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FY09 FHA ACTUARIAL REPORT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 2, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–91 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

December 2, 2009 ............................................................................................. 1 

Appendix: 

December 2, 2009 ............................................................................................. 43 

WITNESSES 

WEDNESDAY, DECEMBER 2, 2009 

Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, National 

Council of La Raza (NCLR) ................................................................................. 32 

Donovan, Hon. Shaun, Secretary, U.S. Department of Housing and Urban 

Development, accompanied by Hon. David Stevens, Assistant Secretary for 

Housing/FHA Commissioner ............................................................................... 4 

Golder, Vicki Cox, President, National Association of Realtors .......................... 34 

Schnare, Ann B., Partner, Empiris LLC ................................................................ 30 

Story, Robert E., Jr., CMB, Chairman, Mortgage Bankers Association (MBA) . 36 

APPENDIX 

Prepared statements: 

Marchant, Hon. Kenny ..................................................................................... 44 

Bowdler, Janis .................................................................................................. 45 

Donovan, Hon. Shaun ...................................................................................... 51 

Golder, Vicki Cox .............................................................................................. 64 

Schnare, Ann B. ................................................................................................ 76 

Story, Robert E., Jr. ......................................................................................... 82 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Article from Amherst Securities Group LP entitled, ‘‘Negative Equity 

Trumps Unemployment in Predicting Defaults,’’ dated November 23, 

2009 ................................................................................................................ 94 

Editorial from The Wall Street Journal by Robert Pozen entitled, ‘‘Homebuyer Tax Credits Threaten the FHA,’’ dated November 24, 2009 .......... 103 

(1) 

FY09 FHA ACTUARIAL REPORT 

Wednesday, December 2, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 1 p.m., in room 2128, 

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

the committee] presiding. 

Members present: Representatives Frank, Waters, Watt, Sherman, Moore of Kansas, McCarthy of New York, Lynch, Green, 

Adler, Himes, Peters; Bachus, Miller of California, Capito, Hensarling, Garrett, Neugebauer, Posey, and Jenkins. 

The CHAIRMAN. The hearing will come to order. 

Today’s hearing has been called to look into the status of the 

FHA. We are pleased to have the Secretary of HUD, Secretary 

Donovan, and we appreciate his accommodating us. We have 

changed the schedule a couple of times, and I thank him for doing 

that. And then we had some votes. But we will, I think, be able 

to get through the votes and to question the Secretary so he will 

be able to leave on time. And he is accompanied by Commissioner 

Stevens of the FHA. 

Because we are delayed, I am not going to take a lot of time in 

my opening statement, just to say that I think there is a common 

interest in having an FHA that is financially sound and socially 

useful. And this is a collaborative effort to improve it. 

This committee, during this period between the election and the 

assumption of office of the new Administration, had a hearing with 

FHA officials, and out of that, in fact, came some legislation that 

we adopted to increase the ability of the FHA to deal with problems. 

This committee has adopted legislation as well that banned seller-financed downpayments. Some members thought it went too far, 

but at the very least, it gave them that tool. We also gave them 

debarment authority, which they didn’t previously have. 

Obviously, no one can expect, in an agency dealing with housing, 

to be totally free of problems in this area of housing, given where 

we are today. And we are talking about a new Administration, and 

we are talking about some problems which they inherited. 

And the question we have now is: What can we do going forward 

to fully strengthen the hands of the Commission or the Secretary 

so that they can, as I said, have this agency perform its very important social and economic mission in a fiscally responsible way. 

2 

And this being a hearing with the Secretary, we have two 5- 

minute statements and two 3-minute statements. I now recognize 

the gentleman from Alabama for his statement. 

Mr. BACHUS. Thank you, Mr. Chairman, for granting the request 

that Housing Subcommittee Ranking Member Capito and I made 

last month to hold a hearing on the FHA’s recently released actuarial report. 

I would also like to welcome Secretary Donovan. I had the opportunity to observe Secretary Donovan on a trip to Alabama, and I 

was most impressed, and I believe that you are doing a good job 

at the FHA. 

In the interest of time, I am just going to read my statement. 

The deteriorating financial position of the FHA’s Capital Reserve 

Fund has raised concerns that, like Fannie Mae and Freddie Mac, 

the FHA may soon require its own taxpayer bailout. 

Along with Oversight Committee Ranking Member Issa, I sent a 

letter to Secretary Donovan on November 2nd requesting detailed 

information on the FHA’s business practices, including how the 

agency is working to prevent a taxpayer bailout. And again, I 

would like to thank the Secretary for his cooperation in gathering 

that information. 

The findings of the actuarial report released on November 6th reveal that FHA’s Capital Reserve ratio had dropped below the congressionally-mandated threshold of 2 percent to a less than expected .053 percent. The independent actuarial review also indicated that the economic value of the Mutual Mortgage Insurance 

Fund declined over 75 percent from last year to $2.73 billion. If 

home prices do not recover, the economic value of the fund could 

drop below zero, which could in turn prompt HUD to request an 

appropriation from Congress. 

Mr. Chairman, I am encouraged by the announcements that Secretary Donovan and Commissioner Stevens—and I am glad that 

you have joined us to answer questions—have made regarding the 

implementation of reforms to shore-up the FHA’s reserves and reduce risk, including the hiring of a chief risk officer. But unanswered questions remain. 

Fraud continues to plague the FHA program, and I continue to 

be concerned that the agency lacks the technology and management capacity to perform proper oversight. What steps has the 

agency taken to improve technology and to adequately attract new 

staff to manage the growing FHA program? I know there are great 

challenges there. And what exactly is the agency doing to prevent 

unscrupulous lenders from dumping risky loans into the FHA portfolio? 

Secretary Donovan, I would also like to know what steps the 

FHA is taking to limit taxpayer exposure to a potential FHA bailout. As the private mortgage market falters, lenders flock to the 

FHA program, drawn by the 100 percent government guarantee. 

Some policy analysts have suggested FHA impose credit risk retention requirements for its originators. Others have suggested 

FHA provide less than 100 percent insurance coverage on loans. 

Some members of this committee have recommended that FHA increase premiums and the downpayment requirement. The gentleman from New Jersey, Mr. Garrett, has introduced legislation to 

3 

raise the minimum FHA downpayment from 3.5 to 5 percent. I 

would like to know if the FHA is considering implementing any of 

these measures. 

In closing, Mr. Chairman, the FHA’s insured mortgages provide 

millions of low- and moderate-income Americans, as well as firsttime home buyers, the opportunity to own a home. This committee 

must continue to provide effective oversight of FHA to ensure the 

program will remain viable for years to come. 

As the housing market recovers, Congress must also see to it 

that the agency does not displace the private mortgage market, and 

that FHA’s central mission is not undermined by the expansion to 

more high-cost areas. 

Secretary Donovan and Commissioner Stevens, I look forward to 

your testimony and answers to questions, and promise you my cooperation in working with you on these critically important issues. 

I know it is not something you caused, it is something you inherited, and I promise you my cooperation. I yield back the balance 

of my time. 

The CHAIRMAN. The gentlewoman from West Virginia for 3 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. Thank you for holding 

this important hearing this afternoon on the financial health of 

FHA. As has been said, the ranking member and I wrote a letter 

to the chairman about the importance of having this hearing, and 

I appreciate him accommodating our request. 

On November 6, 2009, we received the annual independent actuarial review of the FHA’s Mutual Mortgage Insurance Fund. We 

had been warned by the Commissioner that it was going to fall 

below the congressionally-mandated ratio of 2 percent. The report 

says that it has fallen well below that level, and it now stands at 

.53 percent. 

