, and Frontline Systems in a HUD-
commissioned report.
    I have introduced legislation, Senate bill 2123, the FHA 
Manufactured Housing Loan Modernization Act, to reform the 
Title I program. My legislation patterns the Title I program on 
the successful Title II single-family program and incorporates 
many of the suggestions from the HUD-commissioned report. I am 
pleased to have Senators Bayh, Martinez, Dole, Johnson, 
Chambliss, and Lincoln join me in this strong bipartisan 
effort.
    The bill would move the Title I program from a portfolio-
based system to loan-by-loan insurance. This change would 
remove a significant barrier to lender participation. This 
would be balanced against lender accountability measures, 
including tighter underwriting standards by FHA, increased 
monitoring of FHA lenders, continued co-insurance and increased 
capital requirements for participating lenders.
    My bill will also raise the loan limits, which have not 
changed since 1992. Updating the loan limits to reflect the 
current market price will make the Title I programs useful to 
more families. These changes will benefit homebuyers. A 
revitalized Title I program will better insure that families 
are able to access one of the most affordable sources of 
homeownership. As additional lenders come into the program, 
increased competition will lead to lower rates and costs.
    Title I reform will also benefit the industry. The 
manufactured housing industry is currently in the midst of a 5-
year downturn, partly stemming from over-tight credit 
conditions. The absence of Title I activity has inhibited the 
manufactured housing industry's recovery. More securitization 
will add liquidity to the market. Finally, my bill will benefit 
taxpayers, in part because it explicitly states that the 
program must become financially self-sufficient and actuarially 
sound. Also, the current structure of the Title I program 
leaves Ginnie Mae highly vulnerable to losses. In the late 
1980's and early 1990's, Ginnie Mae lost millions. While they 
have since taken steps to stem the losses, some of the measures 
have inhibited the program. In some regards, losses have been 
minimized because the program is barely functioning. By setting 
insurance on a loan-by-loan basis, Ginnie Mae will be better 
able to recoup losses, as it does under the Title II program.
    Reform of FHA's Title I manufactured housing program will 
help promote one of the most affordable sources of 
homeownership. We have an excellent lineup of witnesses here 
today to discuss the issue.
    First, we will hear from Brian Montgomery, Assistant 
Secretary for Housing and the Federal Housing Commissioner at 
HUD. I know that HUD is working on a broader FHA reform 
package, and we will be interested to hear how Title I may fit 
into HUD's proposal.
    Next, we will hear from Michael Frenz, Executive Vice 
President of Ginnie Mae. At this point Ginnie Mae is no longer 
accepting new lenders into the program. We will be interested 
to hear about the circumstances that led to this point, as well 
as your reform suggestions.
    Kevin Clayton of Clayton Homes will testify on behalf of 
the manufactured housing industry. As the President and CEO of 
a company that manufactures, sells, finances, and insures 
manufactured homes, he will be able to provide a valuable 
perspective.
    Finally, we will hear from Kevin Jewell, a Consultant for 
Consumers Union. Mr. Jewell has written a number of reports on 
the manufactured housing industry.
    I would like to thank all of the witnesses for appearing 
before the Subcommittee today. We appreciate your time, and 
your testimony will be helpful as the Committee continues to 
work on this issue.
    Next, I would like to call on my colleague, Senator Reed, 
for any comments he may have.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing on the FHA Title I program, and I 
thank all the witnesses for your testimony and participation 
today.
    Affordable housing is rare in today's market. The average 
cost of a home in the country today has topped $200,000. Back 
in Rhode Island, the average home price is now $265,000. And 
for this reason, I have been working with the Chairman on an 
amendment to the GSE reform bill that hopefully will create 
some affordable housing funds and help lower the price of it 
and make access to affordable housing more consistent 
throughout the country.
    Manufactured housing is one of the means that low-income 
households can afford to own their own home. It plays an 
important role in augmenting affordable homeownership 
throughout this country. For example, for households with very 
low incomes, 23 percent of new homeowners purchase manufactured 
homes, and that is a significant benefit for these low-income 
households.
    Despite these opportunities for low-income families to 
become homeowners, manufactured housing also has experienced 
some shortcomings that we will look at today, I hope, and 
discuss in some detail.
    Particularly when it comes to manufactured homes situated 
on leased land. These homes tend to depreciate. Loans for these 
types of housing arrangements tend to have high interest rates, 
resulting in a larger loan payment, than payments for 
manufactured homes on owned land. As a result of these interest 
rate peculiarities, default rates on loans for these homes tend 
to be considerably higher than conventional loans, in fact, as 
much as 4 times as high. And because these homes are considered 
personal property, buyers tend to be subject to fewer 
protections than homebuyers experiencing foreclosure. And 
depending on the State in which they live, consumers also tend 
to face less stable living situations, and they may have month-
to-month leases that do not guarantee that they will be able to 
maintain their home on the land that they have leased.
    And, finally, there is at least some circumstantial 
evidence of predatory lending practices involved in the 
purchase of these homes. That is something we want to look at.
    Again, I think this is a wonderful opportunity to look 
seriously at these issues and try to advance a reform agenda, 
and I thank the Chairman for his efforts.
    Thank you, Mr. Chairman.
    Senator Allard. Thank you very much, and now we will go to 
the panel.
    First of all, I would like to call upon Brian Montgomery, 
Assistant Secretary for Housing and the Federal Housing 
Commissioner, Department of HUD.
    Mr. Montgomery.

