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S. HRG. 111–394 

ROLE OF THE FEDERAL HOUSING ADMINISTRATION (FHA) IN ADDRESSING THE HOUSING 

CRISIS 

HEARING 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SPECIAL HEARING 

APRIL 2, 2009—WASHINGTON, DC 

Printed for the use of the Committee on Appropriations 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 
(II) 

COMMITTEE ON APPROPRIATIONS 

DANIEL K. INOUYE, Hawaii, Chairman 

ROBERT C. BYRD, West Virginia 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

BYRON L. DORGAN, North Dakota 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

MARK PRYOR, Arkansas 

JON TESTER, Montana 

ARLEN SPECTER, Pennsylvania 

THAD COCHRAN, Mississippi 

CHRISTOPHER S. BOND, Missouri 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

JUDD GREGG, New Hampshire 

ROBERT F. BENNETT, Utah 

KAY BAILEY HUTCHISON, Texas 

SAM BROWNBACK, Kansas 

LAMAR ALEXANDER, Tennessee 

SUSAN COLLINS, Maine 

GEORGE V. VOINOVICH, Ohio 

LISA MURKOWSKI, Alaska 

CHARLES J. HOUY, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON TRANSPORTATION AND HOUSING AND URBAN DEVELOPMENT, 

AND RELATED AGENCIES

PATTY MURRAY, Washington, Chairman 

ROBERT C. BYRD, West Virginia 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

RICHARD J. DURBIN, Illinois 

BYRON L. DORGAN, North Dakota 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

DIANNE FEINSTEIN, California 

TIM JOHNSON, South Dakota 

FRANK R. LAUTENBERG, New Jersey 

ARLEN SPECTER, Pennsylvania 

DANIEL K. INOUYE, Hawaii, (ex officio) 

CHRISTOPHER S. BOND, Missouri 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

KAY BAILEY HUTCHISON, Texas 

SAM BROWNBACK, Kansas 

LAMAR ALEXANDER, Tennessee 

SUSAN COLLINS, Maine 

GEORGE V. VOINOVICH, Ohio 

THAD COCHRAN, Mississippi (ex officio) 

Professional Staff 

PETER ROGOFF

MEAGHAN L. MCCARTHY

RACHEL MILBERG

JONATHAN HARWITZ

JON KAMARCK (Minority) 

MATTHEW MCCARDLE (Minority) 

ELLEN BEARES (Minority) 

Administrative Support 

TERI CURTIN
(III) 

C O N T E N T S 

Page 

Opening Statement of Senator Patty Murray ....................................................... 1 

Opening Statement of Senator Christopher S. Bond ............................................ 4 

Statement of Hon. Shaun Donovan, Secretary, Department of Housing and 

Urban Development ............................................................................................. 6 

Prepared Statement ......................................................................................... 8 

FHA Past and Present ............................................................................................ 8 

FHA’s Challenges .................................................................................................... 9 

FHA Performance Today ......................................................................................... 9 

Enhancing FHA Operations .................................................................................... 10 

Priorities Going Forward ........................................................................................ 11 

Troublesome Lenders .............................................................................................. 13 

Early Payment Defaults .......................................................................................... 14 

Loss Mitigation ........................................................................................................ 15 

Loss Mitigation Costs on FHA Fund ...................................................................... 15 

Mortgages Currently in Mitigation ........................................................................ 16 

Statement of Senator Frank R. Lautenberg .......................................................... 16 

Prepared Statement ......................................................................................... 16 

Low- and Moderate-Income Homeowners .............................................................. 17 

FHA Solvency ........................................................................................................... 18 

Statement of Senator George V. Voinovich ........................................................... 18 

Prepared Statement ......................................................................................... 18 

Increase in FHA Lenders ........................................................................................ 19 

Demolition of Properties .......................................................................................... 19 

Neighborhood Stabilization Program (NSP) .......................................................... 21 

HOPE for Homeowners Program ........................................................................... 21 

HOPE for Homeowners ........................................................................................... 21 

Demolition of Properties .......................................................................................... 21 

Mortgage Scams ....................................................................................................... 22 

HECMS ..................................................................................................................... 23 

Statement of Hon. Kenneth M. Donohue, Inspector General, Department of 

Housing and Urban Development ....................................................................... 24 

Prepared Statement ......................................................................................... 25 

The Evolving Landscape ......................................................................................... 26 

Departmental Issues ............................................................................................... 27 

OIG Observations .................................................................................................... 27 

Increased Risks to FHA .......................................................................................... 29 

OIG Concerns Regarding Critical Front-End and Back-End Processes (Improving the Quality of FHA Originations and the Enforcement of Bad 

Actors) ................................................................................................................... 32 

OIG Challenges ........................................................................................................ 35 

Statement of J. Lennox Scott, Chief Executive Officer, John L. Scott Real 

Estate, on Behalf of the National Association of REALTORS® ....................... 36 

Prepared Statement ......................................................................................... 37 

Need for Increased Capacity ................................................................................... 38 

Increased Oversight/Risk Management ................................................................. 38 

Technical Corrections to FHA Programs ............................................................... 39 

FHA and Use of the Homebuyer Tax Credit ......................................................... 40 

Statement of Mia Vermillion, Senior Loan Consultant, Guild Mortgage, Lakewood, Washington ................................................................................................ 40 

Prepared Statement ......................................................................................... 41 

Mortgage Fraud Activity ......................................................................................... 43 

Maximum Loan Limit ............................................................................................. 44 

Mortgage Rescue Scams .......................................................................................... 44 

Default/Bailout ......................................................................................................... 45 
Page

IV 

FHA Appraisal Process ........................................................................................... 46 

Pierce County ........................................................................................................... 46 

HECMS ..................................................................................................................... 47 

FHA Improvements ................................................................................................. 48 

Additional Committee Questions ............................................................................ 48 

Questions Submitted to Hon. Shaun Donovan ...................................................... 48 

Questions Submitted by Senator Patrick J. Leahy ............................................... 48 

The New Issue Bond Program (NIBP) ................................................................... 50 

The Temporary Credit and Liquidity Program (TCLP) ........................................ 50 

Question Submitted by Senator Frank R. Lautenberg ......................................... 51 

Question Submitted by Senator Sam Brownback ................................................. 51 

Questions Submitted by Senator George V. Voinovich ......................................... 51 
(1) 

ROLE OF THE FEDERAL HOUSING ADMINISTRATION (FHA) IN ADDRESSING THE HOUSING CRISIS 

THURSDAY, APRIL 2, 2009 

U.S. SENATE,

SUBCOMMITTEE ON TRANSPORTATION AND HOUSING

AND URBAN DEVELOPMENT, AND RELATED AGENCIES, 

COMMITTEE ON APPROPRIATIONS, 

Washington, DC. 

The subcommittee met at 10:01 a.m., in room SD–138, Dirksen 

Senate Office Building, Hon. Patty Murray (chairman) presiding. 

Present: Senators Murray, Lautenberg, Bond, and Voinovich. 

OPENING STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. This subcommittee will come to order. This 

morning the subcommittee will hold its first hearing in the 111th 

Congress, and I can’t think of a more timely subject for us to examine than the current economic crisis and its impact on homeowners 

across the country. There is no question that a perfect storm of 

Wall Street greed, irresponsible mortgage lending, and uninformed 

decisions by borrowers are at the heart of our economic crisis. 

What this subcommittee will explore today is what role the Federal 

Government and, more specifically, the Federal Housing Administration will play in the stemming of the housing crisis and assisting in our Nation’s long-term recovery. 

First of all, I’d like to extend a very warm welcome to our newly 

confirmed HUD Secretary, Shaun Donovan. Welcome. Good to have 

you here today. This is Secretary Donovan’s first appearance before 

the subcommittee, but he and I have had many conversations 

about the challenges that HUD is facing on a wide variety of issues 

from homeless veterans to housing counseling to the foreclosure crisis. 

We look forward to hearing from you today and to working with 

you to get the agency and the Nation headed down a sustainable 

path when it comes to housing. 

I also look forward to hearing from our second panel of witnesses, including HUD Inspector General Ken Donohue, and from 

our two housing experts from my home State of Washington, Mr. 

Jay Lennox Scott, who’s the Chairman and CEO of John L. Scott 

Real Estate, a family-run business for three generations, and Ms. 

Mia Vermillion, who is the Senior Mortgage Consultant with Guild 

Mortgage in Lakewood, Washington. 
2 

Now, I travel home every weekend and hear from my home State 

families about the challenges that they face, and I think it’s important that Congress get on-the-ground perspective from experts in 

our communities who know what works and, alternatively, where 

there is room for improvement. 

Our Nation is facing the worst economic crisis in generations. 

Since December 2007 we lost 4.4 million jobs, including 2.6 million 

in just the past 4 months. At the root of this crisis is years of reckless, unregulated, and irresponsible mortgage lending. Many of the 

mortgages that were initiated and then repackaged and sold during 

this period now have a new name: toxic assets. They are a significant portion of the assets that are poisoning the balance sheets of 

some of the largest financial institutions in the world, bringing uncertainty to the entire international banking system. 

This impact has been felt in every sector of the American economy, stifling credit from car and student loans to the credit extended to help small businesses meet their payroll. It’s important 

to note that the housing crisis is not just some abstract phenomenon impacting giant financial institutions. There are currently 

over 290,000 American homes in foreclosure, including 3,021 in my 

home State of Washington. 

The housing crisis has swept across our communities and some 

are now calling on the Federal Housing Administration to be the 

savior of the market. The Federal Housing Administration was established in 1934 when the Great Depression ground the mortgage 

lending market to a standstill. The lending industry would only extend very short-term loans to high income households that could afford a very high down payment. Low- and moderate-income families had no hope of participating. So the FHA created a mechanism 

for working families to achieve the dream of home ownership. It 

also lowered the risk to lending institutions by putting the full 

faith and credit of the Government behind new affordable mortgages. 

The FHA was an overwhelming success. FHA was there in good 

times and in bad, especially during recessions and periods of declining home values, as happened in the 1980s. Today, 75 years 

after its founding to help American families purchase a home, the 

FHA is now being called upon to keep millions of families in their 

homes. In 2007, when Commissioner Montgomery testified before 

us, it was to talk about the fact that the FHA was almost irrelevant to the housing market. At the time, the FHA’s presence in the 

market had dropped to only 3 percent because so many lenders had 

taken advantage of the housing boom and instead offered exotic 

mortgages that families couldn’t afford. The FHA’s modest loan 

limits kept it out of many markets, including Seattle, King County 

the most populous county in Washington State. 

Working with my colleagues, I was able to increase the FHA loan 

limits to make it relevant in these markets. But a lot of other 

things have changed with the FHA in a very short period of time 

that are threatening the integrity of the program and the taxpayers that stand behind it. The subprime market has now evaporated, and even the most creditworthy borrowers are having a hard 

time getting a mortgage. 
3 

I want to read to you a part of a letter from a constituent of mine 

in Kirkland, Washington, who, like a lot of Americans, has 

scrimped and saved and has good credit and yet still can’t purchase 

a home of their own. They wrote to me and they said: 

‘‘In spite of my 18 years teaching public school in the Puget Sound region, my 

husband and I have been unable to purchase our own home. My husband was laid 

off from his job in 1998, returned to school to improve his employability, but couldn’t 

for some time find more than part-time work. 

‘‘Now that we are finally in a more comfortable earnings bracket, we put every 

spare dollar into saving for a down payment and paying off the debt that we incurred during those darker days. Certainly there are many like us, unable to gather 

the money necessary to take the first steps to home ownership, but stably employed 

and with good credit, ready to make our own small contribution to the economy by 

taking on the responsibilities of home ownership.’’ 

That’s not an unusual story and it’s one of the many reasons that 

the solvency of the FHA is critical. The mission of the agency is to 

take care of creditworthy borrowers. Compared to the 3 percent 

market share FHA just had 2 years ago, today they guarantee over 

25 percent of the total mortgage volume in the United States and 

the number of lenders with whom it does business has grown by 

more than 500 percent since fiscal year 2006. In Washington State, 

the number of FHA loans increased from just fewer than 9,000 in 

2007 to over 30,000 in 2008. 

We all want to lend a helping hand to the struggling families 

who need it, but we need to focus on exactly who the FHA can help 

through updated laws and revised policies. We don’t want to invite 

a trend in which the worst mortgages are moved off the bankers’ 

books and onto the Federal Government’s. 

My constituents have been clear that they don’t want to wake up 

to learn that Congress has taken steps that leave the taxpayer 

holding the bag, and that’s exactly what could happen if the FHA 

is pushed to buy loans that could go bad soon or down the line. We 

have to ensure that FHA has the tools and flexibility to charge 

enough in fees to cover its costs, because if the FHA can’t pay its 

debts it will be up to this subcommittee to appropriate the funds 

to cover that shortfall and we do not have the dollars to do that. 

We are in tough budget times. Every dollar we spend to cover defaults at the FHA is one less dollar going to public housing, homelessness prevention, or housing counseling to keep families in their 

homes. 

This subcommittee has previously examined longstanding challenges at the FHA, like outdated technology, personnel shortages, 

and inadequate underwriting. Just because FHA has become a 

major player in saving the housing market doesn’t mean those 

challenges have disappeared. As we talk about FHA’s expanded 

role, we have to also discuss more rigorous underwriting and oversight. 

I’ve convened this hearing with Senator Bond and I want to 

thank him for working with me on this because we want the FHA 

to be in a position to protect America’s families and keep them in 

their homes, and to do that we have to ensure that the FHA isn’t 

spread thin and it has the tools and resources needed to adequately 

staff, underwrite, and monitor its skyrocketing loan volume. 

Both American homeowners and the American taxpayers deserve 

to know the Federal Government is acting responsibly and swiftly 
4 

to help families in financial distress and to jump-start the ailing 

real estate market. 

So I look forward to the testimony and responses of all of our 

witnesses today, and with that I want to turn it over to my colleague, the subcommittee’s ranking member, Senator Bond, who 

has been very critical in helping us to put this together today. So 

thank you very much, Senator. 

OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

Senator BOND. Thank you very much, Madam Chair. I hope I’ve 

been critical in helping and not in criticizing. 

Senator MURRAY. No, critical in helping, definitely. 

Senator BOND. I begin by endorsing your warning that this subcommittee and our ability to provide the many needs in housing is 

threatened by a potential major drain on our resources we can’t 

stand. I appreciate your calling this hearing, as I certainly asked 

you to do. I think it’s time that we laid out where we stand. 

I welcome our witnesses today. I congratulate the Secretary of 

HUD, Shaun Donovan, on his appointment and his willingness to 

take on a very challenging job during a very challenging time. I 

asked him repeatedly if he was willing to do it and he indicated 

that he was willing to take the chance. I know Secretary Donovan 

from his previous work. I’ve had good conversations with him. I am 

impressed with his knowledge, understanding, and his past forward. 

I also recognize Mr. Ken Donohue, the HUD IG. Ken has done 

a great job of providing the Department and the Congress with 

independent and objective analysis and oversight of HUD’s responsibilities. 

Make no mistake, the health and solvency of FHA is at high risk. 

There are very troubling signs. FHA defaults are at their highest 

rates in several years. FHA’s economic value had fallen by almost 

40 percent over the past year. FHA-approved new lenders have increased by 525 percent over the past 2 years, and there are troubling signs that former subprime lenders and brokers have been 

approved to conduct FHA business. Fraudulent activity in the 

mortgage industry is on the rise, exposing FHA to more risk. 

I’ve just been advised by the U.S. Attorney for the Eastern District of Missouri that she and her office have filed 58 individual 

and business criminal indictments, from large communities like St. 

Louis to small communities like Sykeston, and they have over 100 

cases currently in review. That means the system is at risk. 

FHA has a significant increase in foreclosures, which endanger 

the stability of communities and neighboring homes. The rise in 

FHA defaults and foreclosures, especially in areas already victimized by subprime lending, threaten to make a bad problem worse. 

It is clear that the families who suffer foreclosure go through a financial crisis. They go through a tremendous personal upheaval, 

losing their homes. But communities are suffering when the foreclosure rates become high. I’ve heard community leaders as well as 

housing advocates outline what happens to a community with foreclosures. Even on a broader basis, the geniuses on Wall Street who 

took these mortgages, securitized them, sliced them, diced them, 

and sent them out to poison not only our financial system, but the 
5 

world’s financial system, are really a very significant part of the 

worldwide economic crisis that we face right now. 

Mr. Secretary, you inherited an agency that has longstanding 

challenges. I’m confident that you’re up to the task of turning the 

agency around. I appreciate your recognition and willingness to 

tackle FHA’s management and operational problems. But despite 

your skills and leadership, the Congress and the administration 

must not make your job harder by placing more risk on FHA until 

the problems are fixed, until the agency can handle it, or the agency will crash. 

I believe I’m hearing from Americans there’s a message for Congress and the administration: The taxpayer credit card is maxed 

out, the alarm has sounded. If Congress and the administration 

place more risk on FHA before the problems are solved, this powder keg will explode and taxpayers will be on the hook. 

Now, we know that FHA has suffered from longstanding management and oversight problems, and in addition past administrations and Congress have contributed to FHA’s woes by making 

changes to FHA so that it could refinance existing subprime mortgages. For example, the Bush administration created a new program called FHA Secure to allow the agency to refinance subprime 

borrowers who are late on a few payments. While the program 

served a fraction of troubled subprime borrowers and it was good, 

it did provide some assistance, the FHA terminated the program 

because of the negative financial impact on its insurance fund. 

In addition, Congress created the FHA Home for Homeowners 

Program as part of last summer’s Housing and Economic Recovery 

Act of 2008. Out of concern about the increased risk, the FHA 

spoke against and voted against the bill. While this $300 billion 

program has not served as many borrowers as anticipated, the 

Obama administration and some in Congress are advocating 

changes that would relax the standards of the program to increase 

participation. 

In addition, there are efforts in the House to reestablish no down 

payment programs that significantly contributed to FHA’s troubles. 

The seller no down payment program defaulted at an unacceptable 

rate, higher than subprime loans. As a result, I strongly oppose 

those efforts. 

I look forward to working with the Secretary to ensure that you, 

Mr. Secretary, have the needed resources to carry out FHA’s mission. It’s vitally important that the FHA hire the necessary staff, 

provide consistent and comprehensive training, ensure that you install necessary safeguards to minimize fraud and abuse, and get 

your IT systems up to the modern day capabilities and the needs 

of the agency. 

FHA has a very important role to provide home buyers with clear 

and comprehensive requirements, to help ensure the success of 

their home ownership. If the homeowners don’t succeed, they lose, 

the communities lose, and we all lose. 

Thank you, Mr. Secretary, for taking on this major task. 

Senator MURRAY. Thank you, Senator Bond. 

Mr. Secretary, we will now turn to you for your testimony. We 

do have your written testimony and we would ask you to summarize in about 5 minutes for the subcommittee. 
6 

STATEMENT OF HON. SHAUN DONOVAN, SECRETARY, DEPARTMENT 

OF HOUSING AND URBAN DEVELOPMENT 

Secretary DONOVAN. Thank you very much. Chairwoman Murray, Ranking Member Bond, and members of the subcommittee. 

Thank you for the opportunity to speak with you today about the 

state of the Federal Housing Administration. I come before you in 

a historically unique moment. Our economy has deep challenges, 

unemployment is high, incomes are falling, and home foreclosures 

are greater than at any time since the Great Depression. 

The Obama administration has responded with a comprehensive 

program to stimulate our economy and revive our housing markets. 

Last week President Obama announced his intention to nominate 

David Stevens to be the Assistant Secretary for Housing, and the 

Federal Housing Commissioner. I believe that Mr. Stevens is one 

of the best and brightest in the mortgage business, with a deep 

range of experience, and will be a steady hand in helping to manage through these challenging times. 

Current market conditions highlight the critical role of the Federal Government in keeping mortgage credit flowing. In particular, 

FHA’s role has grown substantially, from 3 percent of lending activity by dollar volume in 2006 to over 20 percent of all mortgages 

originated today. 

Like other market players, FHA is experiencing elevated defaults 

and foreclosures, and with it losses that exceed prior estimates. In 

contrast to the subprime sector, where unsafe loan features and 

poor underwriting made those mortgages risky from the start, for 

FHA the primary reason for defaults and foreclosures continues to 

be economic factors, especially loss of income. FHA, however, is unlikely to face the catastrophic losses born in the subprime sector. 

Moreover, much of our recent loss activities have been attributable to the growth in seller-funded down payment assistance, 

which accounted for a large and growing share of FHA losses and 

which Congress terminated last year. I thank you for your leadership on this issue and this should help to substantially reduce future losses in FHA’s new business. 

Several other factors should mitigate the damage in the current 

recession—that the current recession wreaks on FHA’s portfolio. 

First, credit scores of FHA borrowers have risen markedly as tighter underwriting standards in the private market have driven better 

borrowers to FHA. Second, before mid-2008 FHA’s loan limits reduced its market share and exposure in some of the Nation’s highest cost housing markets, particularly in California. 

My overall goal then is to continue efforts to identify both the existing strengths and to honestly look at the weaknesses of FHA, to 

work with Congress to make sure that FHA has the right program 

mix and pricing structure, is actuarially sound, and has the organizational infrastructure to continue to expand home ownership opportunities to those families traditionally not well served by the 

private marketplace. 

Let me talk for a minute about the investments in both technology and human resources we need to make to build a sound infrastructure. FHA relies too heavily today on manual processes and 

needs to adopt more automated processes for underwriting and risk 

management. FHA staff spends too much time manually per-
7 

forming risk management duties, monitoring lenders and appraisers, and reviewing the underwriting of individual loan files. We 

must accelerate our adoption of market standard technologies for 

both of these areas. 