As we are all aware, FHA has reemerged as a major market participant, insuring almost 30 percent of home purchases and 20 percent of refinances. FHA has a critical role to play in our housing 

market, and if it is going to maintain this level of participation, we 

must work together to ensure that the program remains self-sustaining and returns to a solid financial footing. 

I am encouraged by many of the steps that Secretary Donovan 

and Commissioner Stevens have taken so far to shore-up the FHA. 

But there is more to be done. I think we could agree on that. I look 

forward to a vibrant discussion on whether or not FHA has the resources to upgrade technology, and also compete for experienced 

personnel to streamline their operations and improve efficiencies. 

Secretary Donovan mentions in his testimony that FHA may be 

exploring raising premiums for new borrowers. In late 2007, FHA 

issued regulations to implement a risk-based pricing program, but 

Congress put a year-long moratorium on that, which essentially 

ran through October 31, 2009. 

One of my questions will be: Does HUD intend to implement a 

risk-based pricing program once the moratorium is expired, which 

it has? And if the need to raise premiums on all borrowers is clear, 

why should we not have FHA price their premiums based on risk? 

I would also like to hear more from the Secretary on stories of 

FHA borrowers who are not able to make that first payment. I unVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
4 

derstand that is becoming a bit of a problem. It would be helpful 

to know the statistics on first payment default rates, and I know 

that the Secretary is indicating that he will be seeking greater recourse with lenders, and I look forward to hearing more details on 

that. 

I want to welcome Secretary Donovan back to the committee 

today. The FHA program is an important component to the housing 

market. Congress and HUD need to do everything that is necessary 

to make sure this program is run in a manner that does not expose 

the taxpayer to yet another bailout. I look forward to hearing from 

you, and I want to thank, again, the chairman for having this hearing. Thank you. 

The CHAIRMAN. Mr. Secretary? 

STATEMENT OF THE HONORABLE SHAUN DONOVAN, SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, ACCOMPANIED BY THE HONORABLE DAVID 

STEVENS, ASSISTANT SECRETARY FOR HOUSING/FHA COMMISSIONER 

Secretary DONOVAN. Thank you, Chairman Frank, and Ranking 

Member Bachus, for this opportunity to testify on behalf of the Administration regarding the Federal Housing Administration and 

the steps we are taking to protect its loan portfolio as it helps to 

get the economy back on track at this historic moment. 

We want to ensure that we are able to continue to support the 

housing market in the short term and provide access to homeownership over the long term while minimizing the risk to the American taxpayer. Created by President Franklin Roosevelt at a time 

when 2 million construction workers were out of work and housing 

prices had collapsed, the FHA was designed to provide affordable 

homeownership options to underserved American families and keep 

our mortgage markets afloat during tough times. 

And by insuring almost 30 percent of purchases and 20 percent 

of refinances in the housing market, FHA is certainly doing so 

today, though I would caution that we are by no means out of the 

woods. As the National Association of Realtors reported last week, 

home sales have rebounded to levels not seen since February 2007. 

And the S&P Case-Shiller Home Price Indices find that home 

prices have now risen for 2 quarters in a row. 

While there is considerable uncertainty about what these numbers mean going forward, what is not in doubt is that the FHA has 

been central to much of this improvement. We know the critical 

role first-time home buyers are playing in the market. More than 

three-quarters of FHA’s purchase loan borrowers in 2009 are firsttime home buyers, and nearly half of first-time buyers in the housing market in the second quarter used FHA loans. 

Unfortunately, FHA has not been immune to the hard times for 

the housing sector. With the actuarial study I cited earlier, we recently reported to Congress that FHA’s secondary reserves have 

fallen below the required 2 percent level, to .53 percent of the total 

insurance in force. 

However, when combined with reserves held in the financing account, FHA holds more than 4.5 percent of total insurance in force 

in reserves today. Indeed, with $31 billion set aside specifically to 

5 

cover losses over the next 30 years, the actuary concluded that 

FHA’s reserves will remain positive under all but the most severe 

economic scenarios. 

Further, while its secondary reserve account has been significantly depleted, FHA is not the next subprime, as some have suggested. Subprime delinquencies are 240 percent higher than FHA’s, 

for a reason. FHA stuck to the basics during the housing boom, 30- 

year fixed-rate traditional loan products with standard underwriting requirements. Unlike some prime lenders, FHA requires 

that borrowers demonstrate they can pay their mortgage by 

verifying their income and employment. 

Still, we have learned from recent history that the market is 

fragile, and we have to plan for the unexpected. That uncertainty 

is complicated by an organization we inherited that, to be honest, 

was not properly managing or monitoring its risk. Credit and risk 

controls were antiquated, enforcement was weak, and our resources 

and IT systems were inadequate. 

Little of this may have been obvious when FHA’s market share 

was 3 percent as recently as 2006. But when our mortgage markets 

collapsed last fall, and home buyers increasingly turned to the FHA 

for help, the potential consequences of these lapses in risk management became clear. 

In 2008, Congress put an end to the practices that led to the 

most troubled loans in FHA’s portfolio, so-called seller-financed 

downpayment assistance loans. This year, we have taken several 

additional steps, many of which we announced on September 18th. 

We have steeply increased enforcement efforts, having suspended 

7 lenders and withdrawn FHA approval for 270 others, including 

Lend America just this week. 

We have strengthened credit and risk controls, toughening requirements on our streamlined refinance program, making several 

improvements to the appraisal process, and proposing a rule to increase net worth requirements for all FHA lenders. And we have 

hired a permanent chief risk officer to provide the most comprehensive and thorough risk assessment in the organization’s history, 

and delivered FHA’s first comprehensive technology transformation 

plan to Congress in September. 

As significant as these reforms are, Mr. Chairman, as Senator 

Bond recently wrote in the Washington Post, these management 

and resource challenges are longstanding challenges that should 

have been addressed a long time ago. That is why we are drafting 

several new policies in FHA to address the quality of the existing 

portfolio, improve the performance of future books, and return the 

capital reserve to above the legislated 2 percent level, while also 

ensuring that FHA continues to contribute to the Nation’s housing 

recovery. 

The actuary projects that even with growing volumes, more than 

71 percent of FHA’s losses over the next 5 years will come from 

loans already on our existing books. That is why an important step 

we can take to minimize losses to Capital Reserves in the near 

term is to increase enforcement and make lenders more accountable. 

As such, we will step up efforts to ensure lenders assume responsibility for any losses associated with loans not underwritten to 

6 

FHA standards. We will hold lenders accountable for their origination quality and compliance with FHA policies, increasing our review of mortgagee compliance with FHA program requirements. 

And we intend to expand enforcement of new loans as well. That 

includes requiring lenders to indemnify the FHA fund for their own 

failures to meet FHA requirements, and holding lenders accountable nationally for any improper activities, as we are presently limited to sanctioning individual branches. We will also develop a 

lender scorecard posted on our Web site that will summarize the 

performance of lenders who do business with FHA. 

In addition to stepping up enforcement and accountability, which 

will improve the performance of both the existing and future books 

of business, we are committed to making additional steps to increase the quality of our business going forward. 

First, an initial measure is to reduce the maximum permissible 

seller concession from its current 6 percent level to 3 percent, 

which is in line with industry norms. And we will continue to consider additional reductions. 

Second, to protect the fund from the riskiest loans, we will for 

the time being also raise the minimum FICO score for new FHA 

borrowers. We are currently analyzing what this floor should be, 

including the relationship between FICO scores and 

downpayments, to determine whether we should increase FICO 

minimums in combination with changes to other underwriting criteria for lower downpayment loans. 