                STATEMENT OF BRIAN D. MONTGOMERY

                    ASSISTANT SECRETARY FOR

             HOUSING-FEDERAL HOUSING COMMISSIONER,

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Montgomery. Thank you very much. Chairman Allard, 
Ranking Member Reed, and distinguished Members of the 
Subcommittee, thank you for the opportunity to testify on S. 
2123, the FHA Manufactured Housing Loan Modernization Act of 
2005. At your pleasure, I would like to submit my statement for 
the record.
    Senator Allard. They will be made a part of the record.
    Mr. Montgomery. Thank you, sir.
    In 1969, Congress expanded Title I insurance to cover loans 
on manufactured housing. Under Title I, FHA insures loans on 
manufactured housing that does not qualify as real estate. 
Title I borrowers may finance the purchase of a manufactured 
home and a land lot, or they may finance the manufactured home 
only or the land lot only. FHA-approved lenders make Title I 
loans eligible to borrowers from their own funds, and FHA 
insures the lenders against loss.
    Secretary Jackson and I support the concepts presented in 
the bill introduced by Chairman Allard and agree that the Title 
I program is in need of reform. In fact, the Administration's 
FHA reform bill includes provisions very similar to those 
proposed by the Chairman. Certainly, both bills are intended to 
expand affordable housing opportunities and drive down consumer 
costs, while limiting risks to the Federal Government. HUD 
officials have discussed the proposed changes with industry 
leaders and manufactured home lenders, and I think we are all 
in agreement that the changes will accomplish these objectives.
    The need for a viable Title I program is very clear. Nearly 
22 million Americans, or roughly 8 percent of the population, 
live in manufactured housing. If enacted, this legislation will 
expand the financing options for families seeking to purchase 
these types of affordable homes. In many areas of the country, 
particularly rural areas, manufactured housing is the only form 
of quality affordable housing available, so it is sensible to 
have a strong FHA program to help families buy these homes at a 
fair price.
    At an average cost of $58,100--that is a 2004 figure--a 
manufactured home is typically more affordable than bricks and 
mortar homes, which cost on average $201,000, excluding the 
price of the land, I might add. In addition to value, today's 
manufactured homes offer new homebuyers many of the property 
features they desire. They can choose walk-in closets, 
fireplaces, or even ``Energy Star'' appliances.
    If enacted, the program changes proposed by the Allard bill 
and the Administration's FHA reform legislation will modernize 
the Title I manufactured home program in a manner that we 
believe will encourage more lenders to participate in the 
program. Additional competition will drive down the financing 
costs for prospective homebuyers while improving the programs 
long-term financial soundness.
    Both bills remove the key impediments that drove lenders 
away from Title I for the last several years, and both propose 
to increase the loan limits to levels that reflect today's 
manufactured housing prices. Both bills also propose that the 
limits be indexed to permit annual adjustments to keep them in 
line with actual home costs.
    The most important change proposed in both bills is the 
conversion of Title I from a portfolio insurance program to an 
individual loan insurance program, similar to our current Title 
II program. This change will eliminate the most problematic 
statutory limitation of the program today, and that is the 
restriction on insurance claim payments to 10 percent of the 
value of a lender's loan portfolio.
    This outdated portfolio insurance structure, which results 
in uncertainty and higher costs, was the primary reason Ginnie 
Mae curtailed securitization of Title I manufactured home loans 
in 1989. With portfolio insurance, lenders are not guaranteed 
coverage against loss and subsequently price their loans for 
additional risk. The higher loan costs, in turn, increase the 
likelihood of borrower default.
    With additional default risk, but insufficient coverage, 
the losses grew to unsustainable levels in the 1990's, and 
Ginnie Mae pulled out of the program. The elimination of this 
outdated insurance model will encourage Ginnie Mae to 
reconsider participation in the secondary Title I securities 
market.
    HUD's proposal is also consistent with S. 2123 in that it 
retains the 90-percent co-insurance feature of the Title I 
program, whereby FHA covers only 90 percent of the lender's 
loss. Co-insurance provides lenders with additional incentive 
to perform high-quality 
underwriting to protect themselves from loss. As such, the co-
insurance feature will help ensure only responsible lenders 
participate in the program.
    Finally, HUD agrees with and offers in its own legislation 
a 
provision stating that the insurance coverage should include a 
guarantee to lenders that their claims will be paid. We believe 
a loan-level insurance model that includes such an 
``incontestability clause,'' guaranteeing insurance coverage, 
will help drive down the price of these loans, again by 
reducing the risk of loss to lenders.
    This risk will be transferred to FHA. To address this, 
should either the Allard or larger FHA reform bill be enacted, 
FHA plans to implement additional risk control measures.
    I mentioned at the outset of this testimony that HUD's bill 
is slightly different from S. 2123. One of the differences is 
the provision regarding insurance premiums. The Senate bill 
mimics the existing Title II coverage, with a 2.25-percent up-
front premium cap, and retains the existing Title I annual 
insurance premium with a 1-percent cap. Our version, however, 
allows FHA flexibility in setting premiums at a level 
appropriate to ensure adequate cashflows and to cover potential 
losses.
    For both the Title I and Title II programs, HUD is 
proposing a risk-based insurance premium structure. Combining a 
risk-based premium charge with the appropriate up-front 
underwriting standards, HUD will be able to operate the program 
in a more financially sound manner and, over time, at a 
negative credit subsidy rate, as proposed in the Allard bill. 
Although both bills propose that FHA operate the program in a 
self-sustaining manner, without the risk-based premium 
structure, it is unlikely FHA could operate the program at a 
break-even. FHA needs flexibility to set the premiums at 
appropriate levels to assure adequate cashflow to cover these 
costs.
    This flexibility is particularly important because nonreal 
estate manufactured housing does not always appreciate in 
value. Defaults are more likely and recoveries are lower with 
this type of property. FHA will bear this additional risk and 
must have the ability to set premiums at levels commensurate 
with the risk.
    While we look forward to working with the Subcommittee to 
find common ground on these issues, I want to make clear that 
HUD supports the underlying reforms in this legislation. As FHA 
Commissioner, I believe that modernization of the Title I 
program is long overdue and that the FHA Manufactured Housing 
Loan Modernization Act proposes appropriate modifications to 
make Title I a viable, affordable financing option once again.
    In closing, I want to thank you, Mr. Chairman, Ranking 
Member Reed, and Senator Bayh for introducing legislation to 
improve Title I and for holding this important hearing. I 
appreciate the interest of the Subcommittee in the program and 
in expanding access to a critical form of affordable housing.
    Thank you, sir.
    Senator Allard. Thank you.
    Now, we will call on Mr. Frenz, Executive Vice President of 
Ginnie Mae.
    Mr. Frenz.