Specifically, technology can also enhance FHA’s fraud detection 

by borrowers, lenders and appraisers. We have already secured the 

use of anti-fraud technology for our Hope for Homeowners Program 

and are now looking to expand the use of that tool to all of FHA’s 

single family business, beginning with a pilot application in fiscal 

year 2009. 

These efforts tie in directly to the Obama administration’s multiagency combating mortgage fraud initiative. Under this initiative 

HUD and FHA will be playing a central role by investing in bringing anti-fraud systems on line. This initiative will also include additional resources from the FBI and the Justice Department to investigate and prosecute mortgage fraud. 

I also want to say a special mention to the early cooperation and 

collaboration I have had with HUD’s Inspector General, Ken 

Donohue. 

Finally, as you well know, FHA’s basic program data and technology systems are old and woefully inadequate. We will be requesting funding in our 2010 budget for IT investments and to 

prioritize the modernization of FHA IT systems, to upgrade our 

technology and core systems. 

Automated tools to assist in risk management will be a good addition, but FHA also needs more staff and staff with a different 

skills mix than our current work force. I want to thank you, Chairwoman Murray, and members of the entire subcommittee for providing additional funding specifically for the Office of Housing to 

hire approximately 200 additional personnel in the fiscal year 2009 

budget. The agency has already developed a staffing plan and job 

announcements are under way. 

So my first priority is shoring up the basic infrastructure of the 

program. In addition, two other priorities are at the top of my list: 

helping homeowners avoid foreclosure and rethinking FHA’s role in 

the new mortgage market. Last month, President Obama announced a bold plan to help borrowers avoid foreclosure. In addition to the making home affordable components, the President has 

called on Congress to enact carefully crafted bankruptcy reform 

along with important reforms to enable FHA to play a larger role 

in the overall effort to stabilize our Nation’s housing market. 

As you know, housing legislation, H.R. 1106, has passed the 

House and is now before the Senate. We hope it gets enacted quickly so that more borrowers can avoid foreclosures. There are two 

specific provisions that we’d like to see enacted: changes to Hope 

for Homeowners as a viable prevention, foreclosure prevention tool; 

and reform of FHA’s loan modification process to allow FHA to enhance its use of partial claims authority, to align our loan modification activities with making homes affordable. 

Finally, the recent mortgage market meltdown has provided 

ample evidence that we must work to rethink each and every aspect of the Nation’s housing finance system. Building on its historic 

mission, I am committed to ensuring that FHA continues to provide 

liquidity and stability to the mortgage market, while at the same 
8 

time developing the new products and programs that continue to 

expand access to home ownership to lower income and lower 

wealth households not well served by the private market. 

PREPARED STATEMENT

In summary, I want to assure the subcommittee that, while significant challenges exist, the FHA is preparing to meet these challenges head on. I’m looking forward to having Dave Stevens confirmed and take the reins at FHA and look forward to answering 

your questions. Thank you. 

[The statement follows:] 

PREPARED STATEMENT OF HON. SHAUN DONOVAN

Chairwoman Murray, Ranking Member Bond, and members of the subcommittee, 

thank you for the opportunity to speak with you today about the state of the Federal 

Housing Administration (FHA). 

I come before you in a historically unique moment. Our economy has deep challenges: unemployment is high, incomes are falling, and home foreclosures are greater than at any time since the Great Depression. The Obama administration has responded with a comprehensive and multifaceted program to stimulate our economy 

and revive our housing markets: a recovery package to create or preserve 3–4 million jobs, a comprehensive program to stabilize financial markets, lower mortgage 

interest rates and unfreeze credit markets; and new efforts to help homeowners refinance their mortgages, avert foreclosures, stabilize hard hit neighborhoods and end 

the downward pressure on housing prices. 

HUD has a critical role to play in each of these areas. I am deeply appreciative of your subcommittee for providing HUD with $13 billion in recovery funds, including a new infusion of funding for the Neighborhood Stabilization Program to help 

communities prevent blight and make foreclosed homes community assets rather 

than liabilities. HUD has been deeply involved in the development of the Obama 

administration’s Homeowner Affordability and Stability Plan (HASP), including the 

Making Home Affordable initiative that will allow 4 to 5 million homeowners now 

locked out of GSE refinance options to take advantage of today’s lower rates, and 

help 3 to 4 million additional borrowers receive affordable, sustainable loan modifications and avert more costly foreclosures. 

But no part of HUD is more central and important to our national effort to promote affordable homeownership than the Federal Housing Administration, and I am 

committed to making FHA as responsive to market demands as it was when it was 

founded. 

FHA PAST AND PRESENT

As you all well know, the FHA was created in 1934 to address a set of economic 

conditions that were unquestionably of greater scale, but clearly of similar character 

to what we are facing today. Property values were declining. Unemployment was 

rising and incomes were dropping. Families could not pay their bills. It is no surprise that many homeowners could not meet their mortgage obligations. The overall 

contraction in the credit markets meant that borrowers had no place to turn to refinance out of their mortgages, which, at that point in history, were most often structured with 5-year terms and ‘‘balloon’’ repayment schedules. 

FHA was set up as a Government mortgage insurance company to protect financial institutions from risk of loss and, in so doing, to encourage lenders to make 

longer-term, fixed rate home loans. The goal was to create liquidity and stability for 

the mortgage and real estate markets—to provide families access to credit, to keep 

them in their homes, and to offer homebuyers a new way to buy homes, by offering 

longer-term affordable financing. 

The agency’s mission has not changed since that time. As part of this mission, 

FHA continues to play a countercyclical role—serving as a backstop to the private 

mortgage market. FHA stays active in volatile and declining markets, continuing to 

make mortgage credit available to borrowers, even when private mortgage providers 

are withdrawing from the market. During difficult times, it is critically important 

to have an entity like FHA play this role—offering families access to near-prime 

rate financing. FHA picked up private market slack in Texas, Oklahoma and Louisiana during the Oil Patch bust in the late 1980s and in Southern California during 

the early 1990s, and it is playing this role again today. 
9 

Current market conditions highlight the critical role of the Federal Government 

in keeping mortgage credit flowing. With the collapse of global credit markets, FHA, 

Fannie Mae and Freddie Mac must continue to work with strong and well managed 

private sector entities to expand access to mortgage credit in the market. In particular, FHA’s role has grown substantially from 3 percent of lending activity by dollar volume in 2006 to approximately 30 percent of all mortgages originated today. 

FHA’S CHALLENGES

FHA is now playing a critical role in addressing the current mortgage crisis, but 

FHA also faces many challenges today. Like many Federal domestic agencies, FHA 

has suffered under the penny-wise and pound foolish priorities of the previous administration. FHA was stagnant, limiting its ability to maintain adequate staffing 

levels and invest in state-of-the art technology. Repeated budget stalemates and resulting uncertainty of future funding levels undermined the ability to implement 

long-term organizational improvements. 

While FHA’s volume of business has increased dramatically in the last 2 years 

and increased administrative appropriations will help ensure FHA properly oversees 

this workload. We certainly are appreciative of the additional funding and management flexibility we received in the fiscal year 2009 appropriations process and plan 

to bolster our staffing quickly. Outdated information technology (IT) systems, systems that were built to handle simpler and smaller mortgage programs, continue 

to serve as the primary vehicles for collecting, tracking, and validating program 

data and performance. 

At the same time, I know that you Senator Murray and the rest of the members 

of this subcommittee share my concerns of the importance of helping FHA continue 

to operate safely and soundly in the current environment. Your actions in the fiscal 

year 2009 budget to allow FHA to have greater staffing and flexibility across the 

departments of the agency was a critical first step in helping to build a stronger 

and more market savvy FHA. But it was just a first step. For FHA to realize its 

full potential to respond to the current mortgage crisis it will require additional resources and development of new and innovative reform initiatives. 

That is why I was so pleased last week when President Obama announced his 

intention to nominate David Stevens to be the Assistant Secretary for Housing/Federal Housing Commissioner. I believe that Mr. Stevens is one of the best and brightest in the mortgage business with experience ranging from mortgage originations, 

to secondary markets, to managing a national real estate firm. Should he be confirmed by this body, Mr. Stevens and I will work closely together to diagnose and 

address the challenges now facing FHA. Mr. Stevens brings a hands-on systems approach to mortgage origination, and is anxious to see firsthand the status of FHA’s 

systems and programs and to quickly put in place process and technology improvements in all facets of FHA’s operations 

FHA PERFORMANCE TODAY

Prior to a fuller review, it is already clear to me that the agency has done good 

work in meeting the growing needs of the industry and the public. With resources 

constrained, the leadership and career staff at FHA have worked hard to process 

rapidly growing levels of new business, upgrade business processes and bring new 

FHA products—like FHA Secure and Hope for Homeowners—to market in record 

time. 

But we all know that the FHA team cannot sustain their efforts and protect the 

programs over the long-term without an infusion of resources: for new staffing with 

new skills, investments in new state-of-the-art technologies, and new efforts to reach 

out to enforcement agencies at all levels of Government to better monitor FHA partners. In addition, the organization must continually rethink how to best reshape its 

product mix and pricing, particularly in light of today’s dramatic market changes. 

The organization needs all of us to commit to providing the support needed to implement strategic improvements in its business operations and program designs. 

As is the case with other mortgage market participants, currently FHA is experiencing elevated defaults and foreclosures and with it, losses that exceed prior estimates. In contrast to the subprime sector, where unsafe loan features and poor underwriting made those mortgages risky from the start, for FHA, the primary reason 

for defaults and foreclosures continues to be loss of income combined with low or 

negative home equity, and economic factors present in today’s environment. Although this is a challenging time for all entities in the mortgage market, FHA is 

unlikely to face the catastrophic losses borne in the subprime sector. FHA loans continue to substantially outperform subprime loans: only 7 percent of FHA loans are 
10 

seriously delinquent (greater than 90 days delinquent or in foreclosure) compared 

to more than 23 percent of subprime loans. 

Moreover, much of our recent loss activities have been attributable to the growth 

in seller-funded down payment assistance. These loans grew from under 2 percent 

of all FHA home purchase originations in fiscal year 2000 to greater than one-third 

of purchase originations in fiscal year 2007 and 2008. The seller-funded down payment originations result in completed foreclosure at three times the rate of loans 

where borrowers provided their own downpayments and while they only represented 

12 percent of the FHA portfolio at the start of 2008, accounted for 30 percent of all 

foreclosure completions that year. The termination of this program should substantially reduce FHA loses on new originations in the years ahead. 

Several factors should mitigate the damage that the current deep recession 

wreaks on FHA’s portfolio. First, before mid-2008, FHA’s constrained loan limits reduced its market share and hence its exposure in some of the Nation’s highest-cost 

housing markets, including California, where price declines and related foreclosure 

activity have been particularly intense. 

Second, FHA has been attracting better quality borrowers in the last year. With 

much tighter underwriting standards in the private market, more higher quality 

borrowers can’t qualify for conventional financing and end up with FHA-insured 

loans. Credit scores for new borrowers grew sharply in 2008, averaging over 680 at 

the end of 2008, compared to prior year averages of around 640. This is a positive 

development although, given the dynamic housing market, it is difficult to say how 

long this trend will continue in the future. 

FHA is now playing its traditional role in today’s turbulent market. But it’s important to understand the positive trends as well. My goal is to continue my efforts 

to identify both the existing strengths and weakness of FHA, to work with Congress 

and the rest of the administration to make sure that FHA has the right healthy 

program mix and pricing structure, is actuarially sound, and the organizational capacity to continue to expand homeownership opportunities to those families traditionally not well served by the private market place. 

ENHANCING FHA OPERATIONS

Since FHA insurance is backed by the full faith and credit of the United States 

Government, I want to assure the market participants that FHA insurance is as reliable as ever and there is no possibility of FHA ‘‘running out of money.’’ Under authority provided to all Federal loan programs, FHA has indefinite resources to honor 

its outstanding commitments. At the same time, I want to reiterate my concern that 

FHA does need to make significant business process improvements to cope with 

growing demand and secure state-of-the-art fraud detection and risk management 

systems. 

Expanding Use of Automated Risk Management Tools 

It appears to me that FHA relies too heavily on manual processes and needs to 

adopt more automated processes for underwriting and risk management. Today, approximately 90 percent of FHA’s 850 Office of Single Family staff and 100 percent 

of its contract dollars are devoted to risk management practices. They perform three 

types of risk management duties: assessing and monitoring business participants in 

FHA business, including lenders and appraisers; evaluating individual loan files to 

ensure compliance with FHA underwriting standards; and monitoring the entire insurance portfolio, by analyzing performance trends. The concentration of so many 

resources on quality control means that simply freeing up staff from other functions 

to provide additional support is not an option; there are very few staff who do anything but quality control. 

Underwriting.—Working in partnership with the GSEs, FHA developed and utilizes an automated underwriting engine, but has not been able to keep it updated 

for analytic, market and technological changes. This is an area I’ll look to improve. 

Greater reliance and application of automated underwriting systems would also enhance uniformity in the application of policy changes, which are now subject to interpretation by four FHA Homeownership Centers (HOCs). Getting organizational 

standards aligned with centralized oversight is critical, as is the need to continuously enhance the training of existing staff in FHA’s own rules and procedures. 

Fraud Detection.—Technology can also enhance FHA’s fraud detection by borrowers. Automated risk management tools are being used industry-wide with great 

success, offering an efficient and effective means to access a large amount of critical 

information that can be used to detect the most common types of mortgage fraud— 

falsification of borrower identity, income, and employment and misrepresentation of 

property value. 
11 

Better automated tools will expand FHA’s ability to closely monitor past and 

present practices of FHA-approved lenders and appraisers. Specifically, the best industry tools tap into public data sources that provide FHA with information that 

is not readily apparent in individual loan files or in the FHA-specific activities of 

lenders and appraisers. Access to this broader mortgage-related data set will help 

FHA uncover problematic practices before FHA insures loans or grants approval to 

lenders and appraisers to participate in FHA programs. 

To that end, we have already secured the use of anti-fraud technology for our 

HOPE for Homeowners program and are now looking to expand the use of that tool 

to all of FHA’s single family business. Unfortunately, by statute, the HOPE for 

Homeowners funding cannot be used to support the core FHA refinance and purchase programs. Thanks to our fiscal year 2009 appropriation, we now have funding 

and an existing contract to begin testing the use of the fraud detection tool on the 

entire FHA single family portfolio. The pilot will serve as the basis of the framework 

for full implementation of the tool in fiscal year 2010. 

These efforts tie in directly to the Obama administration’s multi-agency ‘‘Combating Mortgage Fraud Initiative.’’ Under this initiative, HUD and FHA will be 

playing a central role, and the Department has requested additional 2010 resources 

specifically for investing in additional systems to enhance fraud detection and monitor lender originations. This initiative will also include additional resources for the 

FBI and the Justice Department to investigate and prosecute mortgage fraud. 

Finally, as you well know, FHA’s basic program data and technology systems are 

old and woefully inadequate. The basic IT infrastructure—both hardware and software—is outdated and inflexible. The various data systems are not well-integrated, 

so time is wasted reconciling data across systems that all collect the same information individually. Finally, and of greatest concern, the systems were written to support business procedures that have changed substantially and the tools themselves 

force FHA to maintain some practices that no longer make sense. To that end, we 

will be requesting funding in our fiscal year 2010 budget for IT investments and 

prioritize the modernization of FHA IT systems to upgrade our technology, to replace obsolete systems, and to invest in infrastructure that can support our core systems into the future. 

Investing in Human Resources 

Automated tools to assist in risk management will be a good addition, but FHA 

also needs more staff and staff with a different skills mix than our current workforce. We need to bolster specific expertise and skill sets: housing finance, including 

underwriting and appraisals; quality control and risk management; and policy analysis and communications. Recent hirings have brought some new skills, but with 

one of the oldest workforces of all Federal agencies, retirements continue to take 

their toll. 

Therefore, I want to thank you, Chairwoman Murray and members of the sub- committee for providing an additional $12.7 million in funding specifically for the 

Office of Housing to hire approximately 200 additional personnel. The agency has 

already developed a staffing plan and job announcements are underway. 

PRIORITIES GOING FORWARD

As noted earlier, my top priority for FHA is shoring up the basic infrastructure 

of the program to ensure that it continues to meet the needs of underserved borrowers through this current mortgage crisis. 

Helping Borrowers Avoid Foreclosure.—Last month, President Obama announced 

a bold plan to help borrowers avoid foreclosure. In addition to the Making Home 

Affordable components that I mentioned earlier, the President has called on Congress to enact carefully crafted bankruptcy reform, along with important reforms to 

enable FHA to play a larger role in the overall effort to stabilize our Nation’s housing market. As you know, housing legislation (H.R. 1106) has passed the House and 

is now before the Senate. We hope it gets enacted quickly, so that more borrowers 

can avert foreclosures 

I would like to direct your attention to two critical elements of that package: proposed changes to Hope for Homeowners and reform of FHA’s loan modification tools. 

While Congress and the administration had high hopes for the Hope for Homeowners program when originally enacted last year, it has refinanced very few borrowers. I still believe in the original premise of Hope for Homeowners: that many 

investors would be willing to accept a refinance for less than the full amount of their 

loan to avoid the uncertain possibility of future defaults. It could fill an existing program void to refinance underwater borrowers who do not qualify for either the Making Home Affordable refinance or loan modification programs is a necessary addition 

to a comprehensive array of foreclosure prevention tools. 
12 

We look forward to working with you and other leaders in the Senate and House 

to develop a set of Hope for Homeowners programmatic reforms that will provide 

HUD greater flexibility to better meet this critical need in the marketplace. 

In addition, I urge the Senate to enact pending provisions to enhance FHA’s loss 

mitigation program. Specifically, we are anxious to incorporate new legislative authorities to enhance FHA’s use of partial claims to help facilitate more aggressive 

and timelier modifications in FHA insured loans that are in imminent danger of default. These changes will more closely align the FHA loan modification program 

with the Making Home Affordable modification program in the conventional market. 

More importantly, these reforms hold the promise of reducing losses to the FHA 

fund by intervening at the earliest sign of mortgage payment difficulties 

Creating New and Innovative Products.—FHA can also be a market leader in developing and introducing new mortgage products to make it easier and less expensive for homebuyers to finance energy improvements. Energy improvements reduce 

long-term costs to homeownership in the form of lower utility bills. In addition to 

making Energy Efficient Mortgages (EEMs) easier to obtain for homebuyers, we can 

work with Fannie Mae and Freddie Mac to coordinate product designs so that they 

are easily understandable and accessible to lenders and borrowers. 

Getting to scale in energy efficient mortgage development will require the creation, testing and potential adoption of a range of approaches. The objectives for 

these programs include creating the proper incentives for energy-efficiency, being 

‘‘user-friendly’’ to both borrowers and lenders, and exhibiting a sound cost and risk 

profile compared to other energy investments. Those approaches include streamlining HUD’s existing, but under-utilized energy efficient mortgage program, and allowing greater flexibility in use of the EEM. The program would extend the benefits 

of the existing FHA Energy Efficient Mortgage (EEM) program to more homeowners 

through a coordinated approach that addresses supply-side, demand-side, and financing issues, while providing a mechanism for evaluating strengths and weaknesses of the initiative. 

Rethinking FHA’s Role in the 21st Century Mortgage Market.—The recent mortgage market meltdown has provided ample evidence that we must work to rethink 

each and every aspect of the Nation’s housing finance system. Building on its historic mission, I am committed to insuring that FHA continues to provide liquidity 

and stability to the mortgage market, while at the same time developing the new 

products and programs that continue to expand access to homeownership to lowerincome and lower-wealth households not well served by the private market. This is 

not to say that all households should become homeowners—we still need to provide 

decent and affordable rental housing to those who by choice or necessity remain as 

renters. But FHA has led the market in the past, and I am committed to making 

FHA once again a market leader. 

CONCLUSION

In summary, I want to assure the subcommittee that while significant challenges 

exist, the FHA is prepared to meet these challenges head on. I’m looking forward 

to having David Stevens confirmed and take the reins at FHA. 

Together we are committed to an ambitious reform agenda: 

—Modernizing FHA’s core technology systems; 

—Enhancing our business practices; 

—Ferreting out fraud among borrowers and lenders; 

—Fixing and scaling up the Hope for Homeowners refinance program for ‘‘underwater’’ borrowers; 

—Revamping FHA loan modification efforts to reduce foreclosures; 

—Stimulating new energy efficiency mortgage products into the market; and 

—Restoring FHA to a respected position of leadership in the marketplace. 

I want to thank you for having me here and I’d be happy to answer any questions. 

Senator MURRAY. Thank you very much, Mr. Secretary. 

We are now going to a round of questions by subcommittee members. We will limit them to 5 minutes because we do have votes 

starting at 11:30 and we have a second panel. We want to make 

sure we have enough time to get to a second round for the Secretary as well as do that. 

Let me begin, Mr. Secretary. Back in November right before the 

election, Business Week magazine published a cover story that was 

entitled ‘‘FHA-Backed Loans: The New Subprime.’’ It pointed out 
13 

instances where subprime lenders that had been disciplined in several States were being allowed into the FHA guarantee program. 

It pointed out times where companies that had officially filed for 

bankruptcy were still allowed to write mortgages with an FHA 

guarantee. It even pointed out companies that never verified incomes when they made subprime mortgages, but now have been allowed to reorganize themselves into companies that are participating with the FHA. 

The number of brokers and lenders doing business now with the 

FHA has gone through the roof. As of the end of 2008, FHA had 

over 3,300 approved lenders. That is a 525 percent increase compared to 2006. When you add the number of brokers now doing 

business with the FHA, the numbers have skyrocketed from 16,000 

in mid-2007 to 36,000 today. 

I wanted to ask you if you believe the FHA has adequate procedures in place to screen out lenders and brokers that caused this 

housing crisis. And how do you do that when the number of lenders 

has increased by more than 500 percent in just the last 2 years? 