Third, we have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table 

in an FHA-backed loan, to make sure that FHA borrowers have 

more skin in the game and a stronger equity position in their 

loans. 

Finally, we are examining our mortgage insurance premium 

structure to determine whether an increase is needed, and if so, 

whether it should be the up-front premium, the annual premium, 

or both. To protect against future uncertainty in market conditions, 

we are requesting authority from Congress to raise annual premiums, as this is one of the most effective means of raising capital 

for the fund with the least impact per borrower. 

Indeed, while most of these changes I have just described we can 

make on our own with no additional authority, and we expect to 

provide detailed and public guidance for these changes by the end 

of January, in some cases, we will need Congress’ help. 

In addition to asking Congress to increase the current cap on the 

annual mortgage insurance premium for new borrowers, we are 

asking for additional authority for our proposals to hold all FHA 

lenders responsible for their fraud or misrepresentations by indemnifying the FHA fund. 

We will also be asking Congress to expand FHA’s ability to hold 

lenders accountable nationally for their performance, as I mentioned earlier. Each will require statutory support, and of course 

we look forward to working with Congress closely on all these 

issues. 

Mr. Chairman, Ranking Member Bachus, shoring-up the FHA 

won’t solve all our housing challenges, which is one reason the Administration is working to produce a more balanced, comprehensive 

7 

national housing policy that supports homeownership and rental 

housing alike, providing people with the options they need to make 

good choices for their families. 

Further, as important as the FHA is at this moment, I want to 

emphasize that the elevated role it is playing is temporary, a 

bridge to economic recovery, helping to ensure that mortgage finance remains available until privilege capital returns. 

That means that while we must remain mindful that qualified, 

responsible families need the continued ability to purchase a home, 

the changes I have announced today and will detail in the coming 

weeks will be crafted to ensure FHA steps back, and will facilitate 

the return of the private sector as soon as possible. 

But the bottom line is this: While FHA must remain a key source 

of safe mortgage financing at a critical moment in our country’s 

history, we recognize the risks that we face and the challenges of 

this temporary role that we play in today’s market. And the bottom 

line is this: The loans FHA insures must be safe and self-sustaining for the taxpayer over the long term. With these reforms 

and others we will be considering, the Administration is committed 

to ensuring that they are today and into the future. 

Thank you very much. 

[The prepared statement of Secretary Donovan can be found on 

page 51 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary. We will obviously consider your request for the premium increase. I am reminded by 

staff that the Congress did give an increase in the up-front premium in the recent legislation. And the House had proposed a 

small increase—not as much as President Bush asked for, in the 

annual fee, and the Senate objected. So there was no increase in 

the annual fee. But we are certainly open to that. 

Let me just say, with regard to fees and risk-based, I agree that 

we should do that. But I have this one concern: I don’t want a situation in which a woman making $50,000 a year and working very 

hard and getting a loan and paying it off has to pay a higher premium at the end than somebody making 3 times that amount of 

money because she was in the risk-based category. 

That is, I want to do risk-based, but there has to be some way 

that those people who are in what is considered a risky category, 

who make their payments, get some compensation because otherwise, you have the situation in which we make people in lower-income brackets or lower-middle-income brackets the insurers of each 

other, while those of us who are wealthier don’t have to bear that. 

If there is going to be some cross-subsidy, I mean, a risk-based 

premium is a form of cross-subsidy. It is taking the overwhelming 

majority who pay off and making them put in a little extra to take 

care of those who don’t pay off. I am for that principle, but it can’t 

be done on an income basis. 

I had raised this issue with Mr. Stevens’ predecessor, Mr. Montgomery, and he said, well, they didn’t find a correlation between income level and risk level. If that is the case, I may feel better. 

But it does seem to me that there needs to be some care taken 

here to make sure we are all talking about wanting to expand 

homeownership, not to people who can’t afford it. We have made 

that mistake in the past. But working people at lower incomes who 

8 

are still eligible who conscientiously make their payments shouldn’t 

have to pay extra, and I would look to that. 

The other issue I want to address is the astonishing misinformation that appears to have taken over so many journalists about the 

higher-cost loans. It frankly began with an article in the New York 

Times, and the Washington Post picked it up. 

If you read the articles, they appear to believe that what we did 

was to set—the gentleman from California, Mr. Miller, is here—a 

national limit of $729,000 on loans. In fact, the operative limit on 

FHA loans in the country is not that dollar number but the median 

house price. The FHA lends according to the median house price. 

Now, house prices are the most geographically, not surprisingly, 

varying price in America. And we have agreed that you should not 

have the FHA paying for luxury housing, guaranteeing luxury 

housing. A limit was set of $417,000 a few years ago. 

That meant that there could be no luxury housing in Nebraska, 

as I look at the numbers, or in Alabama, or in much of Michigan. 

It meant there could be no luxury housing in northern California 

or in Massachusetts and in New York City. It also meant that 

there couldn’t be any middle-income housing in those latter categories. That is, when you say the median, but then you cut it off 

at $417,000, you effectively say that the program can’t work in certain States. 

Indeed, the Times article said, well, they used to not make any 

loans in California and now they are making them. Yes, that is 

what we wanted to do. We didn’t think it was fair for California 

to be frozen out of a program which is supported as much by California taxes as any other. So what we have said is, we will continue to say that the FHA should lend to the median and below. 

But if you set too unrealistically low a price, many areas of the 

country will not get the benefit of the FHA. 

Now, even with that, the average amount is still much lower than that. The journalists have been talking about $729,000. One 

article, again in the New York Times, said, well, everybody ought 

to be able to get this, somebody said, and the reporter said, everybody can. Yes, if she lives in San Francisco or in 50-some-odd other 

counties. But there is only a small number of counties in the country that have that. In 23 States, the increase made no impact at 

all. 

Finally, I would note that according to the auditor of the FHA 

and the CBO, going to the genuine median in those other parts of 

the country that are above $417,000 and still hit the median house 

price are not any more risky than other loans. The CBO gives you 

a zero negative score. There is no cost to the FHA from allowing 

the program to be operative in northern California or southern 

California or Massachusetts, as opposed to saying it can’t operate 

there at all. The auditor says that those things are pretty safe. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Secretary Donovan, I have read your written testimony, and I am 

very impressed with your game plan, the things that you are addressing. And I want to compliment you. Obviously, I think enforcement is essential. We pass all the regulations, but without enforcement, they mean little. 

9 

Holding lenders accountable is critical. And improving the quality and sustainability of new loans, you have outlined that, and increasing FHA capital. So I commend you and Commissioner Stevens. I have been impressed with your knowledge of the markets. 

You understand the markets. So I am optimistic that there are 

going to be changes made for the better. And there already have 

been, so I compliment you on that. 

One of the things you mentioned in your testimony was asking 

Congress to raise the cap on annual premiums is under consideration. What level do you think would be appropriate for an annual 

premium? Have you given that any consideration? 

HUD already has the authority to increase the up-front premium 

up to 3 percent. I would be interested to hear any testimony that 

either one of you would like—or any response that you would like 

to give, why you think the increase in the annual premium is necessary. 

Secretary DONOVAN. There are two things I would say. One is, 

as I mentioned in my testimony, we are still looking at precisely 

the balance of pricing that is necessary. And perhaps it goes without saying, but to be clear, the balance we are trying to strike is 

ensuring that the early signs of housing recovery that we have seen 

continue. 

And the concern would be that if we overprice, we have the potential to hurt ourselves as well as the broader economy in doing 

so, by making capital more expensive in a way that would hurt the 

market. So we are looking carefully at that balance. 

However, one of the things that has become clear, the annual 

premium is, as you say, at the statutory maximum at this moment. 