                 STATEMENT OF MICHAEL J. FRENZ

                  EXECUTIVE VICE PRESIDENT AND

                    CHIEF OPERATING OFFICER,

           GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,

        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Mr. Frenz. Thank you, Chairman Allard and Ranking Member 
Reed. I appreciate the opportunity to testify before you on 
efforts to modernize FHA's Title I manufactured housing loan 
program. At your pleasure, I would like my written statement 
entered into the official record.
    Senator Allard. It will be entered in the record.
    Mr. Frenz. Ginnie Mae promotes affordable housing by 
linking local housing markets to global capital markets. We do 
this by guaranteeing payments to investors in mortgage-based 
securities that carry the full faith and credit of the U.S. 
Government.
    Ginnie Mae's securities are comprised of loans individually 
insured or guaranteed by Federal entities: FHA, VA, Rural 
Housing Service--in the case of manufactured housing, FHA. Most 
types of Federal mortgage insurance reimburse lenders for most 
of the costs of delinquency and foreclosure, including 
principal and interest payments to investors that had not been 
collected from borrowers.
    Ginnie Mae is called upon to honor its guarantee only when 
the financial institution that issued the security is unable to 
make payments to investors. Because the loans are individually 
insured, this generally happens when the financial institution 
fails.
    When an issuer defaults on its obligation to pay Ginnie Mae 
security holders, Ginnie Mae assumes responsibility for 
servicing the portfolio and making payments to investors. At 
that point, Ginnie Mae's risk is dependent on the nature of the 
insurance or guarantee provided at the loan level.
    Ginnie Mae began securitizing manufactured housing loans in 
the early 1970's. At the program's peak, approximately $3 
billion of securities were outstanding and 30 to 40 issuers 
were active at a given time. Between 1986 and 1988, however, 12 
issuers with $1.8 billion of securities defaults, resulting in 
Ginnie Mae assuming their portfolios and suffering large 
losses.
    In 1989, due to those losses, Ginnie Mae imposed a 
moratorium on the acceptance of new issuers, which helped to 
limit subsequent losses. To date, Ginnie Mae has experienced 
$514 million of losses on manufactured housing portfolios.
    Why were Ginnie Mae's losses on these portfolios so severe? 
A number of structural features unique to the Title I program 
exposed Ginnie Mae to risks that could not be mitigated. For 
the sake of brevity, I will focus on the two most important in 
terms of losses to Ginnie Mae.
    The most important feature is the limit on insurance per 
lender. FHA limits its exposure by capping lender insurance 
coverage at 10 percent of all originations and purchases. Once 
claims reach 10 percent of the outstanding portfolio, the loans 
are effectively no longer insured, leaving issuers with little 
economic incentive to continue servicing loans and making 
payments to security holders. Ginnie Mae suffered large losses 
when assuming the portfolios of lenders that had exhausted FHA 
insurance coverage.
    The second feature is that Title I loans are registered for 
insurance, but not reviewed by FHA for insurance eligibility at 
origination. Instead, FHA reserves the right to contest a claim 
for up to 2 years after claims are paid. This increases the 
risk to the issuer, or Ginnie Mae upon a default, that loans 
are not insured and raises costs for borrowers.
    Today, the manufactured housing program at Ginnie Mae has 
almost completely wound down. There are four approved issuers 
in the program, with only one issuing new securities. During 
2005, only $9 million in new securities were issued, and as of 
December 31, 2005, approximately $187 million were outstanding.
    In summary, the structural features of the Title I program 
caused significant losses and made it impossible for Ginnie Mae 
to maintain a viable securitization program. To the extent that 
the Title I program is restructured to address those features, 
Ginnie Mae would consider lifting its current moratorium and 
working with FHA to support this important loan product that 
can help many Americans achieve their dreams of homeownership.
    Thank you for this opportunity to discuss Ginnie Mae's 
experience with its manufactured housing securitization 
program. I will be pleased to answer any questions you have.
    Senator Allard. Mr. Clayton of Clayton Homes.