Secretary DONOVAN. Chairwoman, a very, very important question. Let me start first by making a distinction that I think is critically important. I am absolutely concerned and very focused on the 

issue of ensuring that troublesome lenders don’t migrate to the 

FHA programs. But I also want to be clear that FHA’s products are 

not subprime products. We have never and we will never allow 

products that have exploding or hidden fees that are short-term 

with large adjustments in interest rates. 

If you look at the default rates today and compare FHA’s roughly 

7 percent default rate to the roughly 23 percent default rate in the 

subprime market, I think it’s clear that on a product basis FHA is 

not subprime and will never be subprime. That certainly will not 

happen under my watch. 

TROUBLESOME LENDERS

But to get more directly to your question, there is absolutely 

more that we must do and that we are doing to ensure that we do 

everything we can to stop the migration of troublesome lenders into 

the FHA products. We’ve already taken significant action under my 

watch to begin to do that. In fact, today we are issuing a mortgagee 

letter to remind lenders of the procedures and processes that they 

must put in place. 

A couple weeks ago we activated SWAT teams to look at and 

make visits unannounced to ten of the most troublesome lenders, 

and those teams will continue to focus on areas where we have 

troublesome data from those. There are a range of other things 

that I talked about in my testimony that we must do: improve our 

systems, improve our training and technology. 

In addition to that, I would highlight that we have worked closely with you and the subcommittee and currently there are in the 

H.R. 1106 legislation that is before the Senate at this point increased authority that would allow us to screen out lenders where 

they have been suspended or debarred from other programs and to 

give us other additional authorities to stop the migration of lenders. 
14 

So while we are acting quickly to try and limit that, and I’m certainly concerned about it, I think there is also more that we can 

do on a legislative basis to try to make sure we do that. 

Senator MURRAY. As an appropriation subcommittee, our interest 

is knowing, do you have the resources to adequately screen all of 

those people at this time? 

Secretary DONOVAN. What I would say is that the additional resources that we were provided in the 2009 bill by you are very 

helpful, but I think we need to go further in addition, particularly 

on the systems front, and I look forward to working with you as 

part of the 2010 process, as well as report back to you on what 

we’re doing with the investments in 2009. 

Senator MURRAY. Okay and we will be asking those questions as 

we move forward. 

Recently the FHA has experienced a spike in early payment defaults, defaults when the borrower has made no payment or very 

few payments before the FHA had to make good on its guarantee. 

In your view is this just a sign of a worsening economy or do you 

believe the FHA is now covering loans that should never have been 

made in the first place? 

EARLY PAYMENT DEFAULTS

Secretary DONOVAN. We’ve looked carefully at this data and 

what we’ve seen is that early payment defaults have increased substantially, but they’ve actually increased slightly slower than the 

overall growth in the volume in the FHA program. So in other 

words, they’ve gone from about .8 percent to roughly .6 percent of 

all of the originations. So yes, there has been a significant increase. 

What we’ve also found is that the large majority of those early payment defaults result from job loss and other issues that are directly 

tied to the economy. 

So, having said that, though, I do think there are—and I’ve 

talked with Ken Donohue very recently about this—there are ways 

that we can begin to ensure—and this was part of the mortgagee 

letter that we released today—to ensure that we are getting all of 

the detailed information we need on those early payment defaults, 

to look at them more closely and ensure that fraud is not happening even in a small percentage of those. 

Senator MURRAY. Thank you very much. 

Senator Bond. 

Senator BOND. Thank you, Madam Chair. 

I believe most people know my view on the no down payment 

mortgage issue, but for the record, with the movement starting on 

the other side for reinstating that, what’s your view on no down 

payment mortgages? 

Secretary DONOVAN. Let me start by saying thank you, Senator 

Bond, and to the chairwoman, for your leadership, and the entire 

subcommittee, on this issue. When you look at the facts, what we 

have seen is a dramatic increase in defaults from these seller-funded down payment programs. They have accounted for roughly a 

third of all the claims in recent months at FHA, and I think it’s 

been a critically important change to make sure that we don’t allow 

those types of programs to continue to hurt the future of FHA. So 

I want to thank you for your leadership on that. 
15 

Senator BOND. Thank you for your clear statement. 

Mr. Secretary, on the question of defaults and foreclosures, how 

does FHA define a default and when does it move to foreclosure? 

We have, you said, 7 percent essentially in default. What—where 

do you decide when to go for mitigation into declaring a default or 

foreclosure? How does that process work? 

LOSS MITIGATION

Secretary DONOVAN. Yes. I do want to say that there have been 

significant efforts at FHA around loss mitigation. I think we’ve 

seen through the efforts more broadly that we’ve made through the 

Making Home Affordable Plan that there is an opportunity to avoid 

the major costs that foreclosures have both on families and communities. 

But as you rightly point out, there are situations where you can’t 

go far enough to save that home and that foreclosure is the only 

option. What we’ve seen over recent months is that in roughly twothirds of the cases where we have a default we are able to figure 

out some loss mitigation that will allow that person to stay in their 

home and to avoid foreclosure, whereas about one-third of the cases 

that we look at where they’re seriously delinquent end up in foreclosure immediately. 

What we’ve also seen—and you’ve been very clear that this is an 

important thing to look at; you’re absolutely right—making sure 

that that loss mitigation that we’re doing is successful in the long 

term. Our recent data indicates that 2 years after loss mitigation 

more than 90 percent of the modifications and adjustments that 

we’re making continue to be successful. So we do feel like our loss 

mitigation efforts have generally been successful. We continue to 

look closely at the fact of whether there are other things we can 

do. We’re making some modifications along the lines of the Making 

Home Affordable Plan. There are some changes in H.R. 1106 that 

we do think are helpful for partial payments of claim in certain situations that we don’t currently have authority on. But that’s an explanation of the way our programs are working. 

Senator BOND. What is the cost on the two-thirds that you have 

been able to go into loss mitigation? Is there a portion of that loss 

assumed by the FHA? What are the costs of those mitigations to 

the FHA fund? 

LOSS MITIGATION COSTS ON FHA FUND

Secretary DONOVAN. I actually have a precise number on that. 

This year there were about 48,000 loss mitigation cases and the 

cost of those mitigation efforts was about $107 million. If we had 

had a loss on all of those 48,000, the value of those mortgages was 

about $2.5 billion. I’m not saying we would have taken the full loss 

on that, but you can see that should they be successful, those loss 

mitigation efforts, that $107 million cost far outweighs the losses 

we would have had. 

Senator BOND. Yes. We’re all about keeping people in homes that 

they can afford and making reasonable adjustments. I’d like to see 

the originators sharing more of that cost and not just the taxpayers, because there ought to be some burden on the people who 

write the mortgages that aren’t working. In the private sector, I 
16 

know there is a loss. But certainly mitigation of $107 million compared to what the burdens would have been makes some sense. 

Do you know how many mortgages currently are in mitigation 

and do they differ from State to State? 

MORTGAGES CURRENTLY IN MITIGATION

Secretary DONOVAN. We do see significant differences State to 

State. I gave you the figure, the 48,000 that we’ve done over the 

past year. I don’t have an exact number here. I’d be happy to provide you more information of the details of what’s in mitigation. 

What I would say is that, unlike the broader mortgage market, 

where our delinquencies in the rest of the market have been heavily concentrated in States like California, Florida, Nevada, about 

50 percent of all foreclosures in the country are in California and 

Florida, we’re seeing FHA’s portfolio is, because of the loan limits, 

very differently spread geographically. 

So Midwest is where we have a lot of our loss mitigation efforts 

and we have seen a higher level of foreclosures in those areas, Detroit in particular, Ohio. Senator Voinovich is here. We’ve had discussions about Cleveland and other efforts there where we can try 

to minimize the effect of those foreclosures in those communities. 

Senator BOND. Thank you, Madam Chairwoman. 

Senator MURRAY. Senator Lautenberg. 

STATEMENT OF SENATOR FRANK R. LAUTENBERG

Senator LAUTENBERG. Thank you, Madam Secretary. I ask consent that my statement be included in the record. 

Senator MURRAY. Without objection. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR FRANK R. LAUTENBERG

Madam Chairman, a home is more than just a building. It is a place of safety 

from the elements. It is a place for families to spend time together and for children 

to do their homework. And it is a source of financial security that families use to 

build their future. 

That’s the reason this housing crisis weighs so heavily on our Nation: it not only 

puts our economy at risk—it puts families at risk, too. Millions of families have already lost their homes because they were sold risky sub-prime mortgages—and millions more are at risk from job losses and other unexpected expenses. Instead of realizing the American Dream, 60,000 households in New Jersey may have their home 

taken away this year. 

People are working harder than ever before—and still losing their homes. Congress and the administration must continue to take steps to stop the foreclosure crisis. The Federal Housing Administration will play a big role in our efforts. During 

the housing boom, homebuyers—even those who qualified for FHA-backed loans— 

turned to the private sector for their loans. But now that the housing bubble has 

burst, borrowers are turning back to the FHA again. The agency has become a life 

raft in a sea of debt for current homeowners looking to refinance into a fixed-rate 

mortgage. And it is a source of hope for first-time homebuyers. 

I am pleased that the Economic Recovery law included a temporary increase of 

the FHA’s maximum loan limit for high-cost metropolitan areas to help homeowners 

and homebuyers more easily get FHA loans. There are 12 counties in New Jersey 

that will benefit from this change and I encourage our residents to take advantage 

of these resources. 

But with its new responsibilities and its new customers, FHA may not be able 

to keep up with consumer demands. When FHA lost business during the housing 

boom, it also lost staff and attention from the last administration. 

The average computer system at HUD is about 18 years old. I came to the Senate 

from a company that depended on computers and technology. And I know you can-
17 

not manage billions of dollars worth of business with too few staff or technology that 

is outdated. 

In these tough times, we need to make sure FHA has the funding and staff to 

do its job. 

Americans are relying on FHA to provide mortgages, investigate fraud, and help 

revive the housing market. That is no small task. I look forward to working with 

this subcommittee to accomplish these important goals. 

Senator LAUTENBERG. Mr. Secretary, when I see you here and 

look at your history of service to Washington and to a previous administration, you look so young. The job must be easy. 

Right now New Jersey, for instance, currently has a surplus of 

vacant affordable housing because prospective home buyers can’t 

find an agency to insure their loan. Now, will FHA consider changing its policy so it can start insuring loans on properties that are 

restricted for low- and moderate-income homeowners? 

Secretary DONOVAN. Two things I would say about that, Senator. 

And I appreciate your comments about my appearance of youth despite the difficult circumstances that we’re facing in the housing 

market and the country today. 

LOW- AND MODERATE-INCOME HOMEOWNERS

What I would say is, first of all, that in many ways this is the 

time that FHA needs to be ensuring that there’s adequate credit 

available to low- and moderate-income homeowners. We continue to 

be a source for people traditionally left out of the market, particularly low- and moderate-income buyers, to be able to become homeowners. 

Further than that, as you point out, there are vacant homes 

around the country and it’s been very important through our own 

foreclosures, as well as through partnership with funding that Congress has appropriated and we’re very appreciative of through the 

recovery bill under the Neighborhood Stabilization Program, to 

begin to try to buy up and insure that foreclosed homes get rehabilitated and get sold again as quickly as possible, oftentimes to 

low- and moderate-income borrowers. 

So we are working carefully, closely with our own portfolio of 

REO homes with Neighborhood Stabilization funding to make sure 

that we limit the period of time and the impact that those vacant 

homes have on communities, particularly low- and moderate-income communities. 

Senator LAUTENBERG. So FHA essentially writes off the loss from 

what may have been a subprime loan, and that’s FHA’s responsibility, is it not? I mean, the failures are FHA’s, fall into FHA’s lap. 

Secretary DONOVAN. We do not take losses on any subprime 

products. The subprime products have not been part of FHA’s programs. We do have losses on traditional FHA products. 

Senator LAUTENBERG. The regulations were there to prevent that 

from happening before the crisis began developing? 

Secretary DONOVAN. That’s right. But what we will do through 

the funding in the Neighborhood Stabilization Program, which runs 

actually through our Community Development Block Grant rather 

than FHA—that’s where we have funding appropriated by Congress to work with local areas to acquire those homes that may 

have had subprime mortgages on them. 
18 

There also is the Making Home Affordable Plan, which is modifying loans to affordable interest rates that might have been 

subprime to begin with. 

Senator LAUTENBERG. Because it’s a sad situation to see people 

who need housing and empty houses and not to be able to at least 

get them out of the weather and keep them whole for a while. 

Secretary DONOVAN. That’s absolutely right. In fact, when the 

President put forward the Making Home Affordable Plan we did 

extensive research and believe that by stopping those foreclosures 

and avoiding the vacancies of those homes, the blight that they can 

introduce into a community, we can save all American homeowners, not just the foreclosed homes but all American homeowners, roughly $6,000 on average in the values of their homes. So 

that goes exactly to your point. 

Senator LAUTENBERG. The FHA currently funds its own operations through homeowner fees. With the increase in demand for 

FHA-backed mortgages, can FHA adequately continue to help 

home buyers, homeowners, and still remain self-funded? 

FHA SOLVENCY

Secretary DONOVAN. Let me say, Senator, we are looking very 

closely at that issue, at the premiums that we charge, at the losses 

that we have. At the time that we provide details of the President’s 

2010 budget, we will have detailed information in there about 

whether we believe the current insurance premiums fully cover the 

losses in the programs. 

We have had to take over the last few years’ additional losses 

against the claims and the foreclosures, but we are looking very 

carefully and we should within a few weeks be able to present to 

you our estimates of whether it will be self-financing in the current 

programs. 

Senator LAUTENBERG. Thank you. 

Thanks, Madam Chairman. 

Senator MURRAY. Senator Voinovich. 

STATEMENT OF SENATOR GEORGE V. VOINOVICH

Senator VOINOVICH. Thank you. I would like to ask that my written statement be made part of the record. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR GEORGE V. VOINOVICH

Thank you Senators Murray and Bond for holding this hearing on FHA’s role in 

the current housing crisis. As many of you may know, Ohio has been hit very hard 

by the housing crisis, and I have long been concerned about the foreclosure tornado 

ripping through our cities and neighborhoods. According to the Mortgage Bankers 

Association’s most recent report, Ohio is among the top 10 States in the Nation in 

foreclosures, 4.09 percent of mortgages are in foreclosure in Ohio and another 9.49 

percent are past due. Unlike other States in the Nation, Ohio’s housing crisis has 

not stemmed from speculation or the bursting of a housing bubble. The Foreclosure 

crisis in Ohio has been the result of the economic downturn and irresponsible lending practices. 

Over the past few years, I have worked to stop the rise of foreclosures in my home 

State. I introduced the first piece of legislation enacted to address the foreclosure 

crisis, The Mortgage Debt Relief Act, which was signed into law December 2007. In 

addition, I have worked relentlessly for FHA reform. Last Congress, I introduced 

the Expanding American Homeownership Act to allow homeowners facing foreclosure or resetting interest rates to refinance without the usual burdens associated 
19 

with a FHA loan by increasing and simplifying FHA’s loan limits and loan terms. 

I was pleased when similar FHA modernization legislation was enacted in the Housing and Economic Recovery Act last summer. But I am also concerned about the recent trend of increased defaults of FHA loans and what this means for the solvency 

of the FHA. FHA must balance the responsibility to provide an adequate resource 

for refinancing with the responsibility to make sound loans. I look forward to hearing from our witnesses about additional ways we can increase FHA’s fiscal soundness and effectiveness. 

One of the primary missions of the FHA is to reach borrowers who are underserved, or not served, by the existing conventional mortgage marketplace. It is important that during this time of economic difficulty, FHA continue to serve this critical role in the housing market. During past recessions, including the downturns of 

the early 1980s, FHA remained a viable credit enhancer and was therefore instrumental in preventing a more catastrophic collapse in housing markets and a greater 

loss of homeowner equity. As housing prices fall and credit remains difficult to obtain, many homeowners and prospective homebuyers will need the less-expensive, 

safer financing alternative that FHA mortgage insurance provides. With the FHA’s 

share of the mortgage market up from 2 percent 3 years ago to nearly one-third of 

mortgages today, there is no doubt that consumers are flocking to FHA loans. 

As we continue to work together to restore the housing market and FHA’s fiscal 

soundness, I hope the FHA can establish itself as a resource to the many families 

who are searching for a way to refinance in order to stay in their homes, or who 

are looking to make a first time home purchase, while maintaining their lending 

standards. 

Senator VOINOVICH. The chairman has talked about the fact that 

you’ve had a 500 percent increase in lenders, and what I’d like to 

know is—you don’t have to give it to me now because you probably 

haven’t got the numbers—but how many people do you have working in that area right now, and with the additional work that you 

have are you going to be able to handle that work with the current 

folks that you’ve got, and how many more do you think would be 

needed to do the job the way it’s supposed to be done? 

INCREASE IN FHA LENDERS

Secretary DONOVAN. That’s a very important question. First of 

all, let me just say, while we do have a large number of new applicants for FHA business—you’ve got the numbers right, over a fivefold increase in the last few years—our volume has gone up not 

quite that much, but close to that, and our largest 10 lenders continue to be roughly 90 percent of all loans originated. So while we 

do have lots of new lenders, they tend to be much smaller lenders 

and not in aggregate to originate that much of the business. 

What I would say is we have begun hiring a significant number. 

I’d be happy to provide you detailed information about exactly how 

many of those folks are doing lender approvals and lender monitoring. But we have begun to increase that, and I think in the 2010 

budget you’ll see our proposal for the additional staff that we would 

need to be able to do that. I’d be happy to provide more details to 

you. 

DEMOLITION OF PROPERTIES

Senator VOINOVICH. The other thing that we did when I talked 

to you in your office was the fact that in my city we have, the city 

of Cleveland, a provision that says that when you sell a property 

you’re supposed to notify the person that it’s on the demolition list. 

I’m pleased that you have changed that policy and you’re going to 

abide by that ordinance, and I’m sure there are ordinances all over 

the United States like it. 
20 

The thing that’s troublesome to me is that in so many of your 

properties they get on the demolition list, and when they do it appears that—for example, you’re selling properties to the city of 

Cleveland right now that are in pretty bad shape. But you’re expecting the city to pay for the demolition of those properties with 

the NSP funds or some other funds. 

I just wonder why doesn’t HUD, when they have properties that 

have so deteriorated that they have been condemned not pay for 

the demolition of those properties. I know you hire people to go out 

and they’re supposed to maintain them, but from my experience 

they go out, they allegedly maintain them, and before you know it 

they’re in a position where they’re on the demolition list. 

I just wonder if somebody ought to look at maybe the people that 

you’re hiring to try and either get them to do a better job or look 

at it from the point of view that they’re your properties, they’ve 

gotten in bad shape, and an ordinary person owning them would 

have to pay for demolition. Why doesn’t HUD pay for the demolition? 

Secretary DONOVAN. First of all let me say, the leadership and 

the approach that I want to bring to HUD is not to be defensive. 

You brought us an issue about the way we were coordinating or not 

coordinating with local areas on this issue of demolition and where 

homes have been condemned. You were absolutely right. We made 

a change to our policy that’s now nationwide. So I want to thank 

you publicly for bringing that to our attention and working with us 

on that. That’s the kind of approach I’ll try to bring to any issue 

where we work together. 

I think it is a fair point that we ought to be looking more broadly 

at our policies around our foreclosed homes and to be working more 

closely with cities across the country, and I think that is an issue 

worth looking at and evaluating whether we ought to be involved 

in the cost of the demolitions of those homes. 

Senator VOINOVICH. I’d like you to look at it and the reason why 

you’re not—from a public policy, it seems to me you should take 

care of them if you let them get in bad shape. But there’s a reason 

why you don’t have it in your budget to get the job done. 

I’ve got three other questions real quick. One of them is, you’ve 

received recommendations for a change in regulations for the NSP 

program and I’d like to know the status of those recommendations, 

because they come from some very responsible organizations. 

The other thing is, you’ve got the Home for Homeowners Program and then the President’s Making Home Affordable and I’d 

like to have some written explanation as to what’s the difference 

between the one program and the other program. 

Last but not least, on the Homes for Homeowners or Hope for 

Homeowners, whatever they call it, that very few loans have been 

made under that program and I’d like to know why and what are 

you doing to remedy it so that more people will be able to take advantage of the program? 

Secretary DONOVAN. Do you want me to answer now? 

Senator VOINOVICH. No, I just pose those. I’d like to have those, 

the answers to that, in writing if I could. 

Secretary DONOVAN. Absolutely, I’d be happy to do that. 
21 

Senator MURRAY. If you could provide those in writing, the subcommittee would appreciate it, knowing that as well. So thank you. 

[The information follows:] 

NEIGHBORHOOD STABILIZATION PROGRAM (NSP)

HUD has developed a document responding to several NSP issues: errors and 

omissions in the October 6, 2008 NSP notice as published in the Federal Register; 

policy changes recommended by grantees and interest groups; and statutory changes 

made by the American Recovery and Reinvestment Act (Recovery Act) to the NSP 

authorizing language in the Housing and Economic Recovery Act of 2008 (HERA). 

HUD will be proposing changes to several policy areas that have been of concern 

to grantees and interests groups, specifically the discount provisions and the need 

for full appraisals for de minimus value properties. The notice will also establish 

rules for treatment of program income generated from the use of NSP in light of 

the Recovery Act’s repeal of the HERA revenue provisions and implement other 

changes mandated by the Recovery Act. HUD expects to issue this document in 

May. 

HOPE FOR HOMEOWNERS PROGRAM

HOPE for Homeowners is not a different program but an integral part of the comprehensive approach embodied by the administration’s plan, Making Home Affordable program, which is intended to bring stability to the housing market and help 

American families reduce their monthly mortgage payments to more affordable levels, or assist homeowners with loans owned or guaranteed by Fannie Mae or 

Freddie Mac an opportunity to refinance into more affordable monthly payments. 