And our analysis shows that the annual premium can be a more 

effective way to increase the balance of the reserves within the 

fund over the long term with the least impact on the market. 

And that is why we think it is important, not that—I am not announcing today that we have made a decision to increase those annual premiums. But we would like—today we couldn’t if we wanted 

to because we don’t have that authority. So that is quite important. 

We have not made any determination about what increased level 

we would want Congress to raise it to. I think certainly providing 

as much flexibility as possible, but I would say we would like to 

work with you to determine what level you might be comfortable 

with above the current level of .55 percent that we do charge for 

most loans. 

Mr. BACHUS. Okay. And Commissioner Stevens, I don’t know if 

you have any other comments you would like to make? 

Mr. STEVENS. I would relate it back to the thoughts about riskbased pricing. If you think about a risk-based pricing grid, you can 

only do so much with up-front premium because that would hit its 

cap fairly early on. And when you have the annual capped at .55 

where it is today, a risk-based pricing program could actually worsen the capital for FHA over time trying to build up the capital reserves if you can’t address the annual. 

So that flexibility needs to absolutely be there to be able to trade 

those two off together to come up with a program that works best 

for the market. 

10 

Mr. BACHUS. Right. I understand we are caught in a situation 

where the markets are in distress. And that is a delicate balancing 

act. I do acknowledge that. 

I would like to yield the balance of my time to Ms. Capito. 

Mrs. CAPITO. Thank you. I would like to thank the ranking member. I will just jump right in with a couple of questions. 

Mr. Secretary, in my opening statement, I spoke about the riskbased pricing, that the moratorium was supposed to end on October 

31, 2009. And obviously, we are beyond that date. Are you implementing that, or what is your plan? Are you looking at that? What 

is HUD’s position at this point? 

Secretary DONOVAN. There are a couple of comments I would 

make about risk-based pricing. There is the concern that the chairman raised about it. There is also another concern that I would 

raise that I think is a very important one. We take very seriously 

this issue of our increased role in the market being a temporary 

one. And one of the concerns I have, is if we were to lower pricing 

for the least risky borrowers, that has the effect of potentially 

crowding out the return of the private market, or at least delaying 

it beyond what we might see otherwise. 

I think we have to think carefully about risk-based pricing both 

in terms of whether we are pricing risk correctly for the riskiest 

borrowers, but also whether we have the effect of stopping the private market from returning as quickly as possible. 

One of the things that we are examining is the potential for combining, for example, FICO scores, loan-to-values, and other underwriting criteria in a way that we would limit the entry of the 

riskiest borrowers into the fund without discouraging private capital; so rather than a form of risk-based pricing, looking at riskbased underwriting, if you will, and adjusting our standards, adjusting loan-to-value and other criteria. 

Because ultimately, what we find, and we would be happy to 

share more detailed data with you, is that there is no single characteristic—loan-to-value, FICO score—that is a good predictor of 

performance. It is the combination of those that really has the effect. 

The second thing I would say is that it is important to remember—something I said in my testimony which I think bears repeating: 71 percent of our projected losses in the actuarial study come 

from loans that are already on the books, and even though our loan 

volumes were very, very low over the last few years, what had been 

the most troubled loans. 

So in fact, I also think we have to be careful of, in some ways, 

overcharging. The actuarial study said our loans that we are making today are quite profitable under just about any potential scenario. I think we have to be careful about overpricing risk in a situation where what we really have is something that can be solved 

by greater enforcement and some of the other backward-looking 

steps that we are talking about. So that is a very important balance. 

In sum, I think what you will see is when we announce the final 

details of the changes I talked about today is that we will have 

some risk-based criteria that we apply, but it won’t clearly be the 

risk-based pricing. That is one option. But it is quite possible that 

11 

it might be focused on other ways of underwriting risk and varying 

our underwriting, depending on the risk criteria. 

Mr. MOORE OF KANSAS. [presiding] Thank you. The Chair recognizes himself for 5 minutes. 

Mr. Secretary, does FHA have the tools it needs to manage its 

growing portfolio? Your market share has gone from 3 to 30 percent, yet you essentially have the same amount of staff and the 

same computer systems that you have had. This is what we heard 

from HUD’s Inspector General in an Oversight and Investigations 

Subcommittee hearing that I chaired earlier this year. 

Is Congress doing enough to get you the resources you need right 

away? Would you like for FHA to have the ability to use some of 

the premiums it collects to upgrade staffing and technology, as is 

the practice at every private sector firm? 

Secretary DONOVAN. First of all, I want to thank Congress for a 

number of steps that you have taken this year that have been very, 

very helpful to us. We were provided in our last appropriations bill 

with funding to develop the very first comprehensive technology 

plan for FHA. We delivered that plan in September, and we are 

moving forward on implementing that plan. 

Based on our latest discussions about the 2010 appropriations 

with both the House and the Senate, we do believe that we will 

have adequate funding to get that plan under way in terms of technology. It also provides, along with appropriations from this year, 

the ability for increased staffing at FHA, although I think we do 

need to go farther on that front. 

I will turn to Commissioner Stevens for any more detail he may 

want to provide on the number of new heads we have brought on 

board and what the future plans are. But clearly, staffing is an 

issue that we continue to focus on. 

Mr. STEVENS. Thank you. We can talk about what we have 

brought on. We have certainly added to staff. Under our risk management area, not only have we brought on a chief risk officer, we 

brought in seven new individuals in our evaluations group, five of 

whom are Ph.D. economists to help us better evaluate the portfolio. 

I would refer back to the Secretary’s comments that we clearly 

need an increase in personnel. There is an allocation for that in the 

appropriation. And once that is passed, we will begin to be able to 

add new resources. 

I would just add the one point that many of the changes we are 

announcing here today really don’t require any additional staffing. 

They are purely logical moves to control risk that aren’t dependent 

upon new technologies to implement. 

And so to that extent, I think we can actually protect much of 

the risk coming into the portfolio and improve the returns without 

this immediate up-front increase in staffing. However, that is absolutely needed over time. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. Secretary, the previous leadership at HUD and FHA promulgated rules to ban seller-funded downpayment assistance, and Congress under HERA statutorily banned this practice. The actuarial 

report found these loans to be the leading cause of why FHA is on 

the brink of insolvency, and said that without them, FHA’s reserves would be above the statutory minimum of 2 percent. 

12 

What are your views on this seller-funded downpayment assistance practice, and would you support efforts to circumvent FHA’s 

minimum downpayment requirement? 

Secretary DONOVAN. As you rightly said, one of the things that 

the actuarial report made crystal clear is that— 

Mr. MOORE OF KANSAS. Thanks for saying that right. 

Secretary DONOVAN. Don’t ask me to say it again, though—is 

that without those loans, we would have been above the 2 percent 

congressionally-required minimum. They have had a significant 

drain on our portfolio, roughly a loss going forward beyond existing 

losses we have already taken of about $10 billion, just on that portfolio. So I do think Congress took the right step. 

We are very focused not only on ensuring that the 31⁄2 percent 

downpayment remains, but in fact, as I said today, finding ways to 

increase the cash up-front that needs to come in on FHA loans. 

And I would also point out that there are a number of ways to do 

that. 

Downpayment is one of them. We have an up-front premium; 

how that is treated is important. Seller concessions is another way 

that we can ensure that there is a minimum of cash up-front. So 

there is a range of steps that we can take. And we are looking at 

the broad group of those. 

But I also think it is important, as I stated just a moment ago, 

that we make sure we understand the combination of risk factors 

that are there. In fact, we have loans that have a 31⁄2 percent 

downpayment that perform extremely well where you have high 

FICO scores or other high-quality indicators in the underwriting. 