                   STATEMENT OF KEVIN CLAYTON

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

                CLAYTON HOMES, INC. ON BEHALF OF

        MANUFACTURED HOUSING INSTITUTE AND MANUFACTURED

           HOUSING ASSOCIATION FOR REGULATORY REFORM

    Mr. Clayton. Chairman Allard, Ranking Member Reed, thank 
you for the opportunity to comment, and I ask that my written 
statement be part of the offical hearing record.
    Senator Allard. They will be made a part of the full 
record.
    Mr. Clayton. Thank you. Clayton Homes is a vertically 
integrated modular and manufactured housing company owned by 
Berkshire Hathaway. We began 50 years ago and have been lending 
on manufactured housing for the past 35 years. Both of our 
lending affiliates--Vanderbilt Mortgage and 21st Mortgage--
specialize in the origination and serving of $17 billion in 
manufactured home loans, including FHA Title I. I appear before 
you representing both the Manufactured Housing Institute and 
the Manufactured Housing Association for Regulatory Reform.
    The manufactured housing industry today is in the midst of 
a severe economic downturn with production levels down 60 
percent since 1998. The primary cause for this market 
contraction has been the loss of available financing for 
potential homeowners who apply for manufactured housing loans.
    Manufactured housing has changed dramatically in recent 
years. The pictures that I shared with you indicate the 
positive and significant exterior and interior aesthetic 
enhancements. As material prices have skyrocketed, developers 
are now rushing to use manufactured housing as a more efficient 
means to build beautiful subdivisions.
    Lending on manufactured housing has also changed. Today, 
the industry serves two distinct markets. First, over 80 
percent of 
current industry mortgages include real estate as part of the 
transaction. The other small segment, 20 percent or less, is 
the home-only market which is also a much needed and very 
important segment. The home-only segment serves families who 
want to enjoy homeownership without the additional burden of 
purchasing land. The majority of these owners are placing the 
home on family land. The common example is the grandparents 
allowing the kids to place a home on their property, but they 
are not about to let the kids require them to subdivide the 
land and encumber it with a lien.
    During past industry recessions, the FHA Title I program 
provided much needed capital. However, in recent years, it has 
not functioned as Congress or FHA intended. Unfortunately, the 
current FHA Title I program is burdened with nonvalue-added 
processes causing it to serve less than 2,000 homeowners 
annually. This compares to 1992, when the program was insuring 
over 30,000 loans annually.
    Unchanged since 1992, the loan limits are too low for 
today's manufactured home. The home-only program has a current 
loan limit of just $48,600 resulting in less than 1,000 square 
feet of living space, typically--too small for families today 
or to accommodate the aesthetic improvements of today's 
manufactured housing.
    The Title I program has certain structural problems which 
make it very difficult for Ginnie Mae to recoup losses when 
lenders leave the program or go out of business. This has 
caused Ginnie Mae to severely limit the number of lenders for 
which it will guarantee loan securitizations. Thus, the 
advantages of the secondary market are greatly curtailed, 
particularly given Fannie Mae and Freddie Mac's limited 
participation. The end result is tens of thousands of low- to 
moderate-income homebuyers have been denied access to credit in 
this Federal Government program for several years.
    S. 2123 will provide the necessary reforms to revive and 
stabilize this program. It would raise the loan limits and 
index them to inflation, and the legislation would also require 
that each loan be separately insured, like FHA Title II today.
    To ensure that the Federal taxpayer is protected, the 
legislation requires the program to be actuarially sound by: 
Allowing HUD to increase the up-front insurance premium; 
directing HUD to address underwriting standards as market 
conditions dictate; strengthening the downpayment requirement; 
and maintaining the current requirement that lenders co-insure 
10 percent of each insurance loss.
    Each of these reforms was recommended in four independent 
studies which examined this program over the past 4 years. 
While the industry strongly supports these recommendations, we 
are open to other suggestions that might also improve and 
strengthen this program.
    In closing, Mr. Chairman, we respectfully urge you to move 
S. 2123 through the legislative process as quickly as possible. 
Thank you for your time and attention to this important 
program, and I appreciate the opportunity to answer your 
questions.
    Senator Allard. Mr. Jewell with the Consumers Union.