As an integral part of the Making Home Affordable program, a revised HOPE for 

Homeowners program would help reduce defaults and foreclosures. It would assist 

financially struggling homeowners by providing relief to them, stabilizing home values, and allowing lenders to liquidate toxic assets into new and performing assets. 

It is intended to help homeowners whose loans are not owned or securitized by 

Fannie Mae or Freddie Mac, who are behind on their payments, who owe far more 

than they are worth, and who may find that modifying the terms of their loans is 

not a workable solution. The program would assist homeowners by taking into consideration their ability to pay and making their mortgage sustainable over the long 

haul. 

HOPE FOR HOMEOWNERS

There are significant barriers to participation created by the legislative language 

as evidenced by its restrictive eligibility requirements, its high costs to the consumer, and the departure from standard FHA business rules. Lenders have stated 

that they are reluctant to commit the resources to such a complex and costly program, and that it is more cost effective for them to focus their efforts on other available loss mitigation strategies to assist homeowners. 

Consequently, the administration is seeking legislative amendments to the HOPE 

for Homeowners program as outlined in H.R. 1106, which would specifically lower 

costs to the consumer, ease the restrictive eligibility criteria, and make the program 

easier for lenders to offer. If the eligibility criteria are amended to allow more homeowners into the program, the premiums are reduced, and the program looks and 

feels more like a standard FHA program, HOPE for Homeowners would not only 

be a viable program, but would also be an attractive solution to the obstacles faced 

by both the consumers and lenders. 

DEMOLITION OF PROPERTIES

On average, the Department annually acquires approximately 50,000 single family properties from HUD-approved lenders. To ensure that such properties are properly secured, maintained, and marketed for sale, HUD uses Management and Marketing (M&M) Contractors. These contractors are required to appraise HUD-owned 

properties using FHA Roster Appraisers, establish the list price for such properties, 

and market and sell properties for the maximum price the market will bear. The 

Department uses this disposition strategy as it is necessary to replenish the Mutual 

Mortgage Insurance Fund and is the most effective way for FHA to generate proceeds to provide homebuyers an affordable loan financing alternative to conventional 

and subprime loans. 

Thus, HUD does not require its contractors to simply demolish its properties 

based on their appraised value. Instead, the conditions of the real estate markets 
22 

are also factored in the contractors’ determination of the ultimate disposition or sale 

of a property. In markets such as Cleveland, for example, ‘‘hard to sell’’ properties 

are offered to local governments at deep discounts to further the Department’s affordable housing and neighborhood stabilization objectives. In addition, to the extent 

that the Department is aware of a HUD-owned property being condemned or due 

to receive a Notice of Condemnation, HUD’s contractors have been directed to disclose this information to all potential purchasers of HUD homes. 

Lastly, the Department, via its Neighborhood Stabilization Program (NSP), has 

awarded the city of Cleveland more than $16 million to address its high rate of foreclosed, abandoned properties, which contribute to blight within many of Cleveland’s 

neighborhoods. Under the NSP program, local governments may acquire, demolish 

and rebuild, or rehabilitate foreclosed properties using NSP Federal grant funds. 

Additionally, to assist local governments in combating blight and in maximizing 

their use of the NSP grant funds, the Department is offering HUD-owned foreclosed 

properties valued at $20,000 or less (i.e., those considered to be ‘‘demolition properties’’) for $100. Specifically, 211 HUD-owned properties have been held off the 

market by the Department, pending a direct sale to the city of Cleveland. Many of 

these 211 homes are valued at $20,000 or less, with a collective value of $2,105,200. 

Senator MURRAY. Again, we have votes in about 40 minutes. So 

I just have a couple of really quick questions and if anybody else 

has any quick ones. We want to get to the second panel. 

The first one was about mortgage scams. We’re seeing these 

signs in communities: Call 1–800. People are being ripped off. We 

put $2 million into the Appropriations Committee last year to deal 

with that and $6 million to the Neighborhood Reinvestment Corporation. Can you just share with the subcommittee really quickly 

what you are doing in terms of dealing with that? 

MORTGAGE SCAMS

Secretary DONOVAN. Yes. This is a serious issue. I’ve seen it from 

my own experience as a local housing official, as well as the concerns that you’re raising at the national level. Two things that 

we’re doing: One is we’re moving very quickly, and I’ve already sat 

down and met with Attorney General Holder about this issue, and 

we are beginning to work together with them, along with the FBI 

and our own IG, to try to target these rescue scams in a range of 

areas, as well as bringing in State attorney generals from around 

the country, who oftentimes are on the front lines of this issue. 

I think you’ll also see as we get into the details of our budget 

proposals that this is an area where we think not only through 

FHA, but also through our fair lending area, because often these 

scams tend to target minority communities more heavily than they 

do other communities, that we will have an increased focus both in 

funding and programs on this issue. 

Senator MURRAY. We’re going to continue to follow that as well. 

I would like for you to provide in writing—we are guaranteeing 

loans now that are as large as $730,000. I supported that. I 

thought it was the right move. But I would like you to share with 

the subcommittee the default and delinquency experience of the 

borrowers with those higher loans as we look to what our next policy is going to be. 

Secretary DONOVAN. Absolutely. 

Senator BOND. Madam Chair, I’m going to keep this very short 

because I want to—we have to move on and we need to hear the 

IG. I would just note that last year, at the recommendation of the 

Treasury, I introduced the origination commission proposal to regulate the clicks. We regulate the bricks with the savings and loans 
23 

and the banks, but nobody is regulating the people who don’t originate loans, and that is one reason why I think there are 58 criminal indictments just in the Eastern District of Missouri alone and 

more than 100 under investigation. 

I would like any thought that the Secretary has on whether that 

is the right way to go and any suggestions you have on the legislation. 

I do want to ask one last question on the HECMs. How many 

have been originated and how many defaulted? Are there any specific problems with the implementation of the program and the financial risk to the United States? 

HECMS

Secretary DONOVAN. I’d be happy to have a further discussion 

and provide you more detailed information on the HECMs. What 

I can tell you because of the nature of the program it doesn’t have 

a default issue per se in the same way. But what we’ve seen is in 

the entire history of the program under 10,000, about 9,300 HECM 

loans have been assigned to HUD out of a total of 391,000 loans. 

So it’s a very small percentage. 

We do see some increase, given the economic climate recently, in 

HECM borrowers who are unable to pay their taxes and insurance, 

and we are looking very carefully at that issue to make sure that 

our HECM lenders are responding appropriately. I think that’s an 

area where we have to make sure that we don’t end up, because 

of the nature of the HECM program, with a problem down the line. 

So that’s an area where we need to have some increased focus. 

Senator BOND. I should have phrased the question differently. 

But if people start living a whole lot longer, as all of us senior citizens hope we will, there is a potential downstream risk, and I don’t 

know whether you’ve looked at it. We’ll be happy to discuss that 

with you. 

Thank you, Madam Chair. Thank you very much, Mr. Secretary. 

Secretary DONOVAN. Thank you, Senator. 

Senator MURRAY. Mr. Secretary, thank you very much for your 

testimony today. We will have a number of questions in writing 

that we’ll submit to you and hope we can get a prompt response. 

But thank you very much. 

Secretary DONOVAN. I appreciate your interest in this issue and 

all of the collaboration we’ve had thus far. Thank you. 

Senator MURRAY. We will now turn to our second panel and if 

those witnesses would please come forward. We’re going to be hearing from our Inspector General, the Honorable Kenneth Donohue, 

who will begin his testimony as soon as he is at the table here. We 

also will be hearing from Mr. Lennox Scott, who is the Chief Executive Officer of John L. Scott Real Estate in Bellevue, Washington, 

and Ms. Mia Vermillion, who is a Senior Loan Consultant with 

Guild Mortgage in Lakewood, Washington. 

So once our witnesses are in front of us we will begin their testimony. I want all of you to know we do have your testimony in writing. It will be part of the record and we would ask each of you to 

limit your verbal testimony to 5 minutes. 

Mr. Donohue, we’ll begin with you. 
24 

STATEMENT OF HON. KENNETH M. DONOHUE, INSPECTOR GENERAL, 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. DONOHUE. Chairman Murray, Ranking Member Bond, members of the subcommittee, thank you for inviting me here today. I 

appreciate the opportunity to testify on the role of FHA in addressing the housing crisis. 

Through our work in auditing and investigating many facets of 

FHA programs over the course of many years, we have had concerns regarding the FHA systems and infrastructure to adequately 

perform its current requirements. This was expressed by the OIG 

to the FHA prior to the current influx of loans and numerous proposals that expanded its reach. We remain keenly interested in 

FHA’s ability and capacity to oversee newly generated businesses. 

The volume of single family loans has increased by tripling from $59 billion in 2007 to over $180 billion in 2008. FHA’s share of insured endorsements has increased from 21 percent to 70 percent, 

which includes home sales and refinancing. 

We believe there’s a critical need for more resources for FHA: (1) 

to enhance its IT systems; (2) to increase personnel to deal with escalation in processing requirements; (3) to increase its training of 

personnel to maintain a workforce with the necessary skills; (4) to 

oversee the numerous contractors it maintains; and (5) to increase 

its oversight in all critical front end issues, including areas such as 

appraisal, lender approval, and underwriting process. 

We are gratified the new penalty provision we helped craft was 

inserted into the HERA bill. That statute now creates a penalty for 

committing fraud against FHA programs and will be a useful tool 

for prosecutors and the law enforcement community to employ. 

The results of the latest actuarial studies show that HUD has 

sustained significant losses in its single family programs, making 

a robust program reserve smaller. As of September 30, the fund’s 

economic value was an estimated $12.9 billion, an almost 40 percent drop from over $21 billion a year ago. The current value represents 3 percent of the mortgages insured by FHA. Although 

above the 2 percent ratio required by law, it is below the 6.4 percent ratio for the same time last year. 

If more pessimistic assumptions are factored in, the ratio could 

dip below 2 percent in succeeding years, requiring an increase in 

premiums or Congressional appropriation intervention to make up 

the shortfall. 

The tightening credit market has increased FHA’s position as a 

loan insurer and with that is coming an increase in lenders and 

brokers seeking to do business with the Federal programs and a 

concern regarding some of these loan originators. For example, we 

currently have under investigation several FHA lenders who are 

also lenders in the subprime market. The movement towards HUD 

is already under way, as reflected in the recent statistics. FHA 

lender approvals increased 525 percent in a 2-year period. We note 

that FHA and GNMA’s lenders and issuers’ approval processes are 

largely manual. Both groups will be challenged within current constraints to keep up with the increased volume. Given the recent aggressive history of the industry that is now seeking to do business 

with the FHA, we think it may be prudent to review standards for 

participation. 
25 

As you can see from my exhibit, the current application contains 

a certification for those seeking to do business with GNMA that if 

they knowingly make a false statement they could be subject to 

criminal penalties, such as 18 U.S.C. 1001. There are no such attestation requirements for lender applicants with the FHA. 

Moreover, we have recently initiated inspection of the mortgage 

review board enforcement actions and its effectiveness in resolving 

cases of serious noncompliance with FHA regulations, particularly 

during the period of significant changes in the housing market. 

Another area of concern is the growing home equity conversion 

mortgage program. We are aware that the larger loan limits can 

be attractive to exploiters of the elderly whether it is by third party 

or even family members who seek to strip equity from seniors. Due 

to the vulnerability of the population this program serves, we are 

also concerned about the evasions of statutory counseling requirements. 

PREPARED STATEMENT

Finally, the HUD IG has initiated a broad range of strategies to 

leverage limited resources. As you can see from the other exhibit, 

we are key partners in a variety of Federal and State task forces, 

such as the Department of Justice National Mortgage Fraud Teams 

and in many key jurisdictions across the country. 

Thank you, madam. 

[The statement follows:] 

PREPARED STATEMENT OF HON. KENNETH M. DONOHUE

Chairwoman Murray, Ranking Member Bond, and members of the subcommittee, 

thank you for inviting me to testify today. I very much appreciate the opportunity 

to speak on the important issue of the role of the Federal Housing Administration 

(FHA) in addressing the housing crisis currently confronting our Nation. 

BACKGROUND

The U.S. Department of Housing and Urban Development (HUD) Inspector General is one of the original 12 Inspectors General authorized under the Inspector 

General Act of 1978. The OIG strives to make a difference in HUD’s performance 

and accountability. The OIG is committed to its statutory mission of detecting and 

preventing fraud, waste, and abuse, and promoting the effectiveness and efficiency 

of Government operations. While organizationally located within the Department, 

the OIG operates independently with separate budget authority. This independence 

allows for clear and objective reporting to the Secretary and to the Congress. 

The Department’s primary challenge is to find ways to improve housing and to 

expand opportunities for families seeking to improve their quality of life. HUD does 

this through a variety of housing and community development programs aimed at 

helping Americans nationwide obtain affordable housing. These programs, which include Federal Housing Administration (FHA) mortgage insurance for Single-Family 

and Multifamily properties, are funded through a $45∂ billion annual budget and, 

in the case of FHA, through mortgage insurance premiums. 

The last 2 years have seen enormous and damaging developments in the mortgage 

market: the dissolution of the subprime and Alt-A loan markets; dramatic drops in 

housing prices in most areas of the country; a concomitant rise in default and foreclosures; financial insecurity in the mortgage-backed securities markets represented 

by the Government takeover of Fannie Mae and Freddie Mac; the collapse of credit 

markets; and, as a primary vehicle to address these issues, an urgent reliance on 

the FHA to bolster the mortgage market. As the Mortgage Asset Research Institute 

has stated, the unprecedented onslaught of financial losses, reputational damages, 

and rehabilitative public policies will forever reshape the mortgage industry. 

While there are other programs at HUD that are being utilized in a significant 

way to help stimulate the economy (i.e., billions of dollars in new funding to Community Development Block Grants, to increased Public Housing assistance, etc.), 
26 

which are also vulnerable to fraudulent and abusive activities, the focus of this testimony is on the salient issues facing the FHA program due to the mortgage crisis 

and to an increased reliance on our Department to resolve foreclosure matters at 

this critical juncture. The current degree of FHA predominance in the market is unparalleled. 

First off, to put the FHA issues into perspective, we have recently stated in testimony to the Congress that, through the multitude of our work in auditing and investigating many facets of the FHA programs over the course of many years, we 

have had, and continue to have, concerns regarding FHA’s systems and infrastructure to adequately perform its current requirements and services. This was expressed by the OIG to the FHA through audits and reports regarding a wide spectrum of areas prior to the current influx of loans coming into the program and prior 

to the consideration of the numerous proposals that expanded its reach. We continue 

to remain concerned regarding FHA’s ability and capacity to oversee the newly generated business. 

Some of these are long-standing concerns that go back to unresolved issues highlighted in our work products from as far back as the early to mid-1990s. In my discussions with the Secretary, it is clear he is committed to positioning the Department as rapidly as he can to try to deal with the changing dynamics. As the President recently stated, however, the Government is an ocean liner, and not a speed 

boat, when it comes to moving it in a new direction. The same can be said for some 

of our departmental programs. 

THE EVOLVING LANDSCAPE

The past year and a half have certainly produced a lot of changes and initiatives. 

In response to increasing delinquencies and foreclosures brought about by the collapsing subprime mortgage market, in September 2007, HUD acted administratively 

to provide mortgage assistance through the FHA Secure program to refinance existing subprime mortgages. The program was expanded in May 2008 to provide lenders 

the added flexibility to refinance and insure more mortgages, including those for 

borrowers who were late on a few payments and/or received a voluntary mortgage 

principal write-down from their lenders. This program served a fraction of its anticipated scope. The FHA recently issued a formal letter terminating the program stating that ‘‘maintaining the program past the original termination date would have 

a negative financial impact on the MMI Fund.’’ 

The Housing and Economic Recovery Act (HERA) passed last summer, created a 

new Hope for Homeowners program to enable FHA to refinance the mortgages of 

at-risk borrowers. While activity to date has been limited, the FHA was authorized 

to guarantee $300 billion in new loans to help prevent an estimated 400,000 homeowners from foreclosure. The Congress is working on legislation to revise this program so as to increase participation. These proposals, and others, to remedy a dysfunctional mortgage market are likely to increase the challenges to the OIG. While 

the goal to help homeowners in distress is important, a redraft to relax qualification 

requirements for borrowers and lenders may create a situation that could be exploited by fraud perpetrators to take advantage of desperate homeowners, at risklenders, and the FHA insurance fund. The HERA legislation also authorized 

changes to the FHA’s Home Equity Conversion Mortgage (HECM) program that will 

enable more seniors to tap into their home’s equity and obtain higher payouts which 

raises new oversight concerns for this agency. 

As we turn to today’s environment, the volume of Single-Family FHA-insured 

loans has enlarged in fiscal year 2008 by tripling from $59 billion in fiscal year 2007 

to over $180 billion in fiscal year 2008. The latest figures from Single-Family market comparisons from the first quarter of fiscal year 2009 show that FHA’s total endorsements have increased from 21 percent of the market the year before to 70 percent of the market which includes both home sales and refinances. FHA’s home 

sales’ market share (excluding refinances) has increased from approximately 6 percent to close to 20 percent during this time period. Many potential homeowner loans 

may not have come to the agency yet as some of the new initiatives are still taking 

hold and the industry is flushing out its options and possibly posturing for more favorable terms. 

FHA will be challenged to handle its expanded workload or new programs that 

require the agency to take on riskier loans then it historically has had in its portfolio. This surge in FHA loans is likely to overtax the oversight resources of the 

FHA, making careful and comprehensive lender oversight difficult. In addition, our 

experience in prior high FHA volume periods (such as from 1997–2001) shows that 

the program was vulnerable to exploitation by fraud schemes, most notoriously flipping activities, that undercut the integrity of the program. 
27 

DEPARTMENTAL ISSUES

It is our understanding from the Department that, even with the projected increase in FHA business, they are planning for only 40 more staff positions starting 

in fiscal year 2009. It remains very tight particularly as it relates to departmental 

oversight. For example, the mortgage licensing provisions contained in the new legislation set minimum standards for nationwide licensing and a registration system 

for mortgage broker and loan officers. When we last testified earlier in the year, we 

had been told that there was one FHA person in the RESPA (Real Estate Settlements Procedure Act) unit who was assigned to work with the States in complying 

with this new regulatory requirement. 

Though the recently-passed Omnibus Appropriations bill containing fiscal year 

2009 funding will help to alleviate some of its funding constraints, we believe there 

is a critical need for more resources for FHA: (1) to enhance its IT systems; (2) to 

increase its personnel to meet the escalation in processing requirements; (3) to increase its training of personnel to maintain a workforce with the necessary skills 

to deal with the responsibility of this new portfolio; (4) to oversee the numerous contractors it maintains; and (5) to increase its oversight of all critical front-end issues 

including such important areas as the appraisal, lender approval and underwriting 

processes. 

We are also concerned that increases in demand to the FHA program are having 

collateral implications for the integrity of the Government National Mortgage Association (Ginnie Mae) mortgage-backed securities (MBS) program including the potential for increases in fraud in that program. HUD too needs to consider the downstream risks to investors and financial institutions of Ginnie Mae’s eventual 

securitization of a large proportion of the Hope for Homeowners and Home Equity 

Conversion Mortgage (HECM) Single-Family loans. Ginnie Mae securities are the 

only MBS to carry the full faith and credit guaranty of the United States. If an 

issuer fails to make the required pass-through payment of principal and interest to 

MBS investors, Ginnie Mae is required to assume responsibility for it. Typically, 

Ginnie Mae defaults the issuers and assumes control of the issuer’s MBS pools. Like 

FHA, Ginnie Mae has seen an augmentation in its market share (it has even in 

some recent months surpassed both Fannie Mae and Freddie Mac) and increased 

$150 billion in outstanding mortgage-backed securities and commitments during a 

1 year period from fiscal year 2007 to fiscal year 2008. It too has stretched and limited resources to adequately address this increase. From a different vantage point, 

the industry has noted that Ginnie’s struggle to keep pace with FHA could also reduce liquidity at a critical moment in the housing market. 

The OIG has initiated investigations of Ginnie Mae MBS fraud. In one recent 

case, the two former corporate officers of a Michigan financial company were convicted of defrauding Ginnie Mae by retaining the funds obtained from terminated 

and/or paid off loans. The defendants failed to disclose to Ginnie Mae that the loans 

were terminated, while one of the defendants utilized the funds from the paid-off 

loans to invest in the stock market and to make fraudulent monthly payments to 

Ginnie Mae on the loans that were previously paid-off in order to conceal the fraud. 

The fraud began during July 1998 and continued until October 2007, resulting in 

a loss of approximately $20,000,000. 

Despite all these enumerated issues, we are gratified that a new penalty provision 

was inserted into the Housing and Economic Recovery Act (now 18 U.S.C. section 

1014). When we corresponded during consideration of that legislation, we stated our 

belief that a new penalty enunciated specifically for the FHA program would be beneficial from an oversight and enforcement perspective. We assisted in its development and were very pleased that it was included in the final passage. The statute 

now creates a penalty of up to $1 million and 30 years in prison for committing 

fraud against FHA programs, similar to the predicates established in the Financial 

Institutions Reform, Recovery and Enforcement Act, and will be a useful tool for 

prosecutors and the law enforcement community to employ in order to address those 

who would seek to defraud the program. 