So I think we need to take a nuanced approach in terms of really 

isolating those loans that are the riskiest based on multiple factors, 

while at the same time ensuring that we continue to make homeownership available for those who can be successful homeowners. 

And I think that is exactly the approach that we are trying to take. 

Mr. MOORE OF KANSAS. Thank you, sir. My time is expired. And 

the Chair next recognizes the gentlelady from West Virginia. 

Mrs. CAPITO. Thank you. 

Mr. Secretary, let me ask you—well, let me just make a quick 

comment. You know, in light of the fact that the Commissioner, 

when we heard about the pre-report of the audit, said that he 

thought it was going to go below the 2 percent, and then I think 

the audit showed that it is significantly below the 2 percent, maybe 

more than what was originally anticipated, that I might make a 

suggestion. 

And I think our next panel might have made the suggestion in 

their comments as well, that we don’t wait another whole year before we do another audit, that we maybe do a flash audit or something in a 6-month period of time so we can see what direction we 

are going so that we don’t keep falling down a cliff here. 

So I offer that as a suggestion. I think it would be a smart thing 

to do. And if you have a comment on that, that would be fine. 

The other question I had was in your comment—and you were 

just alluding to this; you were talking about more skin in the game 

for the borrower, talking about maybe premiums or downpayment—I read a scenario in our briefing materials where some people who could possibly take the first-time home buyer credit could 

13 

borrow the money, get the money back off the credit, and then actually that $8,000 could actually cover what would have been their 

downpayment. And there they are back into basically not really, 

you know, feeling it maybe as much as a lot of other people who 

have a full—who don’t have access to that or try to make a downpayment. 

Is that the kind of thing you are talking about here, the skin in 

the game? And I am going to tie that in to one of the other questions I had in the beginning, which is: Has there been an increase 

in the number of people who are not making that first-time payment? I mentioned it. Is that a problem? How do you monitor that? 

And what are you doing with the lenders that go forward with 

those loans? 

Secretary DONOVAN. On this question, first of all, the audit, let 

me say right up-front—and we probably have a few bleary-eyed 

people sitting behind me, and Commissioner Stevens—rest assured 

that we have been in constant touch with the actuary, have been 

using those models, and we will be running scenarios. 

One of the reasons why it was so important—and Dave brought 

on a very, very high-quality, experienced person as our chief risk 

officer—we want to know almost daily what is happening with the 

portfolio. We haven’t had the tools to do that in the past, and we 

are now constantly re-looking at scenarios based on the latest economic data: where home prices are going, where sales volumes are 

going, and on a realtime basis updating our view of the fund. 

So I think even— 

Mrs. CAPITO. We would probably appreciate maybe a little bit of 

a midterm kind of— 

Secretary DONOVAN. Absolutely. In fact, we do now a 6-month reestimate under the fund. We would be happy to make that more 

publicly available. But we would also be very open to coming and 

sitting down more regularly with the committee, sharing information. 

Mrs. CAPITO. Okay. Thank you. 

Secretary DONOVAN. Rest assured, we will be looking at that 

data on a very, very frequent basis. 

Second of all, on this issue of the first-time buyer tax credit, I 

am glad you raised this because I think there is some confusion 

about this. We made a very clear policy which we felt was important, in fact, not just for FHA loans, but to set a standard in the 

market, is that the credit itself could not be used towards the 31⁄2

percent downpayment. It could be used for downpayment above 

and beyond it. It could be used for other costs, like closing or others. But we had a clear policy that it could not be used to pay for 

the 31⁄2 percent downpayment. 

In addition to that, there is the risk that you talk about where 

somebody might go and borrow that money, unbeknownst to FHA, 

and pretend that it was cash that they had in-house. One of the 

important things that Congress did in extending the credit was to 

institute a range of fraud protection measures, and we have also 

put into our system ways to flag the use of the credit so that we 

can go back and check and make sure that we do oversight to ensure that practice is in fact not happening. 

14 

So we have put in place a number of steps to do that. But I want 

to just clarify that we have a very clear policy that you cannot use 

the $8,000 credit, or now even the $6,500 credit, towards that 31⁄2

percent downpayment. 

Finally, just on the first-payment defaults, I think consistent 

with the broader improvement in the quality of our portfolio that 

we have seen over the last year, the statistics have declined substantially in terms of those first-payment defaults. They have been 

cut more than in half over the last roughly year-and-a-half, almost 

2 years. So we have seen significant improvement there. 

Mrs. CAPITO. Thank you. 

Mr. MOORE OF KANSAS. The Chair next recognizes the gentlewoman from New York, Ms. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you. And I appreciate, 

Secretary Donovan, what you have been doing. A number of things 

that you had talked about, and I just want to kind of go back on 

them. 

When I see the TV advertisements on these loans—no credit 

checks, nothing—and I know that you had already mentioned in 

your testimony and speaking today about how that you are cracking down on these predatory lenders, I think that it would be interesting—because, actually, people do watch these hearings—if you 

could go in a little bit deeper on how you are actually finding these 

predatory lenders from the false advertising, which I think they are 

doing an awful lot of on TV, how you are actually looking at the 

new standards that you have put in place to make sure that they 

are not in the FHA system. 

The second part is, which is a little off to the side but it is a 

great concern to me, with everything going on, do you see in the 

future that you are going to be able to actually do a little bit more 

improvements on the Section 8 housing? I can say for Long Island 

that we have almost—certainly we don’t have anywhere near the 

kind of housing that we need. 

On Monday, I visited with a constituent who is in a Section 8 

apartment, if you want to call it that. This is unfortunately someone who is very ill. It is someone who basically has some neurological muscular problems. And they keep putting him on the second and third floor walk-up, which means that to get him out to 

go to the doctors and everything else, it has really become difficult 

for these particular constituents and patients. In my former life, I 

was a nurse before I got here. 

We are looking at how we are going to have more Section 8 housing for those with disabilities, which I think is important. Thank 

you. 

Secretary DONOVAN. Thank you. To start with, on this question 

of fraud, I will turn it over to Commissioner Stevens to talk a little 

bit more in detail about what we are doing within FHA. But let me 

just mention that one of the most important things we can do, because many of these lenders are not FHA lenders or they have 

other types of loan products besides FHA, one of the things that 

we do is participate very closely in a fraud task force that has been 

led by Attorney General Holder. 

And what we have seen is Chairman Leibowitz at the Trade 

Commission has been very, very aggressive, as well as our own InVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
15 

spector General, as well as the Department of Justice, in stepping 

up enforcement efforts against those lenders. Oftentimes, we don’t 

need any violation within FHA to go after them for false advertising for a range of other problems that we see. 

We also have been coordinating very closely with the State attorneys general to crack down through their enforcement powers as 

well. I would be happy to get you some briefing material or more 

about what we are doing there. And if you have particular lenders 

that you are concerned about, we may have a multitude of options 

in terms of the ways that we go after them through that task force. 

Mr. STEVENS. Just to highlight the focus on this particular area, 

it has been paramount in our new Administration to focus on 

fraudulent lenders. I am looking here at a narrow report that we 

now review monthly on lender compliance. We scrutinize institution by institution based on a variety of performance characteristics. 

And we take action—in fact, the Secretary referred to seven institutions. We have already terminated their approvals this year. 

That doesn’t include a number of them which we just did yesterday, in our significantly stepped-up meeting schedule in the Mortgagee Review Board where we take action. 

I am also working very closely with the Inspector General at 

HUD to increase enforcement and investigations into institutions. 

And we actively encourage everybody in the industry to please send 

us examples of violations of marketing so we can go after institutions at an institutional level. I have two examples today alone 

where we took action against those institutions. 