                   STATEMENT OF KEVIN JEWELL

           CONSULTANT, MANUFACTURED HOUSING PROJECT,

                ON BEHALF OF THE CONSUMERS UNION

    Mr. Jewell. Thank you, Senator Allard and Ranking Member 
Reed.
    I am Kevin Jewell. I am with Consumers Union, and I request 
that my written comments be submitted for the record.
    Senator Allard. Without objection.
    Mr. Jewell. In 2001, Consumers Union launched the 
Manufactured Housing Project with one goal, one question. And 
that question was: Does ownership of a manufactured home offer 
the same benefits as ownership of a conventional home?
    The answer is, all too often, it does not. Market failures 
in the lending marketplace mean that consumers often end up 
owing more than they wish and end up underwater on a loan 
months or years after their purchase. Problems with warranty 
service and durability contribute to these failures.
    The question is: What are the benefits of conventional 
homeownership? You mentioned that there are subsidies for 
homeownership: Why do we subsidize homeownership? I submit to 
you the two major factors discussed in the academic literature 
are stability and investment value. Stability allows people to 
build ties with their community, and payment on an asset that 
appreciates allows families to invest to build an asset.
    The home-only product that is the focus of this legislation 
offers neither stability nor investment for the family. The 
question is: Can we add language to this bill to restore those 
benefits to the product? In terms of stability, we can. We can 
require that homeowners that buy under this product demonstrate 
long-term control of the land upon which that home is going to 
sit. That control could be land ownership, although if the 
consumer owns the land, we would encourage them to go with a 
real estate product. But as Mr. Clayton discussed, if they are 
placing the home on family land, and they are able to 
demostrate that the landowner is willing to issue them a long-
term guarantee for the placement of that home, that would 
demonstrate control.
    Freddie Mac, a few years ago, began a program called a 
leasehold program, where they offered personal property loans 
that required that the homeowner have a lease that was 5 years 
longer than the term of the loan. With the high loan-to-value 
that we see in this product, a consumer might have merely 
hundreds of dollars of equity for the first 5 to 10 years. If 
they are on a month-to-month lease, and the landowner decides 
they want to close the park or evict the homeowner, it may be 
in that consumers best interest to send that home back to the 
bank. The cost of moving a home--and remember, we do not call 
these mobile homes any more because they are not particularly 
mobile--the cost of moving a home easily runs into thousands of 
dollars and can damage the home, decreasing its value.
    Requiring demonstration of stability and long-term control 
of the land is one needed change to this bill.
    The other is, can we do anything about the fact that a 
home-only manufactured home loan is a depreciating asset? No, 
we cannot. Generally, manufactured homes that are not on owned 
land depreciate. We can ensure that the purchase occurs at a 
reasonable price. That is where the appraisal standard in the 
bill helps. It prevents what we have seen in the past in this 
industry, where consumers end up paying too much for a home in 
the beginning. The creation of liquidity in the resale market, 
by providing loans for used homes, is a potential benefit of 
this bill. In fact, I would submit that it may be worthwhile 
limiting this program only to used homes. The new home market 
has private participants. The used home market does not have 
many active participants, and without a Government policy 
interest in creating investment opportunity or a Government 
policy interest in stability, we question the underlying 
interest in this legislation.
    Thank you.
    Senator Allard. I want to thank the panel for their 
testimony. Senator Reed and I will take 5 minutes apiece and 
ask questions. That will get close to 4:00 o'clock, Senator 
Reed. I know you have to get going and so do I, so we will pull 
the hearing to a close.
    On this issue of choices for families, most of the families 
that choose to purchase manufactured housing that is not placed 
on owned land, actually, what choices do they have? And with 
these choices, are there reasonable alternatives out there that 
perhaps would fit one family but may not fit another? I am 
wondering if perhaps individually the members on the panel 
might want to comment on the choices that families have when 
they do not have the choice of putting a manufactured home on 
land. You want to comment on that, Mr. Montgomery?
    Mr. Montgomery. Yes, thank you, Mr. Chairman. Certainly 
speaking for my home State of Texas and many parts of that 
State, manufactured housing is about their only option that is 
reasonably priced. You go to a lot of parts of East Texas, that 
is about all you see for miles on end. For these families who 
are lower income, their options are limited, and one of the 
primary reasons we are looking at reforming Title I, just as we 
are Title II, in the case of Title I, just the interest rates 
are so onerous. And here we are at the U.S. Department of 
Housing and Urban Development, and we are only participating in 
1,700, 1,600 loans throughout the whole country. Tells us right 
away that the program needs to be reformed, needs to be 
modernized.
    We think by making some of the changes, Mr. Chairman, that 
are in your bill, certainly eliminating the 10 percent 
portfolio cap, doing some stricter underwriting on the front 
end, so that we can do a preendorsement review and guarantee 
that we can put FHA insurance on it, will certainly, we think, 
drive down interest rates and much more affordable to even more 
lower-income families, especially those who have very limited 
options, especially, again, in the rural communities where 
sticks and bricks construction is just so cost prohibitive.
    Senator Allard. Any other comments?
    Mr. Clayton. If I may?
    Senator Allard. Yes, Mr. Clayton.
    Mr. Clayton. The current industry data does show that 80 
percent of these homes go on land where the land is part of the 
mortgage, so we are only talking about 20 percent of the 
overall market, and of that 20 percent, only 25 percent of that 
20 percent are in the land-lease community environment where 
they do have exposure to a landlord raising rents. It is not 
likely that grandparents are going to kick the kids off the 
land, and the common situation is that these homes are going on 
family land out there.
    I hate to really wreak havoc on this program, the positive 
change we have made, based on that small population of homes 
that go into communities. And, of course, the good news is that 
in most States out there now there are laws that--and we are 
working with State associations across the Nation--address this 
land-lease issue. So the consumers have a lot of options on 
using this home-only product, and they are finding good uses 
for that.
    Senator Allard. So we have rural areas where electricians 
are not necessarily readily available, or plumbers, the skilled 
trades that you need to build a home. I have tried building a 