OIG OBSERVATIONS

The results of the latest actuarial study show that HUD has sustained significant 

losses in its Single-Family program making a once fairly robust program’s reserves 

smaller. The study shows that FHA’s fund to cover losses on the mortgages it insures are contracting. As of September 30, the fund’s economic value was an estimated $12.9 billion, an almost 40 percent drop from over $21 billion a year ago. The 

$12.9 billion economic value represents 3 percent of the mortgages insured by the 

FHA. Although above the 2 percent ratio required by law, it is well below the 6.4 

percent ratio from the same time last year. Moreover, these latest projections used 
28 

macroeconomic forecast data as of June 2008 and are profoundly sensitive to the accuracy of those forecasts. If more pessimistic assumptions are factored in, the ratio 

could dip below 2 percent in succeeding years requiring an increase in premiums 

or Congressional appropriation intervention to make up the shortfall. We think it 

might be useful for the Department to conduct interim assessments of the viability 

of the fund. Further, the new Office of Management and Budget (OMB) Director is 

quoted in a March 18, 2009 online OMB blog as saying that the Congressional 

Budget Office recently estimated FHA loans of the last few years as accruing $15 

billion in losses, and that OMB needed to move the true costs of this program to 

the budget’s discretionary ledger. Since its inception in 1934, FHA has been selfsustaining and premiums paid to the fund have covered the losses due to fluctuating 

defaults and foreclosures. 

A significant problem facing FHA, and the lenders it works with, is the fallout 

from decreasing home values. This increases the risk of default, abandonment and 

foreclosure, and makes it correspondingly difficult for FHA to resell the properties. 

About 7.3 percent of FHA loans are currently in default (i.e., more than 90 days 

non-payment status, foreclosure or bankruptcy). The Mortgage Bankers Association 

reports a 30-day∂ delinquency rate for FHA loans of about 13 percent. A major 

cause for concern is that even as FHA endorsement levels meet or exceed previous 

peaks in its program history, FHA defaults have already exceeded previous years. 

Default levels on FHA loans are above those for prime conventional loans as evidenced below: 

This reinforces the importance for FHA approved lenders to maintain solid underwriting standards and quality control processes in order to withstand severe adverse 

economic conditions. Another extensive problem confronting FHA has been its inability to upgrade and replace legacy (developed in the 1970s and 1980s) application 

systems that had been previously scheduled to be integrated. The FHA systems environment remains at risk and must evolve to keep up with its new demands. Add 

to that an escalation in the properties owned and managed by FHA and the overall 

picture becomes more complicated. The chart below is an OIG analysis of some 

areas of the Nation and of the projected potential impact of subprime loans refinanced to FHA. 
29 

INCREASED RISKS TO FHA

Until recently, FHA’s market share remained quite low as conventional subprime 

loans were heavily marketed by lenders. The tightening credit market has increased 

FHA’s position as a loan insurer and, with that, is coming an increase in lender/ 

brokers seeking to do business with the Federal program and an overall concern regarding some of these loan originators. For example, we currently have under investigation for alleged inappropriate activities several FHA lenders who were also lenders in the subprime market. The movement toward HUD is already underway as 

reflected in recent statistics. FHA approval of new lenders increased 525 percent in 

a 2 year period. For example, as of the end of fiscal year 2008, FHA had over 3,300 

approved lenders as compared to 997 at the end of fiscal year 2007 for an increase 

of 330 percent. If you compare the fiscal year 2008 totals (over 3,300) to the fiscal 

year 2006 totals (692) it is a 525 percent increase. Lender approvals for fiscal year 

2009 currently total over 1,600. 

The integrity and reliability of this crop of program loan originators is, in our 

view, unproven and, in light of the aggressive recent history of this industry, may 

pose a risk to the program. The Mortgage Bankers Association (MBA) in recent testimony stated the ‘‘MBA is concerned that since the once lucrative subprime market 

has evaporated, some of the less scrupulous lenders who specialized in that business 

are now turning their attention to FHA lending.’’ 

In addition, we have seen lenders reacquiring FHA approval despite past abuses. 

A previous investigation on an FHA lender in New York led to the debarment of 

its owner for a period of 5 years from originating FHA insured loans. After the debarment was served, the lender, under the same owner, resumed operations using 

the same fraudulent practices. We again reviewed some of the loans and determined 

that the originations were fraudulent similar to the loans investigated in the first 

case. The OIG, in conjunction with the U.S. Attorney’s Office and departmental officials, sought and received an injunction against them in order to stop the business 

from operating. Following the injunction, FHA withdrew their lender approval. 

Our audit work also highlights how problem lenders may regain admission into 

the FHA program even when previous transgressions were apparent. For example, 

we reviewed an Arizona corporation that was approved as an FHA mortgage lender 

by HUD in 1996. This particular lender had 13 active branch offices and sponsored 

close to 2,000 FHA-approved loan correspondents nationwide. As highlighted in our 

audit, this lender had a number of serious issues related to RESPA violations such 

as paying marketing fees, non-competition fees and quality incentives to real estate 

companies in exchange for more than $57 million in FHA mortgage business. The 

corporation’s license was suspended by the State and it filed for bankruptcy. One 

of the principal owners and principal managers reconstituted under a different 

name but operates from the same location. In 2008, HUD approved the new entity 

to originate and process FHA loans despite its principals’ prior citations for RESPA 

violations. 

Adding to the risk, FHA is now, due to loan limit increases, serving new metropolitan areas with which it previously has had little interaction. Recent legislation 

increased maximum FHA loan limits to $729,750. With such entry, come new play-
30 

ers and unknown hazards. The effects of this significantly increased loan limit are 

potentially much greater losses sustained by FHA on defaulted loans and that the 

loans may be much more attractive to perpetrators of fraud who will be able to extract greater payouts in fraudulent loans schemes. 

Simultaneous to this confluence of events, is an increase in the reported incidents 

of mortgage fraud. As the Federal Bureau of Investigation (FBI) points out, a significant portion of the mortgage industry is void of any mandatory fraud reporting 

and presently there is no central repository to collect all mortgage fraud complaints. 

Mortgage fraud incidents reports, as compiled, however, by the Mortgage Asset Research Institute in the overall marketplace, have increased by 45 percent in the second quarter compared to a year-ago period. It’s most recent third quarter assessment states that fraud incidence is at an ‘‘all-time high’’ and that ‘‘reported mortgage fraud is more prevalent now than in the heyday of the origination boom.’’ 

Our long-term investigative exposure in the area of mortgage fraud schemes impacting both FHA and conventional loans (since most fraud schemes cross loan programs) has given us vast experience and extensive knowledge. Many ‘‘traditional’’ 

fraud schemes continue to affect FHA and are described below: 

—Appraisal Fraud.—Typically central to every loan origination fraud and includes deliberately fraudulent appraisals (substantially misrepresented properties, fictitious properties, bogus comparables) and/or inflated appraisals (designed to ‘‘hit the numbers’’); appraiser kickbacks; and appraiser coercion. 

—Identity Theft.—Often includes use of bogus, invalid or misused Social Security 

numbers and may include involvement of illegal aliens, false ownership documents or certifications. 

—Loan Origination Fraud.—Including false, fraudulent and substantially inaccurate income, assets and employment information; false loan applications, false 

credit letters and reports; false gift letters; seller-funded down payments; concealed cash transactions; straw buyers; flipping; kickbacks; cash-out schemes; 

fraud rings; and inadequate or fraudulent underwriting activities. 

While these types of mortgage fraud schemes continue to operate, changing market conditions have generated new, or variant, schemes: 

—Rescue or Foreclosure Fraud.—Recent trends show that certain individuals in 

the industry are preying on desperate and vulnerable homeowners who are facing foreclosure. Some improper activities include equity skimming (whereby the 

homeowner is approached and offered an opportunity to get out of financial 

trouble by the promise to pay off the mortgage or to receive a sum of money 

when the property is sold—the property is then deeded to the unscrupulous individual who may charge the homeowner rent and then fails to make the mortgage payment thereby causing the property to go into foreclosure) and lease/ 

buy-back plans (wherein the homeowner is deceived into signing over title with 

the belief that they can remain in the house as a renter and eventually buy 

back—the terms are so unrealistic that buy-back is impossible and the homeowner loses possession with the new title holder walking away with most or all 

of the equity). 

—Bankruptcy Fraud.—Typically chapter 7 bankruptcy petitions are filed in lieu 

of chapter 13 petitions on behalf of debtors; however, property sales information 

is fraudulently withheld from the bankruptcy court and the properties are 

leased back to the debtors at inflated rents. The debtors’ property ownership 

and equity are stripped from them. 

—Home Equity Conversion Mortgage (Reverse Mortgage) Fraud.—FHA reverse 

mortgages are a new and potentially vulnerable area for fraud perpetrators. We 

are aware that the larger loan limits can be attractive to exploiters of the elderly, whether it is by third parties or by family members, who seek to strip equity 

from senior homeowners. Due to the vulnerability of the population this program serves, we are also concerned about evasions of statutory counseling requirements or of fraud by counseling entities. We are working with the chairman and members (Senator McCaskill, in particular) of the Senate Committee 

on Aging and the chairman of the House Committee on Financial Services to 

address some of their concerns regarding these issues. We have also been 

partnering with the AARP and other groups to foster consumer protection education awareness. The following represent some of the types of schemes that we 

are encountering: 

—Flipping.—The perpetrator creates a fake mortgage company and ‘‘lends’’ 

funds to the borrower (no money changes hands, no loan is given, but a mortgage is filed). The subject refinances the borrower into a HECM. At closing 

the title company pays all outstanding debt including the fraud perpetrators’ 

fake mortgage and the perpetrator walks away with the payoff. 
31 

—Recruitment.—Some HECM-related fraud activities involve an investor who 

sells the property to an elderly straw buyer and enters into a quit claim deed 

with the straw buyer. The buyer applies for the HECM loan within a short 

timeframe and the appraisal used to originate the HECM loan is then fraudulently inflated. This allows the investor to illegally divert the proceeds of the 

loan. Straw buyers are ‘‘recruited’’ in residential areas with a high rate of 

renters. The buyers are often unaware that they must pay property taxes and 

some are unaware that the cash due to them at closing has been diverted. 

A current investigation involves recruiting elderly homeless to live in properties victimizing these seniors who often have desperate needs. 

—Annuity.—Another activity that we currently have under investigation involves financial professionals fraudulently convincing HECM borrowers to invest HECM proceeds in a financial product, such as an annuity, in an improper way. The financial professionals receive increased fees and, in the case 

of annuities, the victims are unable to get access to their savings for many 

years or even past their projected life expectancy. 

—Unauthorized Recipient.—Individual, often family members, may keep HECM 

payments after the authorized recipient dies or permanently leaves the residence. 

HECM loans represent a significant investment by FHA, with considerable recent 

increases. The chart below shows a 253 percent increase in the dollar amount of 

HECM loans from 2004 through 2008. 

In addition to the schemes described previously, the following case histories also 

illustrate some of the types of prevalent mortgage fraud that the OIG typically encounters: 

—In January 2009, in Philadelphia, Pennsylvania, an appraiser and two settlement agents, were collectively sentenced to 45 months incarceration and 9 years 

probation and ordered to pay HUD $235,802 in restitution for their earlier 

guilty pleas to making false statements to HUD and committing a conspiracy 

and wire and identity fraud. The defendants and others provided fraudulent appraisals and other documents used by unqualified borrowers to obtain FHA-insured mortgages. HUD realized losses of $4,460,588 after 183 mortgages defaulted. 

—In September 2008, two defendants in South Florida were charged in a 21 count 

indictment for their participation in a mortgage fraud scheme that resulted in 

the approval and disbursement of six mortgage loans totaling $980,000. According to the indictment, one of the defendants, through his company, sold six 

properties in Miami-Dade County to unqualified buyers using FHA loans. In all 

six sales, the same defendant, through straw donors, fraudulently financed the 

down payments and closing costs of the buyers. The second defendant, one of 

the false donors, was also a silent investor in the scheme. Both defendants al-
32 

legedly received sizable payments once the properties were sold. When the loans 

were closed, four of the six properties went into foreclosure. 

—An investigation was initiated against a southwest mortgage company. The investigation revealed that the defendant, a real estate broker and owner of an 

investment company, fraudulently sold 17 properties to undocumented aliens in 

the Fort Worth, Texas area. The fraudulent FHA loans totaled $1,060,600. The 

defendant placed false Social Security numbers on the loan applications, inflated loan application figures, made side payment agreements with the borrowers for down payments that, in some cases, were never made and conducted 

other fraudulent activities. Subsequently, 12 of the 17 loans defaulted and HUD 

sustained a loss of $445,862. On December 31, 2008, the defendant was sentenced to 37 months in prison, 36 months probation and ordered to pay restitution of $445,862. 

—In Rockford, Illinois, a loan officer, realtor, loan processor, and company employers were charged with conspiracy, making false statements to HUD, and mail 

fraud, in a 35 count indictment. Specifically, the defendants were alleged to 

have engaged in a complex scheme to defraud HUD through a litany of false 

and fraudulent statements on FHA loan applications. These included, but were 

not limited to, the following: verifications of employment, pay stubs, W–2’s, 

credit letters, cashier’s checks, Social Security numbers, Social Security cards, 

and letters containing Social Security Administration letterhead. Overall, 50 

FHA loans were in question, with losses totaling in excess of $2 million. 

To meet the current crisis, the HUD OIG has initiated a broad range of strategies 

to leverage available resources including participation in Task Forces [See exhibit]. 

We are a key partner in the FBI National Mortgage Fraud team and have provided 

a full-time supervisory special agent to the FBI to coordinate our joint activities. We 

also sponsor training sessions for the FBI on FHA fraud and participate in special 

joint operations such as ‘‘Operation Malicious Mortgage.’’ 

OIG CONCERNS REGARDING CRITICAL FRONT-END AND BACK-END PROCESSES (IMPROVING THE QUALITY OF FHA ORIGINATIONS AND THE ENFORCEMENT OF BAD ACTORS)

To some extent, the FHA has had to work with the hand it was dealt in terms 

of funding and of industry-led initiatives to diminish its authority. As others have 

noted, the FHA cannot keep pace with an industry that is increasingly technology 

driven, and it cannot use its revenues to invest in any new technology. Many of its 

deficiencies could be mitigated with additional resources dedicated to systems and 

staffing enhancement. Our audit and investigative work point to critical front-end 

and back-end process issues that, if strengthened, could enable the FHA to overcome 

some of its present vulnerabilities. 

Appraiser Oversight.—Our work of the FHA appraiser roster identified more critical front-end weaknesses as evidenced in the quality control review and monitoring 

of the roster. The roster contained unreliable data including the listing of 3,480 appraisers with expired licenses and 199 appraisers that had been State sanctioned. 

In a further review, we found that HUD’s appraiser review process was not adequate to reliably and consistently identify and remedy deficiencies associated with 

appraisers. 

The FHA’s current Single-Family insured exposure totals over $560 billion representing 4.8 million FHA-insured mortgages. Inflated appraisals cause higher loan 

amounts. If the properties foreclose, the loss to the insurance fund is greater. With 

significant increases in volume and new responsibilities in the mortgage marketplace, we do believe it may be time for the Department to return to an FHA Appraiser Fee Panel similar to the one dismantled by statute in 1994. It is essential 

if the mortgage industry wants to overcome perceptions regarding its integrity and 

its role in the current economic crisis that it ensures true market values are correctly estimated. Such a move would relieve pressures on appraisers to return predetermined values and would change a system based on misplaced incentives. A recent study indicated that 90 percent of appraisers felt pressure ‘‘to hit the number’’ 

provided (i.e., on the sales contract). The old FHA fee panel was rotational and 

guaranteed work as long as the appraiser met certain HUD requirements. 

Our concern that appraisers tied to lenders may impact the quality of the FHA 

appraisal was also a matter of interest elsewhere as evidenced in last year’s settlement involving Fannie Mae and Freddie Mac and the New York Attorney General 

whereby lenders selling loans to those entities were required to follow stricter guidelines to ensure that people involved in the processing of loans did not also choose 

the appraiser. While the FHA fee panel was disbanded a number of years ago, the 

Department of Veterans Affairs has not abandoned this concept and we believe that 

this Department might want to follow suit thus eliminating the relationship be-
33 

tween the loan officers, real estate agents and appraisers. We should remain cognizant that the downstream negative effect of overinflated appraisals is long-term 

and can be fundamentally corrosive to the housing market and to even, as we know 

today, the world economy. 

Late Payment Endorsement Requirements Changed.—Results from a number of 

other key audits have noted significant lender underwriting deficiencies, inadequate 

quality controls, and other operational irregularities. In another important front-end 

audit, we analyzed the impact of FHA late endorsement policy changes affecting 

FHA insured loans. On May 17, 2005, the Federal Housing Commissioner issued 

Mortgagee Letter 2005–23, which significantly changed the requirements for late 

endorsements for Single-Family insurance. A request for endorsement is considered 

late whenever the loan binder is received by the FHA more than 60 days after mortgage loan settlement or funds disbursement, whichever is later. The Mortgagee Letter removed the prior 6-month good payment history requirement for these loans 

and provided an additional 15 days grace period before the current month’s payment 

was considered late. 

We conducted a review of this rule change and found that, although FHA asserted 

the change did not materially increase the insurance risk, FHA did not perform a 

risk analysis to support this determination. Our review of the performance of loans 

from seven prior OIG late endorsement audits (i.e., Wells Fargo, National City 

Mortgage, Cendant, etc.) found a 31⁄2 times higher risk of claims when loans had 

unacceptable payment histories within the prior 6 months. Since the issuance of the 

Mortgagee Letter, the default rate for loans submitted late has increased and is significantly higher than the default rate for loans submitted in a timely manner. The 

HUD Handbook itself acknowledged the risk of unacceptable payment histories by 

stating that ‘‘Past credit performance serves as the most useful guide in determining 

a borrower’s attitude toward credit obligations and predicting a borrower’s future actions.’’ 

We issued an audit report in 2006 and recommended that HUD rescind the Mortgagee Letter until appropriate rule changes could be designed that were supported 

by an adequate risk assessment. The FHA disagreed with our audit report and declined to implement the audit recommendations. We referred this matter to HUD’s 

Deputy Secretary who concurred with our recommendations on February 27, 2007 

and ordered the FHA to immediately rescind the Mortgagee Letter. 

Initially, the FHA agreed to implement the Deputy Secretary’s directive but failed 

to take action, instead taking efforts to dispute our audit results. This continued 

until April 2008, when the Deputy Secretary’s office again intervened, at our request, and instructed the FHA to publish the proposed rule change in the Federal 

Register reinstating the 6 month payment history requirement for late endorsements. In June 2008, the proposed rule change was published in the Federal Register for comment. 

Although the final rule rescinding the Mortgagee Letter was never published, we 

were notified by the Audit Resolution and Corrective Action Tracking System that 

the audit recommendation had been closed at the request of the FHA. Indeed it was 

not implemented, therefore, in a Memorandum dated March 18, 2009, we informed 

the FHA that, given the amount of time that had lapsed and the absence of a corrective action, the OIG would report this in our next Semi-Annual Report to Congress. 

Given the current mortgage crisis, concerns over losses to the insurance fund, and 

requirements for transparency, we believe that this is an important recommendation 

that should not be dismissed. 

Capturing Key Information in, and Upgrading, Data Systems.—Another major 

input process, touched on earlier in the testimony, is the integration and upgrading 

of FHA legacy systems. While there has been much discussion on an overall plan, 

and what particular types of systems are needed to go forward, we think it would 

be useful at this juncture to reposition the discussion to ascertain which data should 

actually be collected, and maintained, in the system in order to control the new demands placed on the program. Our audit work and our investigative ‘‘Systemic Implication Reports’’ transmitted to the Department over the years, makes it clear 

that, at a minimum, we need the system to track identifying information on key individuals involved in the transaction such as the originating loan officer. 

This person, for example, is central to the initiation part of the loan process where 

due diligence should hypothetically be done on the application material (i.e., credit 

scores, appraisal information, etc.). We would like to see that that person’s name 

and corresponding identifying information (i.e., license, etc.) are put in FHA’s data 

fields. This will allow the FHA and OIG to key in on a vital part of the loan process 

in which fraud typically can occur. If the system could also capture information on 

other loan participants such as the real estate agent for the seller and buyer, and 
34 

other parties to the transaction, that too would be helpful for purposes of increasing 

integrity in the processes in our investigative and audit functions. 

Further, we think it could be beneficial for the FHA to come together more significantly in a unified lender oversight consortium with Fannie Mae, Freddie Mac, the 

Federal Deposit Insurance Corporation, and Ginnie Mae in order to, among other 

things, create standardized forms that could produce common machine readable 

data fields with consistent information as well as to leverage existing data systems. 

Additionally, FHA will be challenged within current resource constraints to keep 

up with the increasing volume of entities doing business. FHA controls currently 

rely upon random, manual processes by contractors to select for review approximately 2 percent of lender endorsements, a decrease from 5 percent due, in part, 

to an increase in volume and to funding limitations. FHA then relies upon post-endorsement automated lender or service performance information, such as high delinquency or early default rates, to target these entities for examining a limited number of loans for quality assurance reviews. We believe FHA needs the resources to 

take advantage of commercial off-the-shelf pre-screening loan software or to require 

at least the larger lenders use such tools as part of their underwriting process. 

Lender Approval Process.—Earlier in this testimony we discussed the increasing 

number of applicants coming into FHA for lender approval and the abuses that 

could result. It should be noted that FHA’s lender approval process, like the review 

of loan processes described in the preceding paragraph, is largely manual. The FHA 

lender approval procedure has different requirements dependent on the type of lender making the application. The general process appears to try to strike a balance 

between not overburdening the applicant with extraneous requirements with a need 

for important oversight information. In light of the recent aggressive history of the 

industry that is now seeking to do business with this Department, we think it may 

be prudent to review the standards and qualifications for participation. While we 

are currently auditing this process and will make recommendations when the work 

is completed, due to the urgent nature of the current circumstances confronting the 

Nation and this Department from the fallout of the mortgage crisis, we believe some 

interim steps might need to be assessed. 