So I think you are raising a most critical element. And this is 

where we can most effectively ensure that the participants in the 

FHA system follow the rules that are required to protect the taxpayer and protect the homeowner. 

Secretary DONOVAN. I would also just call attention to a point I 

made in my testimony, that there are authorities we don’t currently have that we would like to have, and I want to work with 

you on the committee to be able to expand our authority. 

One of those is that our authority currently is limited in terms 

of being able to suspend lenders effectively by branch, only in a 

limited area, not nationwide. One of the things that Dave is doing 

on a regular basis now is monitoring lenders and scrutinizing them 

more closely where they have performance claim and default performance that is well above the average, more than double what we 

see is the average. And yet we need expanded powers to be able 

to take more aggressive action against some of those lenders. And 

we look forward to working with you on that. 

Just finally, on the Section 8 question, having a balanced housing policy that includes both rental and homeownership is one of, 

I think, the most important lessons of the crisis that we have seen. 

It is one of the reasons why, in the President’s budget this year, 

we asked for a $1.8 billion increase for Section 8 voucher funding. 

But it is also why, particularly for people with disabilities, a Section 8 voucher may be the perfect solution for them. On the other 

hand, for many in the disabled community, housing in a Section 

811 unit, which is part of a program that is specifically targeted 

16 

for the disabled may be the solution, or supportive housing, which 

we have grown our support for also substantially. 

And I am very encouraged by the response that we have gotten 

to the budget in Congress. I look forward to having the 2010 budget completed as soon as possible to be able to use that funding 

going forward. 

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

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

Mr. Secretary, I want to congratulate you on reforms you have 

made to FHA. I think you are doing a really good job, and I am 

really glad to see them. 

In September, we passed a bill associated with elevatored multifamily buildings. Now, I don’t know what the state of the multifamily program is today, if it is in financial trouble or if it is doing 

well. But we are underserving the buildings that are higher-cost 

buildings in elevatored areas. 

Would you like to comment on that? 

Secretary DONOVAN. Sure. First of all, I would just generally 

say—and I don’t know if Dave has any further details he would 

want to provide—but we are effectively seeing a similar situation 

in the multifamily portfolio as we are seeing in the single family; 

in other words, given the retreat of private capital, the lack of private capital, given the undercapitalization of many financial institutions, we have seen a growing importance of FHA in that market. 

And as well, we are looking at a range of risk management and 

other strategies that we have already stepped-up, and additional 

steps that we are taking in the future. So it is analogous in many 

ways. 

I think on your particular point, similar to the way that, on the 

single-family side, a temporary increase in the loan limits has been 

important, similarly, on the multifamily side, we were already effectively shut out of markets in California and in other places. And 

with the recent retreat of private capital, it has become only more 

important, I think, that we do increase the loan limits. We are very 

supportive of that on the multifamily side. 

I do want to go back to a point that the chairman raised as well 

on the single-family side. It is amazing what can get reported, and 

the idea that just a few loans somehow we are shifting to going upmarket. Let me try and put some facts around what is happening 

there. 

This year, less than 2 percent of our loans have been over 

$417,000. However, in important markets like California, where 

there are high-cost needs there and where capital has retreated, we 

have done a significant amount of loans. But still, even in California, for example, less than 10 percent of all of our loans in the 

State are above $417,000. 

So it is very important to remember—let’s look at the facts here. 

There may be— 

Mr. MILLER OF CALIFORNIA. But in California, FHA and GSEs 

represent 92 percent of the loans. If it weren’t for you there, we 

would have no market at all. And I want to associate myself with 

the comments the chairman made on the high-cost areas. I think 

17 

it has done tremendous benefit to this country, and as I understand it, those loans are performing very well. 

The CHAIRMAN. Will the gentleman yield? 

Mr. MILLER OF CALIFORNIA. I would be happy to, Mr. Chairman. 

The CHAIRMAN. Apparently, if you read the press, it is astonishing to note that there are no middle-income people living in 

California. But the argument was that by raising the loan limits, 

we are lending in the luxury market. Previously, as some of the 

journalists have noted, there were no loans made in California. So 

California has apparently become the first middle-class-free State. 

Mr. MILLER OF CALIFORNIA. Well, reclaiming my time, you are 

doing a very good job representing people who never knew you 

were there in the past. 

You talked about the DPA program. And I totally agree with you. 

The previous Downpayment Assistance Program was awful. It 

didn’t work. There were too many bad players in the marketplace. 

And it is sad, because in 2003, one of the large DPA groups wrote 

HUD, asking them to deal with increased FICO scores, improved 

appraisals, improving the premiums required, and it went nowhere. They wrote again in 2007. 

We met in recent weeks to discuss that issue in Mr. Green’s office. And I really want to thank you for that. I think there is a 

place for the program if it meets your new standards. And the bill 

that Mr. Green and I were talking to you about, it does a lot of 

those things. It takes and increases FICO scores for individuals to 

meet the same standard other FHA borrowers would be. Improves 

appraisal standards. Increases mortgage premiums. 

You have to make sure that these are legitimate charities involved in DPA. You need to make sure that these are absolute gifts 

that can never be repaid. You have to deal with creditworthy home 

buyers. You can’t just give a payment to anybody who wants the 

money, and then you are required to go make them a loan to put 

the taxpayer at risk. We don’t want to do that, and we need to require mandatory counseling in these areas. 

But I think there is a way that we can say, the old program was 

awful. How do we look at FHA standards as they apply to everybody, and how do we apply those even a little more stringently to 

the DPA system we have? Do you have any comments on how that 

might work in the future? 

Secretary DONOVAN. Well, we look forward to discussing it further with you. But fundamentally, I think, the issues that we have 

seen are that where there is what I would call an interested party 

in the transaction, there is the potential for that kind of— 

Mr. MILLER OF CALIFORNIA. And we have to eliminate that. 

Secretary DONOVAN. Right. And— 

Mr. MILLER OF CALIFORNIA. I am with you 100 percent on that. 

Secretary DONOVAN. So we do allow, for example, families to help 

a buyer. I certainly, when I bought my first home, help from my 

family, and that is something that we see broadly. 

So I do think that there are ways that downpayment assistance, 

done in the right way, can be an effective tool. I think the issue 

has been many of the criteria, but most importantly, that there not 

be an interested party in the transaction there— 

Mr. MILLER OF CALIFORNIA. I am with you 100 percent. 

18 

Secretary DONOVAN. —that participates in that. That is where 

the— 

Mr. MILLER OF CALIFORNIA. Thank you. I look forward to working with you on that. Thank you, sir. 

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

Mr. SHERMAN. Thank you, Mr. Chairman. 

News reports have suggested that the higher loan limits in highcost areas have put a greater risk on the FHA fund. But as I believe the chairman has pointed out, on an actuarial basis, it has 

actually, as I understand it, added to your reserves. 

Mr. Secretary, can you comment on that? And is there a way to 

quantify the reserve increase that is provided by loans in high-cost 

areas up to $729,000? 

Secretary DONOVAN. What I would say is it is too early, given the 

relatively recent increase in the loan limits, to make any definitive 

conclusions about the performance of those loans. We just haven’t 

seen enough seasoning in that portfolio relative to more historical 

data. 

What I will say is that historically, there is some evidence that 

they do perform, as the chairman said, better than the smaller size 

loans. So I think it is certainly reasonable to expect that they 

would, but we don’t have definitive data at this point. 

But again, I would also emphasize, first of all, that this is a temporary measure, from our point of view. I think we all share an interest that as soon as possible, we step back. And again, only 2 percent of our loans so far this year have been over that $417,000 

limit. 