home in a remote area and it is not easy because those people 
will not leave the more profitable urban areas to go into those 
areas. But you are saying these are family farms or family 
ranches or some family owned property, and they take a section 
of it and decide they want a home on it. They keep it within 
the family, but allow one of the kids, for example, to just 
purchase a home and take, in this case it would be a consumer 
loan on that one home, and that is something that you do not 
frequently run into?
    Mr. Clayton. That is the most common loan--a home-only loan 
that does not have land. As you said, it is almost impossible 
to get an affordable site-built home out in a rural America, so 
manufactured housing is also great form of housing, and 
provides employment and labor for those people.
    Senator Allard. Any other comments?
    Mr. Jewell.
    Mr. Jewell. What we find is that in rural areas people tend 
to own the land or a relative owns the land because the land is 
inexpensive. It is in the urban areas that we find the majority 
of the park placements, and that is where the tenure problem is 
going to lead to a lack of stability.
    Requiring an affidavit or a lease demonstrating long-term 
control of the land, a lease from the aunt or from the parent 
saying, ``The owner of the home has a right to leave this home 
here for 5 to 10 years,'' is not going to impact those 
transactions. However, it will protect the consumer who buys a 
home on a month-to-month lease in a city, or in a year-to-year 
lease, and find out that the park owner was not willing to give 
them a 5-year lease. The homeowner may have planned on staying 
in that park for 10 years, for 20 years, but if they do not 
have stability of tenure, they should know that up front. The 
FHA should know that, because that is going to increase the 
risk of default.
    Mr. Clayton. Could I make a comment?
    Senator Allard. Mr. Clayton.
    Mr. Clayton. With all due respect, since lending money 
beginning in 1972, we found that the grandparents do not look 
favorably on giving the kids guaranteed access to leave the 
home there for an extended period of time. I am afraid that you 
are suggesting a hindrance to this program that will stifle 
homeownership.
    Senator Allard. I guess this a question I have. You may 
have some families where it is a good choice, some families 
where it is a bad choice, and why would you exclude everybody, 
including those families for which it is a good choice? I guess 
that is the question that comes up at this particular point in 
time.
    Mr. Jewell.
    Mr. Jewell. Thank you, Senator. We want them to be able to 
demonstrate that it is a good choice for them, and if FHA's 
loan is at the whim of the grandparents, the FHA should know 
that. Because the way that these loans are structured with the 
high loan to value, the equity builds very slowly, and it may 
be that the equity in the home will not cover the cost of 
moving that home to another location for 5 to 10 years. In that 
case, the consumer may be better off saying, ``Repossess the 
home, because it is going to cost me $5,000 to move it, but I 
only have $100 in it or I only have $500 in it.''
    Senator Allard. Mr. Clayton.
    Mr. Clayton. May I address that?
    Senator Allard. Yes.
    Mr. Clayton. This bill has the financial management belts 
and suspenders that if HUD finds a lender where the loans are 
not performing well--they can cut that lender off, they can 
raise the insurance premiums. This bill is absolutely crafted 
so that it will ensure reasonable loan performance.
    Senator Allard. My time has expired. Go ahead, Senator 
Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Secretary Montgomery, just as a point of departure, FHA 
does not collect data on defaults on this title, do they?
    Mr. Montgomery. That is correct, Senator. We do not at this 
point. Right now, we only pay a claim on the back end, and even 
then, sometimes the lender has to jump through hoops for us to 
even approve paying a claim.
    Senator Reed. Does that point to a more aggressive review 
by FHA of this program in terms of getting the data on 
defaults?
    Mr. Montgomery. Yes, Senator. There are some parts of the 
Title I that could better mirror Title II, again, with the 
ultimate goal we think of having tighter underwriting, and a 
guarantee payment of a claim, which you do not have right now, 
we can drive down the cost of the loan.
    Senator Reed. Historically, there is a higher rate of 
default on these types of arrangements than on the usual real 
estate transaction, and I think we have all, again, returned 
consistently to this notion that leased land is a factor that 
might prompt this. Repossessions seem to be higher. Has any one 
at GAO or anyone else done an actuarial study about the likely 
effects of the reform proposals in terms of the FHA insurance 
fund?
    Mr. Montgomery. Senator, I am not aware of a GAO study 
looking at that, but you are absolutely right. As referenced 
earlier, the claim rate on these types of loans has been higher 
than it has been on a traditional Title II program. But I would 
say though, certainly as the volume has diminished through the 
years, so has the claim rate, and it is at its lowest level in 
many years.
    Senator Reed. But I presume from these efforts to reform 
the legislation, and also the huge demand for affordable 
housing, that the hope is that if this legislation is done 
properly, that the volume of FHA Title I loans on manufactured 
homes will increase dramatically. And if there are structural 
problems already or actuarial problems already embedded in the 
program, we should know about those. So, I think it might be 
helpful if your Department would look actuarially at the impact 
of the reforms, so we start off with what we are going to put 
in place and grow is sound.
    Let me ask a question to the whole panel, and that is the 
Ford Foundation sponsored a report by Harvard's Joint Center in 
2002. One of the conclusions about manufactured homes, unless 
sited on owned-land, manufactured housing will have little or 
no potential to increase in value faster than the rate of 
inflation.
    What mechanisms in the reform proposal will there be to 
protect a consumer from owing more than the value of the home? 
Why don't I start with Mr. Jewell and work my way down here.
    Mr. Jewell. One benefit that is in the bill is the language 
requiring appraisal, if properly implemented. One of the major 
historical problems with personal property loans was that 
consumers were buying the home for more than it was worth. 
There was no appraisal standard. There was an invoice standard. 
That meant from day one the consumer was under water. So that 
is a positive.
    A danger especially for new homes, is that new manufactured 
homes have an unwrapping effect. It is a new manufactured home. 
A consumer signs a contract and it becomes a used manufactured 
home, and a used manufactured home is worth a lot less than a 
new manufactured home. Why would a consumer buy a used one when 
there is a new one just like it on the dealers' lot?
    This drop in value, makes a high loan-to-value product, 
especially dangerous for new homes. My calculations show that 
if you are allowing 95 percent loan to value, and 2.2 percent 
of the insurance fees to be financed into the principal, and 