For example, while the current application contains a certification for those seeking to do business with the Ginnie Mae program that if they knowingly make a false 

statement in the application, then they may be subject to civil and criminal penalties (18 U.S.C. sections 1001, etc.), there is no such attestation requirement on the 

application for those seeking to do business with FHA program (See exhibit of Application for Approval to be FHA Lender and accompanying certification statements). 

Along those lines, we also believe that the FHA should have a criminal background 

check done on each applicant by seeking to access data systems that contain such 

information. 

Mortgagee Review Board.—As we move to a discussion of essential back-end processes, we note that we have recently initiated a review, at the request of Senator 

Grassley, of the Mortgagee Review Board (MRB) enforcement actions and its efficiency, effectiveness and impact in resolving cases of serious non-compliance with 

FHA regulations particularly during this period of significant changes in the housing market. FHA Single-Family endorsements total $71.7 billion in the first quarter 

of 2009, up 245 percent from the same period a year earlier, emphasizing the need 

for a strong deterrence to irregular mortgage lending practices. The MRB is a statutorily created board within the Department that has responsibility to sanction FHAapproved lending institutions that violate applicable housing laws and HUD regulations and policies. Established in 1989, it is the sole authorized enforcement body 

at HUD to remove noncompliant FHA lenders. 

Since FHA lending authority is held by more than 12,000 mortgagees and loan 

correspondents, FHA relies on risk management tools other than the MRB to protect its portfolio and the insurance fund including computerized monitoring of loan 

default and claim rates, post-endorsement underwriting and appraisal reviews, and 

on-site lender monitoring. Nevertheless, we believe that a strong deterrence to abusive practices is an effective Board that reaches in a significant way to problematic 

lenders by, for example, imposing penalties viewed as of real financial consequence 

to the violating lender, by hearing cases against larger numbers of violators, and 

by better exposing decisions, in an effort to increase transparency, on more publicly 

visible sites such as the Department’s Web site. Similarly, the Mortgage Bankers 

Association, in recent testimony, stated that the ‘‘FHA should have more aggressive, 

streamlined and timely processes to expel ‘‘bad actors.’’ 

Specifically, our review of the MRB will determine the timeliness of decisions; 

evaluate controls over the mortgagee referral and enforcement processes; summarize 

data gathered on settlement agreements and collections; and provide an objective 

basis to comment on the effectiveness of the MRB as a regulatory body. We are look-
35 

ing into issues such as the types of penalties assessed; whether the penalties were 

mitigated to administrative payments; the sizes of the mortgagees brought before 

the board; the elapsed time from referral to board action; whether indemnification 

was required; and whether the mortgagees were repeat offenders or their principals 

were under limited denial of participations or debarred. We anticipate completion 

of this review shortly. 

OIG CHALLENGES

The task before the HUD OIG is a daunting one: addressing the elements of fraud 

that were involved in the collapse of the mortgage market; monitoring the roll-out 

of new FHA loan products in order to reduce exploitation of program vulnerabilities; 

and, combating perpetrators of fraud, including those who have migrated from the 

subprime markets, who would exploit FHA loan programs. The consequences of the 

current mortgage crisis, its worldwide economic implications, and the subsequent 

pressures placed on the Department and OIG could not have come at a more inopportune time. The Department, as a whole, has had significant new leadership responsibilities over the last 7 years in rebuilding communities devastated by disasters (i.e., lower Manhattan post-September 11th; the gulf coast region after hurricanes Katrina, Rita and Wilma; the Galveston area after recent hurricanes; California fires; and Midwest flooding) that have added tens of billions of dollars in new 

program funds that require quick distribution and keen oversight. In addition, HUD 

received over $13.6 billion in the American Recovery and Reinvestment Act that 

again requires rapid dissemination to an even more widespread area. 

While there have been some monies appropriated for salaries and expenses needed for administering all these new programs and the recent passage of the fiscal 

year 2009 Omnibus Appropriation bill will help, the Department has historically not 

received analogous increases needed to deal with this new influx of requirements. 

They, and we, are quite stretched in our combined ability to keep up with the pace 

of new, critical needs and the changing dynamics of fundamental demands placed 

on the Department. 

Lastly, we would like to note, and emphasize, that we are pleased to be 

partnering with the FHA in a marketing endeavor to increase the general public’s 

awareness of departmental anti-fraud activities and enhance education through better outreach activities, and to heighten efforts aimed at fraud prevention and at 

fraud reporting. The HUD OIG is launching a new Web site, 

www.mortgagefraud.gov, and with the FHA will be using this, as well as other avenues, to better publicize our hotline and activities. Below is the new HUD OIG 

brand insignia that will accompany our marketing effort to reach the public. 

CONCLUSION

As can be deduced from reading through the totality of issues raised in this testimony, a number of cross-cutting concerns transverse many of the highlighted FHA 

processes. These include: (A) inadequate quality controls; (B) reliance on manual 

processes; (C) over dependence on the honesty of program participant(s) to provide 

accurate and truthful information; (D) tendency to focus on entities rather than individuals; and (E) the need to work more with the mortgage industry to better capture data on individuals involved in the process. Further, although not within the 

control of the FHA, the fact that our nationwide mortgage lending system is fragmented with separate players embracing differing requirements creates opportunities for waste, fraud and abuse that a more unified approach could potentially ameliorate. 

In conclusion, though the challenges and tribulations are increasing, the Office of 

the Inspector General stands ready to assist in whatever way is deemed necessary 

and will be vigilant in its efforts to protect the funds of the American taxpayer. We 

thank you for the opportunity to relay our thoughts on these important issues based 

on the body of our work and of our experience, and greatly appreciate the activities 
36 

of the Congress to protect the Department’s funds from predatory and improper 

practices and to ensure an effective response on oversight at this critical time. 

Senator MURRAY. Thank you. 

Mr. Scott. 

STATEMENT OF J. LENNOX SCOTT, CHIEF EXECUTIVE OFFICER, JOHN 

L. SCOTT REAL ESTATE, ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS® 

Mr. SCOTT. Thank you, Chairwoman Murray and Ranking Member Bond. 

I would like to talk a little bit about what’s going on in the housing market. I’m going to refer to my chart quickly about how the 

housing market is working and the importance of FHA in today’s 

solving the housing crisis. Today I represent the 1.2 million members of the National Association of REALTORS®, myself and my 

company. 

In looking at the chart, the basis, the foundation of the residential housing market is in first-time home buyers coming into the 

marketplace. Some of them buy new construction, but the majority 

buys resale homes. So when you bring in first-time home buyers, 

it causes a chain reaction of sales up the price points. 

We break the market into four categories: the first-time home 

buyer category, the more affordable, the above the midpoint, and 

the high end. The inventories are always lower in the first-time 

home buyer category, and they increase as you go up the price 

points for that. 

We have seen an increase in sales activity in first-time home 

buyer category because of four reasons: the first one being the FHA 

loans with the flexible credit score. It is allowing more families to 

come into homeownership, and these are families, individuals or 

families, who have good credit, that can make the payment. 

The next item would be the mortgage interest rates have come 

down 1 percentage point since last October. This is due mainly in 

part to the Treasury stepping in to buy mortgage-backed securities. 

That 1 percent lower on interest rates has created a 12 percent increase in purchasing power. 

The other two items that we have that are in fact helping the 

marketplace are that prices have just been lowered. This past 5 

months starting in October, we saw inventory levels raised since 

October and prices adjusted lower. Even in the first-time home 

buyer price range, they adjusted the prices 5 percent lower. 

Then the last item that we have is that Congress approved and 

President Obama signed a stimulus package on February 17 that 

had the $8,000 first-time home buyer tax credit, and buyers were 

waiting for that tax credit. It came about and they are entering the 

marketplace. 

I’ll give you an example of months supply real quick. In Tacoma, 

Pierce County area, the months supply for existing homes in the 

first-time buyer category is 4.6 months, around the midpoint is 8 

months, above the midpoint is 13.8 months supply, and in the 

upper end it’s 20 months supply. So that just gives you an idea of 

where the months of inventory is and pricing dictates off the 

monthly inventory levels. 

So we have a low inventory level in the more affordable, in the 

first-time buyer price range. 
37 

Overall, the months supply is 7.2 months supply in Pierce County, Tacoma. Healthy is thought to be in the 5 to 6 months supply 

range. King County, for example, where Washington is—I mean, 

where Seattle is, is at an 8.3 months supply. 

So we believe FHA is playing a very important role and they can 

play even a greater role in the recovery of this housing crisis that 

is taking place. First—there’s four points. First, we ask that FHA 

receive the funding necessary to increase the staff and improve 

technology. This just expedites the programs and the efficiency and 

the security of them. 

Second, we would like to see the $8,000 first-time buyer tax credit monetized, which means that it’s available at the closing table, 

so that buyers can use that $8,000 for a down payment. I was talking with NAR chief economist Lawrence Hyun yesterday and we 

are projecting that would bring in an additional 500,000 first-time 

home buyers into the marketplace. They have good credit. They 

have the capability to make the payment. It’s just that they do not 

have enough money for the down payment. 

That would stimulate the first-time buyer category and cause 

that chain reaction of sales up the price points. Already we’re seeing in many areas of the Nation prices stabilizing in the first-time 

home buyer category, and this would then stabilize home prices in 

the more affordable and work its way upward. 

They would then pay this $8,000 back from the first-time buyer 

tax credit, which has already been approved by Congress and 

signed by the President. This would release pent-up demand. 

Also, we’d like to see the higher loan limits made permanent. 

They are making a difference, especially for move-up buyers, that 

they could then receive the lower interest rate. Their equities have 

gone down in this market correction. They need the FHA loans for 

credit. They have the capability. They’re both buying and selling in 

the same market timing. It’s okay to buy and sell at the same market timing in the upper price ranges. They just need the lower interest rates and the credit available to them. 

Lastly, ease the financing for condominiums. Right now there is 

a requirement for an environmental review on a Federal level. We 

would like to see that the environmental reviews at the State and 

local level be accepted. This would expedite the process for condominium projects to be able to move forward. 

Also we’d like to see that the 51 percent occupancy ratio be lowered to a number below 50 percent for that. 

PREPARED STATEMENT

We have submitted our written statement and we’d like to thank 

you for your support of the Federal housing program. Senator Murray, I’d like to thank you in particular for raising the temporary 

loan limits up to help us move this market forward during this 

housing crisis. 

[The statement follows:] 

PREPARED STATEMENT OF J. LENNOX SCOTT

Chairwoman Murray, Ranking Member Bond, and members of the subcommittee, 

thank you for inviting me to testify today on the role of the Federal Housing Administration in addressing the housing crisis. 
38 

My name is Lennox Scott, and I am the chief executive officer of John L. Scott 

Real Estate in Bellevue, Washington. I am here today to represent the views of the 

nearly 1.2 million members of the National Association of REALTORS®, who are 

involved in every aspect of the real estate business. 

The members of the National Association of REALTORS® have had a long tradition of support for innovative and effective Federal housing programs and we have 

worked diligently with the Congress to fashion housing policies that ensure Federal 

housing programs meet their mission responsibly and efficiently. With the collapse 

of the private mortgage market, the importance of the Federal Housing Administration has never been more apparent. As liquidity has dried up and underwriting 

standards have been squeezed tight, the FHA is one of the primary sources of mortgage financing available to families today. Without FHA financing, families would 

be unable to purchase homes and communities would suffer from continued foreclosure and blight. 

In 1934 the Federal Housing Administration was established to provide consumers an alternative during a lending crisis similar to what we face today. At that 

time, short-term, interest-only and balloon loans were prevalent. FHA was an innovator with the 30-year fixed rate mortgage. Once again, FHA is now the leader in 

providing safe, affordable financing. The universal and consistent availability of 

FHA loan products is the principal hallmark of the program that has made mortgage insurance available to individuals regardless of their racial, ethnic, or social 

characteristics during periods of economic prosperity and economic downturn. 

FHA’s market share has grown from less than 3 percent to more than 30 percent 

in a very short time. While this change was necessary to provide a functioning mortgage market, it also provides concern for the safety and soundness of FHA. With 

such dramatic growth comes increased responsibility, and the need for increased infrastructure and staff. 

We believe FHA is doing its best to step up to the challenge. Over the last 18 

months, FHA has demonstrated it can handle volume increases at four times 2007 

levels while its market share increased to over 30 percent. Despite receiving minimal additional resources, there are two reasons why FHA has been capable of handling the volume. First, once lenders have been approved by FHA, they perform all 

of the loan processing, underwriting, closing and insuring functions without HUD 

review. This takes the burden off FHA, although additional oversight in approval 

may be needed. Second, FHA’s technology, despite being 25 years old, remains resilient and fundamentally sound. That said, there are a number of changes that 

should be implemented to ensure that FHA’s Mutual Mortgage Insurance Fund 

(MMIF) remains strong and healthy. 

NEED FOR INCREASED CAPACITY

For years FHA has been hampered by a lack of investment in staff and information technology. The Single Family FHA program currently operates with a nationwide staff of about 900, which is approximately 160 positions less than needed. In 

addition, FHA operates with technology that is an average of 18 years old. FHA 

Commissioner Brian Montgomery had said the software programs FHA uses are, in 

many cases, older than the staff maintaining it. Quickly upgrading the dozens of 

incompatible systems, such as the 30 year old COBOL system, to web based customer centric applications is necessary for the agency’s continued existence and future success. 

Our membership believes that FHA cannot continue to serve its constituency 

without rapidly implementing a quality and systems initiative. Other financial institutions more adequately staffed and with more advanced technology have already 

gone out of business. It has been estimated that $65 million is required to upgrade 

the FHA systems and add the appropriate number of staff. These expenditures could 

save the taxpayer tens of millions of dollars per year and result in a more efficient 

Government mortgage insurance program. 

INCREASED OVERSIGHT/RISK MANAGEMENT

Recent articles have expressed concern about FHA’s oversight of loan originators. 

In order for a lender to be a direct endorser for FHA (and not require HUD approval 

on every loan), they must submit an application to HUD. The number of applications has skyrocketed in recent months, and we agree with the concerns expressed 

about both time to process applications and provide the necessary oversight of lenders. 

Despite media concern that FHA has become a ‘‘dumping ground’’ for subprime 

loans and high-risk borrowers, the fiscal year 2008 independent Actuarial Review 

demonstrates that the FHA Mutual Mortgage Insurance Fund (MMIF) is fiscally 
39 

sound, and projected to remain so over the next 7 years. While the MMIF has experienced a decline in value, it remains above the congressionally mandated 2 percent 

capitalization ratio. A high percentage of the decline was the result of falling house 

prices—something everyone has been facing. In addition, the quality of borrowers 

utilizing FHA has improved. Borrowers now have higher credit scores and lower 

loan-to-value ratios; these changes are expected to further improve the financial status of the FHA MMIF. 

The Actuarial Review suggests that if current conditions continue, FHA will be 

able to handle the increased claim activity and decreased valuation of the housing 

market while meeting its current capital reserve requirements. However, it is important to note that the Actuarial Review is based on July 2008 data, and may not 

take into account the full impact of actual home value declines since then. The review also does not take into account the latest estimates of anticipated employment 

decline, which could impact borrower incomes and ability to pay. These factors— 

higher than expected home price declines and higher than expected unemployment—could present a troubling macroeconomic picture for FHA going forward. 

While current borrowers’ higher credit quality provides some protection from these 

trends, it cannot eliminate all risks. The most recent data shows that FHA’a delinquency rate is climbing at a troubling rate. 

Additional personnel are needed to assure that FHA does not fall victim to fraud 

or abuse. Recent reports indicate an increase in early payment defaults, i.e those 

loans that are delinquent with just their first or second payment. Currently monitoring of these loans is limited due to staffing constraints. Increasing lender oversight and staff to monitor fraud and abuse will help keep FHA fiscally strong, and 

will protect the taxpayers’ interest. 

TECHNICAL CORRECTIONS TO FHA PROGRAMS

The Housing and Economic Recovery Act (HERA) of 2008, signed into law in July 

2008, provided a number of valuable reforms to FHA. However, not all of them have 

been able to be implemented due to confusion over implementation or interpretation 

of the law. 

HERA included provisions intended to ease financing of condominiums for FHA. 

However, HUD’s attorneys have stated that the legislation does not specifically remove the requirement for an environmental review of the property for a condominium loan to be processed. This review is very time consuming and complicates 

the home purchase process. Since Congressional intent was to ease financing for 

condominiums, this matter should be clarified in the law so HUD may implement 

the new HERA provisions. 

Condominiums remain one of the more affordable housing options for American 

families. NAR further recommends that the FHA reduce the 51 percent occupancy 

ratio to a number below 50 percent for all condominium developments. Amending 

the owner-occupancy rules for condominium developments for buyers with FHA 

mortgages will benefit all parties in the real estate transaction. Individuals and 

families purchasing condominiums will have access to more flexible and affordable 

financing opportunities. Potential buyers with FHA mortgages will have a wider 

choice of condominium developments. Finally, existing owners in these developments benefit as vacant units are purchased and occupied and the owner-occupied 

ratio increases. 

HERA also promoted the use of FHA’s energy efficient mortgage (EEM) product. 

Currently an EEM may include up to $8,000 of energy efficient improvements to a 

home. However, HERA increased that amount up to 20 percent of the value of the 

home. FHA has been unable to implement this provision due to a technical flaw in 

the statute. Given the administrations support of energy efficiency, we urge this 

technical correction be made to allow borrowers purchasing homes to use FHA to 

get the full benefit. 

Chairman Murray and the subcommittee members have been strong supporters 

of increasing the FHA loan limits, which was done in both the HERA legislation 

and in the American Recovery and Reinvestment Act (ARRA) passed earlier this 

year. ARRA reinstated the 2008 loan limit levels, at 125 percent of local area median home price, capped at $729,750. ARRA also provided the HUD Secretary with 

discretion to increase the limits in ‘‘sub-areas,’’ where home prices may far exceed 

the county average. However, HUD has chosen not to exercise this authority. We 

believe the loan limits need to be made permanent at the current levels, as to provide some stability to the market. We also believe that FHA should be encouraged 

to use their authority to increase the limits in communities that simply have prices 

higher than their surrounding counties. 
40 

FHA AND USE OF THE HOMEBUYER TAX CREDIT

The Housing and Economic Recovery Act of 2008 also includes a first-time homebuyer refundable tax credit up to $7,500 to first-time home buyers for the purchase 

of a principal residence on or after April 9, 2008 and before July 1, 2009. This was 

followed by the American Recovery and Reinvestment Act, which offers a tax credit 

of up to $8,000 for first-time homebuyers who purchase on or after January 1, 2009 

and before December 1, 2009. 

Enabling homebuyers to have access to their tax credit funds at the time of closing, through a collateralized loan against the tax credit, would allow the home buyer 

to use the credit toward a down payment. The repayment of the funds borrowed 

against the credit would be obtained through use of the tax refund. During his confirmation hearings, HUD Secretary Shaun Donovan stated that FHA has the discretion to permit this type of financing mechanism. FHA regulations permit a borrower 

to use loan proceeds for a home purchase as long as the loan is ‘‘secured by property 

or collateral owned by the borrower independently of the mortgaged property,’’ 

Loans may be used for a down payment, and secured by the mortgaged property, 

in certain circumstances and assuming the loan is not provided by a party having 

a direct or indirect interest in the real estate transaction. This use of the tax credit 

benefits potential first-time homebuyers with little down payment available for purchase. 

Monetizing the tax credit through a loan combined with FHA’s low 3.5 percent 

down payment requirement would offer a strong incentive to buyers who would otherwise not purchase a home this year. NAR estimates that hundreds of thousands 

of buyers will take advantage of the tax credit. However, proactive use of the tax 

credit will release even more pent up demand in real estate markets across the 

country. Granting borrowers access to their tax credit through collateralized loans 

will further ensure FHA products are the mortgage products of choice for homebuyers. 

CONCLUSION

Today’s FHA is not your father’s FHA. Congress and HUD have made a number 

of important and valuable changes to FHA over the last several years that have enabled it to stand up to the challenges of today’s mortgage market. FHA is now the 

principal source of financing for millions of American families. Without FHA our 

economic crisis would be significantly prolonged. 

There are a number of reforms that can be made to FHA to ensure its continued 

success and its availability to hardworking families. We urge the subcommittee to 

review our proposals and consider using these suggestions to strengthen FHA. We 

thank you for your continued support of Federal housing programs, and stand ready 

to work with you to keep these programs viable. 

Senator MURRAY. Thank you very much for your excellent testimony. 

Ms. Vermillion, we’ll go with you. 

STATEMENT OF MIA VERMILLION, SENIOR LOAN CONSULTANT, GUILD 

MORTGAGE, LAKEWOOD, WASHINGTON 

Ms. VERMILLION. Madam Chair, distinguished members of the 

subcommittee—— 

Senator MURRAY. You want to turn on your mike in front of you. 

Ms. VERMILLION. Madam Chair, distinguished members of the 

subcommittee: I am honored to be here today. I’m glad to assist 

this subcommittee in any way possible. Please note I am here as 

a lender, with over 25 years experience, and not a representative 

of my current employer. 

I started originating home loans in Texas and have been in the 

great State of Washington for the last 9 years. My experience includes a number of HUD products, such as the Tribal 184, but for 

today we’re discussing only the basic FHA fixed rate loan. 

As you have pointed out, in Washington State FHA loans went 

out of favor and have now come back. Many loan originators during 

2004 and 2007 had no knowledge of FHA. They’d never done any-
41 

thing that required asset and income verification, so if you didn’t 

have to ask anybody for information it was very simple to close 

loans. In retrospect, the lower volumes in these bubble years actually benefited the FHA insurance fund by avoiding the losses associated with the revaluation of those assets. 