So it is very important in specific high-cost markets, and I have 

data on that. But frankly, it is simply not correct to say that it represents a wholesale shift from where FHA has been. 

Mr. SHERMAN. And so it probably has a positive effect, but that 

effect is very, very small. It is some slight positive or modest positive on 2 percent of your portfolio. 

Now, you talk about pulling back. I would point out that the people in my district who are buying a home and borrowing $500,000 

or $600,000 are no better off—in fact, they are getting a smaller 

home—than somebody in Columbus, Ohio, buying a home and borrowing $400,000. 

Now, the FHA comprises nearly 40 percent of the mortgage market today. Is this appropriate? And, put another way, what would 

happen to housing prices if the FHA wasn’t a major part of the 

mortgage market today? 

Secretary DONOVAN. I think it is fair to say that if FHA were not 

active today, that we would not have seen the early signs of recovery that we have. FHA, particularly if you think about our serving 

nearly half of all the first-time buyers, the fact that in 2008 half 

of African Americans who bought a home, about 45 percent of 

Latinos who bought a home, used an FHA loan, it has been absolutely critical, particularly to those buyers who have really made 

the difference this year in terms of helping to get the market back 

on recovery. 

And I think, most importantly, this is exactly what FHA was created to do. We were created during the Depression to help ensure 

that mortgage capital was available, on good terms, in a self-susVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
19 

taining way for the taxpayer, but that it was available during difficult times, and that we step back when the market returned. 

Mr. SHERMAN. I would point out that this near deposition was 

triggered as much as anything by a rapid decline in home prices. 

And I want to thank you for what your agency has done to stabilize 

home prices in many parts of the country; had you not acted and 

had you not had that result, I think we would be dealing with a 

much, much worse recession than the terrible recession we have 

now. 

What do you think the FHA should do to increase its reserves? 

Secretary DONOVAN. I will ask Commissioner Stevens to provide 

some more thoughts. But certainly the three key areas that I outlined in the testimony—stepping up enforcement on existing loans, 

given that they represent such a large share of expected future 

losses; and that has no impact on borrowers going forward, that is 

a key strategy for us to help ensure the reserves stay as close as 

possible to where they are, and increase going forward. 

Second of all, that we can step up the share of cash that is 

brought up-front in a transaction; and, third, to look at our pricing 

through our premium structure. 

Mr. STEVENS. The one thing I would continue to draw attention 

to is the comment the Secretary made earlier, which is that 70 percent of the losses that are impacting our capital are on the existing 

book of business. And my greatest concern in the existing book of 

business is whether the loans that were originated by the institutions that insured those under the FHA program originated those 

within our guidelines. 

And that is why the Secretary emphasized the need for us to be 

able to enhance our ability to go after institutions that originated 

outside the rules. If we can make institutions pay for those losses 

instead of FHA picking up that burden, we affect that 70 percent. 

The actuary predicts that the future books are actually going to 

be profitable, assuming their scenario. So what we have to be protective of going forward, outside of institutional control, is to make 

sure we do enough adjustments in the program to cover a worse 

scenario than the actuary predicted. 

Mr. SHERMAN. Thank you. And with the indulgence of the chairwoman, I would point out that in my own State, where you buy a 

home for $200,000, the central valley, that is where you have all 

the foreclosures. In my district, you are making a profit on the 

$500,000 loans, and that higher conforming loan limit is helpful. 

I yield back. 

Mrs. MCCARTHY OF NEW YORK. [presiding] Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you. Mr. Secretary and Commissioner, 

thank you for being here. 

I want to go back to—and I am sorry I had to step out, but I 

want to go back to the risk-based pricing for just a minute because 

I think I have some disagreement here. But the current minimum 

downpayment is 31⁄2 percent. Is that correct? 

Secretary DONOVAN. That is correct. 

Mr. NEUGEBAUER. And so the pricing on that is—if I go to counseling, I get a little better deal, and let’s just say I didn’t go to 

counseling. So if I have a 31⁄2 percent downpayment, no-counseling 

20 

loan, you are going to charge me 3 points up-front for insurance 

coverage. Is that correct? 

Secretary DONOVAN. Actually, that is the statutory cap. But the 

current level is 1.75 percent up-front, plus .55 over time. That is 

for most of the loans. There is some variation in that. 

Mr. NEUGEBAUER. So you are charging 1.75 percent right now, 

plus the 55 basis points. Now, if I make a 20 percent downpayment, what is the charge for that? 

Secretary DONOVAN. The pricing is the same. 

Mr. NEUGEBAUER. Yes. And is the risk the same? 

Secretary DONOVAN. Depending on other variables, the risk may 

or may not be the same. 

Mr. NEUGEBAUER. Now, you are saying—I want to be sure, Mr. 

Secretary. You are on the record telling me that you think a loan 

that has a 31⁄2 percent downpayment is on parity with the same 

risk as someone who puts 20 percent down? 

Secretary DONOVAN. I did not say that. What I said is you can’t 

just look at the downpayment in order to be able to understand the 

riskiness of that loan. Let me just provide some details here. 

For a 97 percent or 961⁄2 percent loan-to-value with a high FICO 

score, we have very, very low default rates; whereas, on the other 

hand, you could have a high downpayment, a significantly higher 

downpayment with a lower FICO score, and in fact the performance is significantly worse. So I— 

Mr. NEUGEBAUER. I understand that part. But I— 

Secretary DONOVAN. I will agree—let me just agree with you that 

there is no question that the higher the downpayment, the less risk 

there is. But my only point I wanted to make is that it is important 

to look at the range of factors, not just at that one factor. 

Mr. NEUGEBAUER. And I understand that. I mean, one of the 

things that got us in this situation is we were, across the country, 

loaning money to people who couldn’t pay it back, whether it was 

car loans, house loans, all kinds of—and so one of the things we 

don’t want to do is perpetuate that. 

Secretary DONOVAN. Absolutely. 

Mr. NEUGEBAUER. And so I am sensitive to the fact that, you 

know, we want everybody who can afford to buy a house to have 

the capacity to do that. We don’t want the taxpayers, though, actually to have to somehow maybe subsidize that at some point in 

time. 

But I don’t understand the resistance. And I think, Commissioner Stevens, you said when you testified to this committee that 

you did not intend to implement risk-based pricing. So I still don’t 

get that, because as Chairman Frank said a little while ago, there 

may be that $50,000- or $60,000-a-year individual, that single mom 

raising a couple of kids, and she may have made a 5 or 10 percent 

downpayment. She may have a better FICO score than someone 

with higher income. And we are not rewarding that behavior. We 

keep rewarding bad behavior because we are treating everybody 

the same. 

That is what got us into this mess that we are in today. And so 

I am disappointed. A lot of us worked very hard to make sure that 

this risk-based pricing was on the table so that we could reward 

good behavior, and those people who have lower FICO scores beVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
21 

cause they have not demonstrated good behavior with their credit, 

that we are allowing them to get a free ride on those people who 

are actually out—when they buy a car, they pay for their car. They 

go buy a hot tub, they pay for their hot tub, or whatever it is they 

are buying. 

And so you are going to have to explain to me why that is good 

policy. 

Secretary DONOVAN. First of all, let me agree with you very 

clearly that we do not want to reward bad behavior, quite the opposite. Let me just take that example of someone who may have a 

very high—or want a very high LTV loan, have a poor credit score, 

a poor borrowing history. 

First of all, as I said earlier today, we are going to impose a 

higher FICO limit. We are going to take other steps to ensure that 

kind of bad behavior isn’t rewarded. But I want submit that allowing that person to get a loan and simply charging them more isn’t 

necessarily going to lead to a better outcome. It might actually put 

them at greater risk of default than it would otherwise. 