another 2 percent to come from outside sources, a consumer 
might have as little as three-quarters of 1 percent equity at 
the time of signing. If that transition from a new home to a 
used home drops the value more than three-quarters of a 
percent, that consumer is going to start out under water.
    Senator Reed. Let me ask a follow up on the appraisal. 
Would that appraisal include not just the structure itself, but 
the land, the lease, the value of the lease? Is that what this 
appraisal will look at?
    Mr. Jewell. That is what we would ask to be implemented. It 
is very important that the appraisal looks at the installed 
location value, not the value on the dealer's lot. The value 
after it has been installed on someone's land and inspected, 
including looking at its location and rent. But the 
implentation is something you would have to ask Mr. Montgomery.
    Senator Reed. Can you respond? Then I will finish up.
    Mr. Clayton. Certainly. The premium being paid up front 
that Mr. Jewell referenced is exactly how FHA Title II, as I 
understand it, does that today as well. One way to control the 
equity, of course, is by limiting the loan term, so home-only 
loans are limited to 240 months, which is a good idea. These 
homes, mostly we are talking about now, costs $40, $50, $60 
thousand. So that helps.
    And the Harvard Study talked about, which is something the 
industry supports and is becoming very common, where the 
homeowners actually take over ownership of their land-lease 
community, and that is something that we support 
wholeheartedly.
    We are here today because in the 1990's lending from Wall 
Street came too easy, and now the rating agencies have 
basically just cut off all capital to this industry, and thus 
the need for why we are here today.
    And just exactly as you said, an important part of this is 
the resale market. That is the one component, as this program 
gets some traction, that will be helped the most--the financing 
of used homes out there so the consumer can sell the home 
rather than defaulting.
    Senator Reed. Thank you.
    Mr. Frenz, a quick comment, and then Secretary Montgomery, 
then I think the Chairman.
    Mr. Frenz. Sure. We believe that FHA's more stringent 
underwriting standards would help prevent certain abuses. We 
would significantly increase net worth requirements for lenders 
in our program to increase the likelihood that we would attract 
more reputable lenders. We would also monitor relationships 
between lenders and dealers to minimize abuses. We would 
require lenders, for example, to track delinquencies by dealer. 
We would also plan to develop more rigorous field review 
procedures, and we would conduct extensive due diligence on the 
officers and directors of companies applying to be in our 
program to minimize those types of abuses.
    Senator Reed. Thank you.
    Mr. Secretary, quickly.
    Mr. Montgomery. Yes. I would just agree absolutely with 
Michael's observation. Also, FHA is one of the most transparent 
loan processes around. As you know, we have a punitive side to 
us as well with our Inspector General and GAO. By providing the 
mortgage insurance premium, we can drive the cost of loans, and 
certainly, the ironclad guarantee on the front end, which you 
do not have today, that will pay a claim, we are just saying 
everything would line up to make it more affordable, and we 
think decrease the likelihood that you would have a family 
getting upside down on a loan that you see today.
    Senator Reed. Thank you, Mr. Chairman.
    Senator Allard. I have a question now for you, Mr. 
Montgomery. In your testimony, you testified that HUD proposes 
increasing the premiums, and then removing the premium caps, 
rather than just increasing the caps. Why do you suggest 
removing the caps entirely? This is a concern with the 
industry, and can we come to a point where you would accept 
caps at a certain level that would be acceptable maybe to HUD, 
somewhere along the line, is my question?
    Mr. Montgomery. Yes. Thank you, Chairman Allard, and that 
is certainly something we could discuss more at length on the 
surface. We are not opposed to setting some cap, whatever that 
cap may be, but we are, at FHA, on both the Title I and Title 
II side, looking to do what the conventional market has done 
for some time, and that is price a product more commensurate 
with a particular borrower's risk. Right now, the one-size-
fits-all does not fit all any more. You have some lower risk 
borrowers paying more of a premium, they should be. And the 
worse side of that, sir, is we have many families who are 
unable to use FHA because their FICO scores are lower.
    And we think by being able to make the risk more flexible, 
if you will, sir, we can price it to the risk and also avoid 
some of the problems we may have had in the last 15 or 20 
years.
    Senator Allard. Do you think the 2.25 percent cap is 
insufficient in the bill?
    Mr. Montgomery. Mr. Chairman, I would like to go back and 
crunch the numbers, but what we are looking at on the Title II 
side is somewhere around 3 percent, but bear in mind, sir, 
these are caps. Under the risk-based pricing structure, other 
families could pay lower as well.
    Senator Allard. Thank you.
    This is for Mr. Frenz. In your testimony you mentioned that 
the current portfolio based system provides a moral hazard for 
lenders. Can you, please, elaborate on this, and do you believe 
that the proposed change to a loan-by-loan insurance system 
will eliminate the moral hazard?
    Mr. Frenz. Thank you, Mr. Chairman. It does create a moral 
hazard up until the point that the cap is reached, because as 
lenders have losses in portfolios and claims against the FHA 
fund, they can increase that 10 percent by adding loans at the 
margin. So up until the point where the cap is reached, it 
creates incentives for lenders to add more loans, which results 
in more risk to FHA and ultimately to Ginnie Mae.
    I believe that a loan-by-loan insurance program and the 
elimination of a cap would largely eliminate that problem.
    Senator Allard. So you support eliminating the cap?
    Mr. Frenz. I do.
    Senator Allard. In our negotiations, I mean the industry 
has a problem in eliminating the cap. If there was to be a 
certain cap level in the bill, is there a level there where you 
think would be acceptable to you?
    Mr. Montgomery. Mr. Chairman, I could give you a number 
today, but----
    Senator Allard. You suggested 3 percent.
    Mr. Montgomery. Three percent is what we are looking at on 
the Title II side, but we will certainly continue talking with 
the industry. I think they have been very open in their 
discussions of that matter.
    Senator Allard. Mr. Frenz.
    Mr. Frenz. I would not be able to give you an answer today. 
I would have to discuss it with other people at Ginnie Mae and 
with Mr. Montgomery.
    Senator Allard. Very good. Okay. Mr. Clayton, in your 
testimony you described the manufactured housing that a family 
could purchase under the existing loan limits. What kind of 
home would a family be able to purchase under the proposed loan 
limits in the bill? And for those who might think that the 
increases are too high, would you not agree that even under the 
new limits the home would still be reasonably modest?
    Mr. Clayton. Yes, it would be. I suggest that the proposed 