Currently we have a great climate for FHA loans and they are 

playing a critical role in reviving this real estate market. Thanks 

in great part to Senator Murray, the increased loan limits have allowed buyers of more expensive homes to benefit from FHA financing. First-time home buyers are out in droves. I usually teach three 

to four home buyer classes each month following the 5 hour format 

of the Washington State Housing Finance Commission and our 

class attendance is sharply up—a good indicator that buyers want 

to be better informed before committing to a mortgage loan. 

Our trade organization I’m sure has let you know that the biggest challenge for FHA lenders relates to warehouse capacity. We 

have a huge demand for funds and many lenders are struggling to 

accommodate the volume. 

The FHA loan program is a cornerstone of our prudent lending 

as we move forward. One of my personal concerns is the attempted 

revival of the seller-funded down payment assistance program. The 

current down payment for FHA is only 3.5 percent. There are a 

number of sound down payment assistance programs such as the 

Washington State Housing Finance Commission offers. The down 

payment can come from relatives, 401k, or buyers’ own funds. 

When a seller funnels a down payment to a borrower, we’re not 

only actually doing a zero down loan; in most cases that borrower 

is paying more as a higher price for that home than they otherwise 

would. 

PREPARED STATEMENT

In conclusion, I hope we all learn from this current housing crisis 

and do not repeat some of the practices that have led us here. 

Thank you for your time and attention. 

[The statement follows:] 

PREPARED STATEMENT OF MIA VERMILLION

I am honored to be here today and glad to assist this subcommittee in any way 

possible. Please note that I am here as a lender with over 25 years of experience 

and not as a representative of my current employer. I started originating home 

loans in Texas and have been in Washington State for the last 9 years. My experience includes a number of HUD products, such as the Tribal 184 loans. For today, 

I am discussing the basic FHA 30 year fixed rate loan, known as a 203B. 

In Texas we experienced a very challenging real estate market in the early 1980s. 

Fixed interest rates went from 11.5 percent to 18 percent. The market responded 

with financial innovation and produced many adjustable rate products for conventional loans. Compared to these products, FHA loans often took longer to close and 

thus fell out of favor in the market. When the overheated real estate market cooled 

off these conventional loans became very difficult to obtain. At that time, FHA then 

became the only loan option for buyers who were not VA eligible and did not have 

the 10–20 percent down payment required for conventional loans. 

Moving forward to Washington State, FHA loan endorsements for the most common loan type—the 203B—grew from 15,372 loans in 2000, to 30,766 loans in 2003. 

After that the number of FHA closed loans dropped to 15,556 in 2004, 8,290 in 2005, 

7,707 in 2006 and 8,704 in 2007. Please refer to the attached chart from the HUD 

site. 
42 

WASHINGTON STATE FHA 203B CLOSED LOANS 1990 THRU FEBRUARY 28, 2009 

Year Loans 

2009 ..................................................................................................................................................................... 1 6,307 

2008 ..................................................................................................................................................................... 30,500 

2007 ..................................................................................................................................................................... 8,704 

2006 ..................................................................................................................................................................... 7,707 

2005 ..................................................................................................................................................................... 8,290 

2004 ..................................................................................................................................................................... 15,556 

2003 ..................................................................................................................................................................... 30,755 

2002 ..................................................................................................................................................................... 24,162 

2001 ..................................................................................................................................................................... 22,958 

2000 ..................................................................................................................................................................... 15,372 

1999 ..................................................................................................................................................................... 18,657 

1998 ..................................................................................................................................................................... 17,698 

1997 ..................................................................................................................................................................... 14,169 

1996 ..................................................................................................................................................................... 13,175 

1995 ..................................................................................................................................................................... 9,150 

1994 ..................................................................................................................................................................... 22,791 

1993 ..................................................................................................................................................................... 20,704 

1992 ..................................................................................................................................................................... 13,908 

1991 ..................................................................................................................................................................... 16,411 

1990 ..................................................................................................................................................................... 21,183 

Total ........................................................................................................................................................ 338,157 

1 Two Months Activity. 

Source: HUD. 

Many loan originators during 2004–2007 had no knowledge of FHA and had never 

done anything besides a conventional loan. The market provided varieties of zero 

down loans, and loans with no proof of income or assets required. These loans not 

only made it easy for borrowers to qualify, but made it easy for the loan originators. 

There was just not much work involved when documentation was not necessary. So 

FHA, requirements for strict borrower income documentation, asset verifications 

combined with Realtor perceptions that the FHA product was unwieldy, resulted in 

lower volumes. In retrospect the lower volumes in the ‘‘bubble years’’ has actually 

benefited the FHA insurance fund by avoiding the losses resulting from the re-valuation of real estate. 

And now we have come full cycle again. In 2008 Washington State had 30,500 

FHA loans closed. FHA loans are again the best product for both buyers and people 

trying to refinance—as long as they still have some equity. Conventional loans have 

additional fees, and mortgage insurance companies are experiencing heavy losses 

and tightening their guidelines. Loan officers who have never before collected W2s, 

bank statements, and paystubs are learning we are ‘‘back to the basics’’ in mortgage 

lending. FHA loans are playing a critical role in reviving this real estate market. 

In this environment of uncertainty, FHA provides a stable source of liquidity. 

Thanks in great part to Senator Murray, we now have increased loan limits so buyers of more expensive homes can also benefit from FHA financing. 

This is especially true for the first time homebuyers who are benefiting from a 

combination of lower prices, great interest rates, and the $8,000 tax credit. I usually 

teach three to four home buyer classes each month, following the 5 hour format of 

the Washington State Housing Finance Commission. Our class attendance is sharply up, a good indicator that buyers want to be better informed before committing 

to a mortgage loan. 

Mindful of loan quality, most lenders have now implemented minimum FICO 

scores for their FHA product. These actions will benefit the insurance fund going 

forward. 

As you have heard from our trade organization, the Mortgage Bankers Association, the largest challenge for FHA lenders relates to warehouse capacity. With 

rates nearing record levels, there is a huge demand for funds. The credit crisis has 

removed much of the warehouse capacity from the industry and many lenders are 

struggling to accommodate the volume. This will have a negative effect on consumers as it impacts our ability to continue to make good loans to qualified borrowers, a key element to revive our housing industry. 

The FHA loan program is a cornerstone of our prudent lending as we move forward. One of my personal concerns is the attempted revival of the ‘‘seller funded 
43 

down payment.’’ The current down payment for FHA is only 3.5 percent, and there 

are a number of sound down payment assistance programs such as the Washington 

State Housing Finance Commission offers. The down payment can also come from 

relatives, 401k accounts, or a buyer’s own funds. When a seller funnels the down 

payment to a borrower, we are actually not only doing a zero down loan, but in most 

cases the buyer is paying a higher price for that home than they otherwise could. 

In conclusion, I hope we all learn from this current housing crisis and do not repeat some of the practices that have led us here. 

Thank you for your time and attention. 

Senator MURRAY. Thank you very much. 

I appreciate both of you traveling all the way out here from 

Washington State to lend us your advice and counsel as we move 

forward to deal with this very important issue. So thank you for 

being here. 

Mr. Donohue, I do want to start with you on questioning. None 

of us want to see the FHA’s portfolio infected with the kind of bad 

loans that caused the current economic crisis that we’re in. Historically, FHA’s strong underwriting and programming compliance 

process has prevented that from happening. 

Your testimony and your written testimony explained in great 

detail the different forms of fraud that can enter into the FHA loan 

guarantee process. Have your audits shown that there is a significant increase in any of these forms of fraud since the FHA’s role 

started to expand in this current credit crisis? 

MORTGAGE FRAUD ACTIVITY

Mr. DONOHUE. Senator, first of all let me thank you and Senator 

Bond for the support you’ve given me over the past several years 

as the IG. I do want to say too that my friend Secretary Donovan— 

we met regularly and discussed these very issues in a very practical way. 

I think the best way to answer this question is that with the increased volume of FHA activity going back on we’re seeing an increase in regard to fraud activity. It stands to reason and certainly 

the FBI and ourselves, have both commented that as the time goes 

on with the more activity—the way I look at it is to instill as much 

prevention as you possibly can to ensure that you’re doing what 

you can to prevent that. 

I made reference to my easel over here that I think, stating to 

the effect that when applicants come back into our business at 

FHA they need to know that if they lie, if they provide false information that they’re going to be held accountable to a particular 

criminal statute. 

I think FHA—and I was pleased by the comments of the Secretary as far as being very proactive as far as ensuring the policing 

of lenders and brokers. I have a host of ideas I’ve spoken to the 

Secretary about, and I think my comments mentioned that, such 

as—my best example of this, Senator, was a matter that came up 

in your very State, in Seattle, Washington. I couldn’t help but notice about a month ago there was an article in the paper about a 

scam that went on with regard to activity. It mentioned convicts, 

including embezzlers, robbers, rapists, being involved in mortgage 

fraud activity. 

It was the leadership of the Senate and I believe the State as 

well to try and police that and make sure it doesn’t happen again. 
44 

So I think we’re trying to, working close with the State and the 

Federal authorities and DOJ, to make sure we police these activities when we hear about it, and we get information from the Department. They refer cases to us on a regular basis. 

Senator MURRAY. Thank you very much. 

MAXIMUM LOAN LIMIT

Mr. Scott, in your testimony you talked about the raised loan 

limits and our support of that. As the law is currently written 

today, the maximum loan limit is supposed to be adjusted downward by over 100,000 on January 1, 2010. Maybe you and Ms. 

Vermillion both could comment on what you believe would happen 

to the market if those higher loan limits are allowed to adjust 

downward as is currently called for. 

Mr. SCOTT. Well, the higher loan limits provide a lower interest 

rate for borrowers in those price ranges. That increases the purchasing power. It allows them to move forward in their purchases. 

Especially in the condition where the months supply is so high, it 

helps get the markets moving in that price category. 

Otherwise they’re jumping maybe from a conforming loan up to 

a jumbo loan. The jumbo loan interest rates are higher than the 

Government-backed loans of FHA. So it is extremely important in 

the marketplace. 

Also, I talked about first-time buyers up 500,000 additional if we 

can get the money at the closing table. That would equate into a 

million sales overall because of the chain reaction effect of monetizing the $8,000 first-time home buyer tax credit at the closing 

table, and that combined—the higher loan limits are a piece of that 

chain reaction of sales. 

Senator MURRAY. Ms. Vermillion, can you comment on that? 

Ms. VERMILLION. I agree with that, and I think it’s really critical. 

We have the first-time home buyers out right now because of the 

combination of low interest rates, lower home prices, and the 

$8,000 tax credit. So as Mr. Scott has pointed out, that is the very 

first chain on our chain reaction, and I think the higher limits for 

FHA are critical to ensure good loans for upper income borrowers. 

Senator MURRAY. I expect that you don’t expect the current economic crisis to be gone by 2010. That would say we’re past this and 

we need to move on? Do you see that extending out into next year? 

Mr. SCOTT. Well, the economics will come forward as they may. 

But also, the higher loan limits create fairness across the Nation 

to have access for families to have affordable priced loans. So this— 

on both coasts and in several areas throughout the Nation, there 

are higher cost areas, and just making loans accessible. 

MORTGAGE RESCUE SCAMS

Senator MURRAY. Are either one of you concerned about an influx 

of shady lenders and brokers into the FHA program now that the 

subprime market has disappeared? 

Ms. VERMILLION. I am very concerned about that. We’re seeing 

a lot of ‘‘mortgage rescue’’ scams. We’re seeing a lot of ‘‘loss mitigation’’ scams. And we are seeing increased fraud in the FHA arena, 

since that’s the primary lending mechanism now. We saw that in 

Texas back in the 1980s and we’re seeing it again. 
45 

Senator MURRAY. Okay, thank you very much. 

Senator BOND. Thank you, Madam Chair. 

A special thanks to our private sector witnesses from Washington 

traveling here. It really helps to hear your views of the challenges 

on the ground and providing adequate financing for homeowners. 

Ms. Vermillion, I appreciate your recognition of the point that I 

made with Secretary Donovan and he so strongly endorsed, that we 

don’t need any mechanisms that encourage foreclosure. It may not 

be fraudulent, but they are just in a position to be foreclosed if they 

don’t have enough money to put down a down payment. 

DEFAULT/BAILOUT

I turn to our good friend the Inspector General, Mr. Donohue. 

With this tremendous fivefold increase in business of the FHA, 

what’s your honest assessment that the explosion of FHA authorities and responsibilities might lead to a default or the requirement 

for a significant bailout from taxpayers, either through what I consider to be a back door way of marking it down as directed spending, taking it out of the budget, appropriating it, or having to recognize it elsewhere on the budget? 

What are the risks to taxpayers? 

Mr. DONOHUE. Well, Senator, based on my testimony you could 

see the impact it’s had on the FHA MMI fund. It’s going the wrong 

direction. I will state again, as I know you’ve been an avid supporter of the elimination of selling down. You know how strongly 

I felt about that. 

Senator BOND. We were together on that one. 

Mr. DONOHUE. And I’m so pleased to see that end, and so on. But 

I do think, as it goes—I think the FHA is trying to make some corrective actions. They’re working with us. Obviously, if in fact it 

goes down to the 2 percent margin, then of course they’re faced 

with the very thing that has been raised today, and that’s the fact 

of appropriated funds or an increase in premium. I think that’s the 

only two alternatives that would be placed to ensure the fact that 

the FHA stays solvent. 

Senator BOND. What do you think is the real—are we looking at 

the potential of a significant taxpayer bailout, given where we are 

now? Can you assess that? 

Mr. DONOHUE. Well, it’s hard to say, sir. I think that, based on 

the numbers we’re seeing, I think that it’s going to wrong direction 

by the sheer volume. I think it’s something I’d have to take a look 

at in more detail to comment to you about as far as to the volume. 

I think with the increased volume certainly is increased premiums. 

There are actuarial studies that would indicate that it has impacted on this past year. 

I see my job, sir, as to try and do everything I possibly can to 

work with FHA to insure in a proactive way that we prevent any 

bad activity from coming further into this program as a result of 

it. But as far as specifics, it’s just the pattern we’re seeing and the 

direction its going is not going in the direction which I would like 

to see and as you would not like to see. 

Senator BOND. I would be interested in any further thoughts that 

you have on needs for FHA staffing. We will be seeing that in the 

budget, and the IT system. 
46 

FHA APPRAISAL PROCESS

But there’s a particular area where I think we’ve seen some really questionable activities. That is in the appraisal process. A good 

appraisal is essential to make sure that we are not insuring something that isn’t worth it. The value of the property has to be accurate. There is always a risk of conflict of interest. I live in a small 

town. The appraisers are good friends with everybody else. 

There is also a danger that appraisers—and I believe that some 

of the 58 actions that have been brought by the U.S. Attorney for 

the Eastern District put appraisers in with the mortgage originators. 

What kind of steps, what additional steps, should FHA take to 

make sure that they are getting—that the appraisals are being 

made by competent people without conflict and on a professional, 

realistic evaluation of the property? 

Mr. DONOHUE. Senator, I think this is a concern that we’ve 

shared for some time. The large amount of increase in appraisal activity has drawn the application process. We have seen in our cases 

and across the country licenses expired. We have seen the absence 

of good review. As you all know, dating back to 1994 FHA had an 

appraisal fee panel that used to actually go back and approve FHA 

appraisals specifically and monitor that number. 

I talk to the appraisers as well and of course their challenge is 

that they’re asked to hit the mark, whether it’s going down or 

going up. I think that’s of great concern. I couldn’t help but notice 

that the New York Attorney General with FNMA had gone back 

and expressed a third party resolution to have some uninterested 

person hire the appraiser involved, and I think it’s an interesting 

notion. 

The former general counsel at HUD and I have spoken and he 

came out of the Mortgage Bankers Association. He expressed to me 

directly concerns in the ongoing process that appraisals are the 

thing that we have to look at so very, very carefully. 

Finally, sir, the VA itself, which doesn’t deal with the volume we 

deal with, has an appraisal fee program that’s still in place and 

they approve their appraisers on a regular basis. 

Senator BOND. Is that something that the FHA should consider? 

Mr. DONOHUE. I think they’d have to look at that, sir. They don’t 

certainly do the volume that FHA has done, but I certainly think 

it’s worth taking a look at. 

Senator BOND. Thank you very much for your suggestions. 

Thank you, Madam Chair. 

Senator MURRAY. Thank you. 

Mr. Scott and Ms. Vermillion—Ms. Vermillion, you live and work 

in Pierce County, that’s one of the hardest hit areas in our State. 

Mr. Scott, I know you’re familiar with that area as well. I wanted 

to ask you if there’s something particularly there that we should 

be focused on doing here at the Federal level to help that county. 

PIERCE COUNTY

Ms. VERMILLION. Pierce County has been the hardest hit compared to many places in Washington. I believe a great deal of that 

is due to the economic numbers. 
47 

The other thing I would like to see—and I don’t know if HUD 

has the ability to do this; I am assuming they do—is the tracking 

of foreclosures based on originators or based on sellers. I know we 

have the notice of deferment—I’m sorry. We debar people if they’ve 

been involved. But it was my experience previously that typically 

if someone is involved in fraud that they don’t typically complete 

one transaction; they typically do multiple transactions. 

The other thing that’s happened in Pierce County is partly just 

the economy. We did an FHA loan for a real estate agent, very successful, obviously a full documentation loan, tax returns, et cetera. 

That person’s income has sharply gone down, to the point where 

she is currently working additional part-time jobs. But she is at 

risk of losing her home. And that is not something that anybody 

could have anticipated in retrospect. 

Senator MURRAY. Mr. Scott, any comments on that? 

Mr. SCOTT. Yes. The Pierce County market changed the year before the Seattle market did, and so the cumulative effects of the 

years of the economic situation. But as I’ve pointed out earlier, the 

months supply in the first-time buyer category has already stabilized and we’re seeing renewed activity that will move up the 

price points. 

If we can monetize the $8,000 for an FHA loan at the closing 

table, that would make a huge impact. If FHA and the IRS could 

get together and figure that out, that would be just incredible for 

our Nation to move these programs forward. 

We are very excited about having David Stevens as nominee for 

the head of FHA. The National Realtor Association is very excited 

about that. 

Senator MURRAY. Okay, that’s good to know. Thank you very 

much for that. 

HECMS

Mr. Donohue, I wanted to ask you about HECMs. Senator Bond 

referred to them earlier. They’re relatively new, but it is a pretty 

rapidly growing business for FHA. Those reverse mortgage programs are obviously mostly senior citizens. Can you talk a little bit 

about any special concerns you might have about HECMs and their 

potential impact on solvency? 

Mr. DONOHUE. I certainly can, Senator. I’m sure you agree this 

is a very vulnerable population of people with regard to HECMs, 

from everything from the third party to family participation. We’re 

seeing—we have cases throughout the country that deal with some 

of these as well. The larger loan limits are certainly going to have 

a concern with regard to it as to making it attractive to go and pursue these matters. 

The other thing we’re interested about is the statutory counseling, to make sure they are going back and sitting down with 

these people and addressing these matters as a primary concern. 

We have said—I have met with Senator McCaskill and the Senate Committee on Aging. We have met with the AARP, the Mortgage Bankers Association. They’re all concerned about the effect of 

this program. I think we’d like to see as they go through the process, be it the counselor or the closing agent, to make sure when 
48 

they see something that’s not right to refer those matters to us and 

address those things rather quickly. 

It’s a consumer issue that I think, as I said, AARP and they are 

very much involved with. We’re trying to do as much outreach, too, 

also in letting the communities know how to be on guard with regard to the possibility of this activity. 

Senator MURRAY. Thank you. 

FHA IMPROVEMENTS

Senator Bond, thank you. I just have one final question to Mr. 

Scott and Ms. Vermillion. FHA’s not been known as the easiest bureaucracy to deal with. You’re on the ground out there. Can you 

tell me your experience? Is it improving, not improving? Does it 

need improvement? What are you seeing? 

Ms. VERMILLION. I’m an FHA fan. I’ve been working with them 

for a long time. So when you say it’s a bureaucracy, in our level 

we’re originating the loans, we’re funding the loans, we’re fine. 

In terms of going back to the appraisal issue, that has become 

a concern for a number of appraisers. VA has us use a panel. FHA 

used to do that and it became so unwieldy it was a problem. I think 

again if we can address that with monitoring quality that we will 

be there. But I’m a big fan of FHA loans. I would appreciate them 

having the additional technology and staff to do what they need to 

do to keep us going. 

Mr. SCOTT. We appreciate the FHA loans. It’s making a difference in the marketplace. Of course, the technology enhancements always make a difference. 

Senator MURRAY. You both talked about increased staffing, particularly because of the high use right now, too. So I appreciate 

that. 

Mr. SCOTT. Well, it’s not only on newly originated transactions, 

but it would also be refinance activity coming through on top of 

that, and they will need the staffing. 

ADDITIONAL COMMITTEE QUESTIONS

Senator MURRAY. Okay. At this time I will ask the subcommittee 

members to submit for the record, any additional questions they 

have for the witnesses. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED TO HON. SHAUN DONOVAN

QUESTIONS SUBMITTED BY SENATOR PATRICK J. LEAHY

Question. Secretary Donovan, I would like to explore how ongoing issues surrounding HUD and the housing markets are impacting rural areas. 

I understand that the Department is working with the Department of Energy on 

a memorandum of understanding regarding the utilization of weatherization funding from the stimulus. Additionally I understand that it is your intention to make 

assisted housing automatically eligible for weatherization funds. I believe that this 

type of coordination is important to ensure that stimulus funds are well utilized, 

but would like you to clarify what projects will be eligible to receive funding. 

As part of this MOU will all types of assisted housing such as section 8, those 

that have received funds through the HOME, CDBG, and Low Income Housing Tax 

Credit Programs be automatically eligible for weatherization funds? 
49 

Answer. HUD and DOE signed a Memorandum of Understanding on May 6, 2009 

aimed at streamlining the use of DOE weatherization funds in HUD-assisted, public 

housing, and Low Income Housing Tax Credit (LIHTC) multifamily properties. The 

MOU was aimed primarily at eliminating duplicative income verification requirements which have proved to be a barrier to the use of these funds in these properties in the past. DOE published a Proposed Rule implementing the terms of the 

MOU in June 2009, solicited public comments, and published a Final Rule on January 25, 2010. 

The following projects are generally covered by the new regulation: (1) Public 

housing; (2) Project-based section 8 assisted housing, section 202 Supportive Housing for the Elderly, section 811 Supportive Housing for Persons with Disabilities; 

(3) Certain Low Income Housing Tax Credit (LIHTC) properties. Under the terms 

of the MOU and the DOE rule, HUD will provide DOE with a list of properties in 

these categories where at least two-thirds of their residents meet the DOE income 

requirement (200 percent below poverty) for weatherization assistance. Properties 

identified by HUD that appear on this list will not be required to provide independent income verification, but will automatically meet the DOE income eligibility 

requirements. 

Due to lack of available data, several programs are not specifically covered by the 

rule: section 221(d)3 and d(5), and section 236 Below Market Interest Rate properties, as well as Indian housing, unless they fall into one of the three categories 

noted above. Section 8 tenant-based rental vouchers are also not addressed. However, any of these programs will continue to be eligible for weatherization assistance 

through normal DOE procedures. 

Please note that it is not entirely accurate to say that the MOU and subsequent 

DOE Rule would make assisted housing ‘‘automatically eligible for weatherization 

funds’’—it is still up to individual States and local weatherization providers to allocate these funds to individual properties, according to local preferences and priorities and as outlined in each State’s weatherization plan. Nothing in the Final Rule 

overrides these State prerogatives. Most States have focused their resources on single-family housing; the DOE regulation will streamline procedures for verifying 

rental incomes in those States and/or for those local weatherization providers who 

wish to allocate funds for multifamily weatherization assistance. 

Question. The Neighborhood Stabilization Program has helped many communities 

around the country address their redevelopment needs. However for many rural 

States, conditions other than foreclosures have led to distressed housing markets. 

I believe that this program should be more flexible in order to support addressing 

the diverse issues facing in our housing markets. 

Would the Department be open to modifying or waiving the established targeting 

areas for States receiving the minimum allocation under this program? Further, 

would the Department support counting the redevelopment of demolished, vacant or 

blighted properties toward the requirement that 25 percent of the NSP units serve 

very low income families? And, for State’s like Vermont that have not received adequate counseling assistance due to relatively low foreclosure rates, but still facing 

the skyrocketing foreclosure crisis, will the Department allow at least 10 percent of 

a State’s allocation of NSP funds to be used for foreclosure counseling and prevention activities? 

Answer. With regard to expanding target areas for States with minimum Neighborhood Stabilization Program (NSP) allocations, a provision in Public Law 111–22 

authorized HUD to permit qualifying States to expand their target areas and is in 

the process of issuing guidance to implement this provision. With regard to properties eligible to meet the requirement that 25 percent of NSP funds be expended 

to provide housing to households at or below 50 percent of area median income, 

HUD is constrained by the NSP authorizing language in the Housing and Economic 

Recovery Act of 2008 (HERA) which specifically states that only abandoned or foreclosed properties can qualify as meeting this low income benefit requirement. Finally, HERA defines the eligible uses of NSP funds and foreclosure counseling is included as not an eligible use. HUD has, however, permitted the use of NSP funds 

to pay for housing counseling when it is associated with the purchase of a property 

assisted with NSP funds. 

Question. Due to the frozen credit markets, Housing Finance Agencies (HFAs) 

cannot find investors for their mortgage revenue bonds or liquidity providers to back 

their bonds. As a result, more than 30 housing finance agencies across the country 

are being forced to suspend or limit their mortgage lending programs. Among the 

housing recovery plans announced by the administration at the beginning of March, 

support for HFAs was among these plans. 

What specific steps are the Department and administration going to take to improve liquidity for State HFAs and when will this action be taken? 
50 

Answer. On October 19, the administration announced a new initiative to provide 

critically needed assistance to State and local HFAs to help support low mortgage 

rates and expand resources for low and middle income borrowers to purchase or rent 

homes that are affordable over the long term. Following up on the intent to support 

HFAs first outlined in February under the Homeowner Affordability and Stability 

Plan, the administration’s initiative has two parts: a New Issue Bond Program 

(NIBP) to support new lending by HFAs and a Temporary Credit and Liquidity Program (TCLP) to improve the access of HFAs to liquidity for outstanding HFA bonds. 

THE NEW ISSUE BOND PROGRAM (NIBP)

The New Issue Bond Program (NIBP) provided temporary financing for HFAs to 

issue new housing bonds. Treasury purchased securities of Fannie Mae and Freddie 

Mac backed by these new housing bonds. With these investments, the HFAs have 

issued an amount of new housing bonds equal to what they are authorized to issue 

with the allocations provided them by Congress but have been unable to issue given 

the current challenges in housing and related markets. The program may support 

up to several hundred thousand new mortgages to first time home buyers this coming year, as well as refinancing opportunities to put at-risk, but responsible and performing, borrowers into more sustainable mortgages. The NIBP will also support development of tens of thousands of new rental housing units for working families. 

THE TEMPORARY CREDIT AND LIQUIDITY PROGRAM (TCLP)

Fannie Mae and Freddie Mac are administering a Temporary Credit and Liquidity Program (TCLP) for HFAs to help relieve current financial strains and enable 

them to continue to serve their important role in providing housing resources to 

working families. Treasury has agreed to purchase a participation interest in the 

Temporary Credit and Liquidity Facilities (TCLFs) provided to HFAs under the program, providing a credit and liquidity backstop. The TCLP provides HFAs with temporary credit and liquidity facilities to help the HFAs maintain their financial 

health and preserve the viability of the HFA infrastructure so that HFAs can continue their Congressionally supported role in helping provide affordable mortgage 

credit to low and moderate income Americans, as well as continue their other important activities in communities. 

On January 13, the administration announced the completion of all transactions 

under the State and local Housing Finance Agency (HFA) Initiative, With these 

transactions, the Obama administration helps support low mortgage rates and expands resources for low and middle income borrowers to purchase or rent homes 

that are affordable over the long term. 

Over 90 State and local HFAs representing 49 States participated in the NIBP 

for an aggregate total new issuance of $15.3 billion. Twelve HFAs participated in 

the TCLP for an aggregate total usage of $8.2 billion. The Initiative is expected to 

come at no cost to the taxpayers and to the Government Sponsored Enterprises. 

Question. With more and more Americans facing eviction and the threat of homelessness, the already-long waiting lists for section 8 vouchers continues to swell. In 

Vermont, the Vermont State Housing Authority has intermittently had to close the 

wait list and it has been thousands of people long at different times—a wait of several years for assistance finding a safe and affordable place to live. 

What does the Department plan to do about the increasing demand for rental assistance? Will you support the creation of additional vouchers? 

Answer. The housing choice voucher program is HUD’s largest affordable housing 

program, which currently assists over 2 million families. Under the fiscal year 2010 

Appropriations Act, HUD received $75 million in new vouchers for the Veterans Affairs Supportive Housing (VASH) program, which targets voucher rental assistance 

and supportive services to homeless veterans. HUD also received $15 million in new 

vouchers for the Family Unification Program (FUP), which provides rental assistance to families for whom the lack of adequate housing is a primary factor in the 

separation of a child from their family. In addition, HUD received $150 million in 

new voucher assistance for tenant protection activities such as public housing demolition and disposition. 

HUD recognizes that long waiting lists are common in many areas of the country. 

While vouchers are a vital component in addressing that need, additional funding 

requests cannot adversely impact funding needs for other critical HUD programs 

and initiatives. HUD is seeking to expand affordable housing opportunities for families not only through the use of tenant-based rental assistance but also by increasing affordable housing production and preserving existing housing stock. 
51 

QUESTION SUBMITTED BY SENATOR FRANK R. LAUTENBERG

Question. In the wake of the credit crisis, the New Jersey Housing and Mortgage 

Finance Agency—along with housing and finance agencies around the country—is 

having trouble finding agencies that will insure loans for homes designated for lowincome homeowners. I understand that, under current policy, the Federal Housing 

Administration (FHA) does not insure mortgage loans made to purchasers of income-restricted housing. New Jersey currently has a surplus of vacant affordable 

housing because prospective home buyers cannot find an agency to insure their loan. 

Will the FHA consider changing its policy so it can start insuring loans on properties that are restricted for low- and moderate-income homeowners? 

Answer. FHA does not permit any form of ‘‘resale’’ restriction as a general practice, any type of requirement that would prevent a home from being sold on the 

open market to any buyer. However, when resale restrictions are established as part 

of a specialized affordable homeownership program, the FHA does have regulatory 

authority to permit these types of arrangements. We would be happy to work with 

the New Jersey Housing and Mortgage Finance Agency to ensure that FHA financing is available to home buyers purchasing homes that are part of the agency’s program. 

QUESTION SUBMITTED BY SENATOR SAM BROWNBACK

Question. Secretary Donovan, most economists agree that the housing market continues to be the primary concern for the economy. Part of solving that is decreasing 

the amount of housing stock available. To assist in that, Congress included a firsttime home buyer tax credit in legislation last year and then increased and extended 

the tax credit in this year’s stimulus legislation. Unfortunately, the tax credit can 

only be effective in helping individuals get into homes if it can be utilized up-front. 

I understand there is confusion in the marketplace as to whether that tax credit 

can be monetized and used at closing for downpayment and closing costs. In a response to a question from my colleague, Senator Corker, I’m told that you stated 

that the Federal Housing Administration (FHA) has the ‘‘discretion’’ to allow for the 

tax credit to be monetized (under certain specific provisions of FHA’s underwriting 

guidelines). However, I also understand that some lenders are having trouble receiving clear guidance from HUD as to whether the tax credit can be used as collateral 

to obtain a loan for down payment and closing costs at closing. 

Can you provide clarity and certainty as to whether this can be allowed? 

Answer. FHA will not permit the home buyer tax credit to be monetized and used 

to meet the borrower’s downpayment, which is also referred to as FHA’s statutory 

3.5 percent minimum cash investment requirement. However, an advance on the 

credit (or monetization) may be used to help cover the borrower’s closing costs. 

QUESTIONS SUBMITTED BY SENATOR GEORGE V. VOINOVICH

Question. At HUD and the FHA, do you have the human capital needed to responsibly approve new lenders doing business with the FHA? 

Answer. Yes. FHA’s monthly average number of entities requesting approval as 

an FHA lender has decreased from 396 in fiscal year 2008, to 215 in fiscal year 

2009, to 154 for fiscal year 2010 to date. In addition, turnaround time for applications that meet all of FHA requirements during the first review is within the 30- 

day standard set by FHA’s Lender Approval Division. FHA is working to obtain the 

necessary system and contracting dollars needed to comply with the additional eligibility standards for approval as an FHA lender in the ‘‘Helping Families Save Their 

Homes Act of 2009’’ (Public Law 111–22). 

Question. Do you have the human capital to investigate the potential abuse by 

lenders misleading homeowners? 

Answer. This question is very general and thus it is difficult to provide a comprehensive response. FHA and HUD have a myriad of responsibilities and consumer 

protections built into its various programs. For instance, Housing’s Office of Regulatory Affairs and Manufactured Housing is equipped to enforce violations under the 

Real Estate Settlement Procedures Act (RESPA). HUD’s Office of Fair Housing and 

Equal Opportunity (FHEO) is equipped to investigate violations of Fair Housing 

laws. Within FHA, approved lenders serve as the financial intermediary between 

FHA and the homeowner. Consequently, FHA does not receive a great deal of direct 

consumer complaints regarding potential abuses by lenders. Nonetheless, FHA does 

pay particular attention to any complaint regarding abuses within its loan programs. FHA uses a rigorous nationwide Quality Assurance program to monitor lend-
52 

er performance and compliance with its program rules and regulations. As an element of its risk-based lender targeting, FHA incorporates complaints received on 

abusive or misleading lending practices. Any instances of consumer abuse discovered during FHA lender reviews are addressed via administrative action through 

FHA’s Mortgagee Review Board. All instances of potential fraud and/or criminal activity are referred to HUD’s Office of Inspector General for investigation. 

Question. What training is provided for new FHA lenders regarding FHA loan 

guidelines? Who ensures that FHA loan guidelines are being carried out, such as 

agency rules requiring borrowers to document their income, down payment requirement, and a time commitment to living in the home? 

Answer. FHA is constantly monitoring lender performance and loan level compliance from the moment a lender is approved to originate and/or service FHA loans, 

and from the instant a loan is originated. Lender applications for FHA approval undergo an evaluation of: (1) the company’s financial capacity/resources; (2) its possession of appropriate State licensing; (3) the eligibility of the company and its principals, owners and officers to participate in Government programs; and (4) the company’s quality control and compliance plans and procedures. Once approved, lenders 

recertify annually to ensure continued adherence to FHA requirements. Moreover, 

if a lender wishes to gain Direct Endorsement approval, it must undergo a ‘‘Test 

Case’’ evaluation, which helps FHA assess the lender’s knowledge of and adherence 

to FHA underwriting guidelines. 

After ensuring that a lender meets all approval requirements, FHA switches the 

focus of its monitoring activities to the loans underwritten by a lender. All loans 

are required to pass certain checks prior to insurance endorsement, including but 

not limited to, verifications of borrower identity, confirmation that borrowers do not 

possess outstanding obligations to the Government, and certification that borrowers 

have not participated in property flipping activities. Following endorsement of a 

loan, FHA staff conducts Post Endorsement Technical Reviews (PETRs), emphasizing compliance with FHA requirements to ensure that loans do not pose a risk 

to the FHA insurance fund. 

FHA’s Quality Assurance Division (QAD) also administers the Credit Watch Termination Initiative, which identifies underwriting lenders and originators whose default and claim rates are deemed excessive relative to other lenders in the same 

HUD Field Office Jurisdiction. Additionally, Headquarters QAD is responsible for 

the Neighborhood Watch Early Warning System, which is used to monitor lender 

and servicer performance by FHA staff, lenders, and other stakeholders. Utilizing 

Neighborhood Watch to assess risk indicators and default rates, FHA staff target 

lenders for on-site review by QAD Divisions that are based in field offices throughout the country. 

QAD offices located in the field conduct HUD Lender Monitoring Reviews that include on-site loan level review of lender files, and a review of lenders’ compliance 

with FHA program requirements. FHA’s review of loans continues throughout the 

life of the loan. 

FHA’s National Servicing Center conducts an analysis of lenders’ participation in 

loss mitigation, which identifies those lenders in need of additional training from 

the NSC, as well as those that should be considered for a lender monitoring review 

or possible investigation. 

During the course of quality assurance reviews, HUD staff identify potential evidence of fraud and refer those findings to the HUD OIG. Additionally, evidence of 

program violations is referred to the Enforcement Center and/or the Mortgagee Review Board for possible administrative action. 

The Mortgagee Review Board may take the following administrative actions 

against mortgagees and lenders: withdrawal, suspension, probation, letter of reprimand, and cease and desist. The Board also has the power to impose civil money 

penalties as well as enter into settlement agreements. It is only by settlement 

agreement that the Board can obtain an indemnification agreement. The Board does 

not have statutory authority to require indemnification. 

As stated above, the Board can penalize FHA lenders and mortgagees for material 

violations of HUD requirements and may also enter into settlement agreements. 

Question. Why is the participation rate for the Home for Homeowners program 

so low when foreclosure rates continue to increase? What can be done to improve 

the Hope for Homeowners program to increase participation? 

Answer. HOPE for Homeowners (H4H) was initially authorized under the Housing and Economic Recovery Act of 2008 to provide a mechanism to help distressed 

homeowners refinance into FHA insured loans. Unfortunately, due to several obstacles to participation, including steep borrower fees and costs, complex program requirements, and lack of operational flexibility in program design, the original program only assisted a small number of homeowners. 
53 

The administration has taken a number of steps to improve the uptake for the 

program. On April 28, 2009, the administration announced steps to incorporate H4H 

into the Making Home Affordable program. In addition, on May 20, 2009, the President signed the ‘‘Helping Families Save Their Homes Act of 2009’’ which provided 

improved program features. The legislation eases eligibility requirements and 

streamlined the application process for the HOPE for Homeowners program. 

Guidance for the improved H4H program was issued in October and went into effect on January 1. However, there are some continuing challenges to maximizing 

program uptake. Because of legislative language mandating certain underwriting 

features for the program, servicers must modify their underwriting systems. In addition, the underwriting features also raise questions about the pricing of H4H MBS 

in market place. The administration is pursuing regulatory and legislative changes 

to increase the number of at-risk borrowers who can benefit from the program. 

Question. How does the Obama administration’s foreclosure plan—‘‘Making Home 

Affordable’’ coordinate with Home for Homeowners to help families refinance into 

more affordable loans? 

Answer. As mentioned above, the H4H program has been integrated into the administration’s comprehensive approach to stabilizing the housing markets—the 

Making Home Affordable program. When a borrower approaches a participating 

MHA servicers for assistance, the servicer is required to offer the option for a H4H 

refinancing in tandem with the MHA trial modification option. To ensure proper 

alignment of incentives, servicers and lenders will receive pay-for-success payments 

for H4H refinancing similar to those offered for Home Affordable Modifications. The 

Home Affordable Modification program is intended to bring stability to the housing 

market and help American families reduce their monthly mortgage payments. The 

revised H4H program is intended to help homeowners whose loans are not owned 

or securitized by Fannie Mae or Freddie Mac, who are behind on their payments, 

who owe far more than they are worth, and who may find that modifying the terms 

of their loans is not a workable solution. The program would assist homeowners by 

taking into consideration their ability to pay and making their mortgage sustainable 

over the long haul. 

Question. In my hometown of Cleveland, the foreclosure crisis has ripped through 

like a tornado. I have supported the Neighborhood Stabilization Program (NSP) created last summer to provide local communities resources to address vacant, abandoned, and foreclosed properties. Recently, it has been brought to my attention that 

HUD is selling condemned HUD-owned properties to the city of Cleveland for the 

city to use its limited NSP resources to demolish the home. Can you please explain 

to me why HUD cannot use its own resources to demolish the homes they should 

have taken care of in the first place? 

Answer. On average, the Department annually acquires approximately 50,000 single family properties from HUD-approved lenders. To ensure that such properties 

are properly secured, maintained, and marketed for sale, HUD uses Management 

and Marketing (M&M) Contractors. These contractors are required to appraise 

HUD-owned properties using FHA Roster Appraisers, establish the list price for 

such properties, and market and sell properties for the maximum price the market 

will bear. The Department uses this disposition strategy as it is necessary to replenish the Mutual Mortgage Insurance Fund and is the most effective way for FHA to 

generate proceeds to provide home buyers an affordable loan financing alternative 

to conventional and subprime loans. 

Thus, HUD does not require its contractors to simply demolish its properties 

based on their appraised value. Instead, the conditions of the real estate markets 

are also factored in the contractors’ determination of the ultimate disposition or sale 

of a property. In markets such as Cleveland, for example, ‘‘hard to sell’’ properties 

are offered to local governments at deep discounts to further the Department’s affordable housing and neighborhood stabilization objectives. In addition, to the extent 

that the Department is aware of a HUD-owned property being condemned or due 

to receive a Notice of Condemnation, HUD’s contractors have been directed to disclose this information to all potential purchasers of HUD homes. 

Lastly, the Department, via its Neighborhood Stabilization Program (NSP), has 

awarded the city of Cleveland more than $16 million to address its high rate of foreclosed, abandoned properties, which contribute to blight within many of Cleveland’s 

neighborhoods. Under the NSP program, local governments may acquire, demolish 

and rebuild, or rehabilitate foreclosed properties using NSP Federal grant funds. 

Additionally, to assist local governments in combating blight and in maximizing 

their use of the NSP grant funds, the Department is offering HUD-owned foreclosed 

properties valued at $20,000 or less (i.e., those considered to be ‘‘demolition properties’’) for $100. Specifically, 211 HUD-owned properties have been held off the 
54 

market by the Department, pending a direct sale to the city of Cleveland. Many of 

these 211 homes are valued at $20,000 or less, with a collective value of $2,105,200. 

Question. Secretary Donovan, in a previous meeting I gave you a list of recommended modifications to the Neighborhood Stabilization Program supported by 

the ‘‘National Foreclosure Prevention and Neighborhood Stabilization Task Force.’’ 

What is the status of the proposed regulatory modifications for NSP? 

Answer. The Department implemented several regulatory changes for NSP in a 

notice issue in June 2009. These changes reduced the required purchase discount 

for NSP properties to 1 percent and eliminated the overall portfolio discount requirement. HUD also reduced appraisal requirements associated with properties 

having value below $25,000. The notice also implemented several statutory amendments made to NSP by the American Recovery and Reinvestment Act of 2009, most 

notably the repeal of NSP revenue provision. This enabled HUD to implement program income provisions for NSP that parallel the program income requirements of 

the Community Development Block Grant program. The Department is committed 

to working closely with its NSP grantees to address and resolve programmatic 

issues that arise in the implementation of the program. 

Senator MURRAY. Well, I’d like to thank all of our witnesses 

today, especially for keeping your testimony tight, as we are in 

budget mode here and have a number of amendments that we’ll 

start voting on shortly. But thank you again to both of our Washington State folks for coming out here. To all the FHA and to Mr. 

Donohue, we appreciate your testimony. 

CONCLUSION OF HEARING

At this time the subcommittee will be recessed subject to the call 

of the Chair. 

[Whereupon, at 11:25 a.m., Thursday, April 2, the hearing was 

concluded, and the subcommittee was recessed, to reconvene subject to the call of the Chair.] 

Æ