limits are far from being too high, with material prices over 
the last 5 years having increased north of 30 percent for home 
builders. And so the limits that are proposed will work, and 
tying them to inflation is a necessary ingredient. But it would 
be a home that, obviously, if it has smaller square footage, 
then it could include some of the very nice aesthetic changes, 
which also help in the resale value, which is a very important 
component. It would also allow us to start financing homes with 
steeper-pitch roofs, things like that which would serve the 
consumer very, very well. I hope I addressed your question.
    Senator Allard. I think you did. You are saying over what 
period of time was there a 30 percent increase in construction?
    Mr. Clayton. Over 5 years.
    Senator Allard. Over 5 years?
    Mr. Clayton. We have seen them increased by 30 percent.
    Senator Allard. So you think about 6 percent a year then on 
the average over 5 years, you end up with a 30 percent 
increase.
    Mr. Clayton. Correct.
    Senator Allard. And is this for manufactured housing, or is 
it just housing in general?
    Mr. Clayton. I suspect that it is all housing in general. I 
speak to manufactured housing only.
    Senator Allard. Okay. In manufactured housing though, there 
are certain advantages to manufacturers as opposed to 
construction that would help keep the cost of the product down. 
Do you still think that is as high as for the overall industry?
    Mr. Clayton. I do because the material prices I am 
referring to are lumber, gypsum, steel.
    Senator Allard. That is before you can start construction?
    Mr. Clayton. Correct.
    Senator Allard. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    One of the other issues that has come up is the 
arrangements between the dealers and the financiers, and 
sometimes these arrangements are too close for comfort. I think 
that Mr. Frenz referred to this in his comments. But could the 
panel respond to what steps you think should be taken to ensure 
that there is an appropriate relationship, and that these 
lending arrangements are not abusive or predatory?
    Some of the things that I have heard about are requirements 
for either large downpayments or some type of arrangements on 
what the dealer sells the property, that locks the person in. 
Mr. Clayton, why don't you start?
    Mr. Clayton. Thank you for the opportunity, because there 
have been major changes in the manufactured housing industry, 
particularly over the last 3 years, starting really with the 
law change that you supported, I assume, the law change in 
2000, which mandated that all of our homes, by last year, have 
to be inspected at the set-up and delivery. So we are insuring 
a proper installation of homes. I might add that there is not a 
single manufactured home built after 1994, in any of the past 
hurricanes in the last 3 years, that was severely damaged. So 
it is a very sound, strong product that we are building today.
    Lenders' best practices is something, as an industry 
association, that we enacted. Homebuyers will be able to choose 
those lenders, if they so desire, that follow the lenders' best 
practices--those which do all the verifications of the customer 
data and the retailer information that has been provided to 
them.
    Another industry program is, truth in invoicing--we call 
this TIPS. Every manufacturer has to stamp the invoice, saying 
that it as reflected, and there is total transparency as to 
what is in the invoice.
    There is a community attributes program now that is out 
there, that gives the lender the ability to see what kind of 
community it is lending into--looking at rent increases, and 
other kinds of things, and rate each community before they lend 
into it.
    So we think all these major initiatives really address some 
of the negatives that were brought up in manufactured housing 
in the late 1990's.
    Senator Reed. There are some other issues you might comment 
on, nonrefundable deposits in certain cases, and also a fee 
structure that discourages buyers from looking around for other 
lenders, rather than the approved lender. Is that commonplace 
now?
    Mr. Clayton. It is not commonplace at all in the industry 
today. And we continue to work with State associations to 
address issues like that.
    Senator Reed. Mr. Jewell, any comments on these issues or 
the lending arrangements underlying the transaction?
    Mr. Jewell. Our experience in Texas: In 2001, 2002, and 
2003, Consumers Union reviewed complaints at the Attorney 
General's Office, and at the Texas Department of Housing and 
Community Affairs, which regulates the manufactured housing 
community in Texas. We uncovered a pattern of nonrefundable 
deposits, difficulty for consumers to shop around for lending 
products. Unfortunately, the tying between lenders and 
manufacturers means that a consumer often does not have the 
bank on their side.
    In a conventional home where you have a bank going into a 
real estate transaction, the bank does not want that loan to 
fail. With the manufactured homes--no one is saying that the 
manufactured home lender wants that loan to fail, but they are 
going to make money off of both the loan and the home. There is 
additional incentive for them to sell that home even if the 
financing in the transaction is a little questionable.
    Senator Reed. Mr. Frenz, and then Secretary Montgomery, and 
then I will relinquish my time. Any comments further?
    Mr. Frenz. My only further comment in addition to what I 
said earlier was that we would work with FHA to see what they 
are doing to monitor those relationships, and we would augment 
our field review efforts to help them out.
    Senator Reed. Thank you.
    Secretary Montgomery, final word.
    Mr. Montgomery. Yes, sir. If this goes forward, we would 
certainly establish new and tighter underwriting guidelines for 
lenders to follow, including a preendorsement of review, 
similar to what we do on Title II. And I would also say again 
that FHA is one of the most transparent loan products out 
there.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Senator Allard. I guess I am the bottom-line guy, so we 
will get to the ultimate question. If Senate bill 2123 or 
similar legislation is enacted into law, does Ginnie Mae intend 
to lift the current moratorium on the program and new lenders?
    Mr. Frenz. If the bill in its current form were to pass, 
Mr. Chairman, I believe we would.
    Senator Allard. Thank you.
    We are running out of time here. I think there will be more 
questions I think I want to present to the panelists, and I 
think maybe Senator Reed might have a few more questions he 
would like to send out. If you could respond within 10 days, 
the Committee would appreciate that.
    I want to thank you for taking time to come to testify 
before the Committee. I know it is not easy to get away from 
your personal schedules to be here, but your testimony is 
important. It is important for us to understand the impacts of 
legislation and the impacts of what is happening in the current 
program. So, I thank you all for being here to help inform us.
    With that, I will go ahead and adjourn the hearing. Thank 
you.
    [Whereupon, at 4 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follows:]
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