And I would submit that there are other ways to approach that 

same problem. For example, we might say that we would raise the 

minimum downpayment for low FICO score borrowers so that they 

couldn’t get that high downpayment loan—that high LTV loan to 

begin with. 

And so I think there are other ways of approaching risk and riskbased underwriting that aren’t necessarily risk-based pricing. It is 

not to say risk-based pricing isn’t an appropriate tool. I think the 

question is, is it the right tool for an organization like FHA to use 

relative to a private market player? 

And again, I will reiterate, I do have some concerns that by raising pricing for certain borrowers and lowering it for others, we may 

actually be getting into a territory of competing against private 

capital coming back. And what I don’t want to do is impede in any 

way the private sector returning as quickly as possible. 

I think private sector risk-based pricing makes sense in a lot of 

cases. But I think we have to look at it somewhat differently for 

FHA, but to get to the same result that you are trying to get to, 

which is not to reward risky or bad behavior, but to reward good 

behavior. 

Mr. NEUGEBAUER. Yes. And I agree that it has to be all of the 

above. I just hate to see you take risk-based pricing—what I hear 

you saying, I agree with the higher downpayment requirements for 

lower FICO scores, all of those things, looking at the total. But I 

hate to see you taking the risk-based pricing off because, you know, 

your fund isn’t going in the right direction right now. 

Mrs. MCCARTHY OF NEW YORK. Gentlemen, the time has expired. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Madam Chairwoman. 

Welcome, Mr. Secretary. Frankly, much of what I heard in your 

testimony I agree with. And frankly, I rarely say those words to a 

member of the Administration. 

Having said that, I am far more impressed by actions than 

words. But I am hopeful that what I heard in your testimony, see 

in your testimony, that there will certainly be follow-through. I 

have a great concern about the actuarial soundness of the MMIF. 

22 

The first question I have, I guess, is maybe help me with a little 

bit of historical context. I wasn’t able to complete the study on my 

own. But just how often in the history of the fund have the FHA’s 

secondary reserves been at this level? We know they are below the 

2 percent statutory level. But how often has the reserve fund 

dipped to, I believe it is 0.53 percent? 

Secretary DONOVAN. Well, the 2 percent requirement was actually created in the wake of the mid-1980’s— 

Mr. HENSARLING. Right. I understand that. 

Secretary DONOVAN. —collapse that we had. And at that point 

when it was created, in fact, the reserve level was far below the 

2 percent minimum. It took a number of years of growing the capital after it was established to get it above 2 percent. So it has been 

below the 2 percent. 

This is the first time that it has dropped below the 2 percent 

since it went above that first time. But it has been below the 2 percent— 

Mr. HENSARLING. I am sorry. Since the 1980’s? After it— 

Secretary DONOVAN. I don’t have the exact date in front of me. 

I don’t remember whether—I believe it was the early 1990’s where 

it actually went above. 

Mr. HENSARLING. Okay. Regardless, when one looks at the entire 

history of the fund— 

Secretary DONOVAN. I am sorry. 

Mr. HENSARLING. Yes? 

Secretary DONOVAN. It was 1995 where the 2 percent was 

achieved. Between 1990 and 1995, it was below the 2 percent. 

Mr. HENSARLING. In your testimony, Mr. Secretary, you say that, 

‘‘As such, the actuary concluded that the FHA’s reserves will remain positive under all but highly severe economic scenarios.’’ I 

know you believe that. I hope that to be true. 

You may have had come to your attention an editorial in the 

Wall Street Journal yesterday where now-OMB Director Dr. Peter 

Orszag back in 2002 wrote a paper, and I quote from it, ‘‘On the 

basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.’’ In that same paper, 

now-OMB Director Orszag—apparently they tested Fannie and 

Freddie ‘‘against the financial and economic conditions of the Great 

Depression.’’ 

I just say that, Mr. Secretary, again, some of us are skeptical, 

particularly when we look at what has happened to the unfunded 

liabilities of Social Security that weren’t supposed to need taxpayer 

infusions; the Pension Benefit Guarantee Corporation; the National 

Flood Insurance Program; and now we know what the status of the 

FDIC fund is. It could be a matter of time before Chairman Bair 

is knocking on the Treasury’s door for a line of credit there. 

So I am concerned ultimately, notwithstanding your fairly sanguine posture, that we still have the fund in harm’s way. And that 

concerns me greatly on a number of different fronts. 

Number one, I believe everything that we do ought to be viewed 

through the prism of, what does it do for jobs? And I think the 

number one job of this Congress ought to be jobs. And unfortunately, since this Administration has come into power, we have had 

an additional 31⁄2 million of our fellow countrymen lose their jobs. 

23 

The only thing I see that the stimulus has brought us is the highest deficit in the Nation’s history, the first trillion dollar deficit, 

and rising unemployment. 

I believe, frankly, that a lot of that is tied to the debt overhang, 

and the actuarial soundness of the MMIF, frankly, could be one 

more shoe to drop. And I don’t know—at least when I talk to people 

in the 5th Congressional District of Texas, when they are looking 

at the possible monetizing of the debt, if they are looking at huge 

tax increases, when they are looking at further bailouts by this Administration, nobody wants to hire anybody. Nobody wants to 

launch a new enterprise. 

And so I am just hopeful, and I see my time is running out, that 

what you said in your testimony you will do to ensure that the insurance fund does not need a taxpayer bailout, I hope you follow 

through. And particularly, I hope that you pay very careful attention to the legislation by the gentleman who is sitting to the left 

of me, the gentleman from New Jersey, who has legislation to increase the required downpayment for these FHA loans. 

And in the conversation you were having with the other gentleman from Texas, certainly statistically and anecdotally the correlation between, as you put it in your own testimony, skin in the 

game—and default rates cannot be denied, and I hope that you will 

pay very serious attention to the gentleman’s legislation—I see I 

am out of time. 

Mrs. MCCARTHY OF NEW YORK. The gentleman’s time has expired. 

Secretary DONOVAN. If I could just—one comment. I do think if 

we look at the broader economic picture, first of all, the actions 

that we—I have talked about in my testimony, the actions that we 

have already taken are very much focused on exactly what you 

said, Congressman, which is ensuring the health of the fund. We 

are very, very focused on that, and it is a critical piece of our commitment to the taxpayer that FHA should be self-sustaining. 

I would also add, though, that housing, as you know, is a critical 

part of economic recovery, and that without the important role that 

FHA is playing today in that economic recovery, I would submit 

that we would have lost many more jobs, and in fact, that the early 

signs of recovery that we have seen have begun to contribute to 

broader recovery in the economy overall. 

So we shouldn’t lose sight of the important job-generating role 

that FHA can play in supporting the broader housing market. 

Mrs. MCCARTHY OF NEW YORK. Mr. Garrett? 

Mr. GARRETT. Thank you. And I thank you, Mr. Secretary. 

I think members on both sides of the aisle will agree with your 

last point, that we all want to make sure that the economy starts 

actually growing again. And to your point that housing can and 

will and should play a significant part of trying to get back on 

track, and we would like to see the housing market get back on 

track. 

A caveat to that is, or the other element of that is, if FHA’s situation continues to decline, if we get a worst-case or a bad scenario, 

and it deteriorates and we need to get to that bailout situation, 

that would be a horrendous situation for us to be in. And that 

24 

would—I question whether we would be able to do that bailout 

again, in the light of the political realities. 

And obviously, the situation then on the overall economy, if we 

get to the situation that FHA can’t be there as it has been in the 

past to be the backstop, would be something that none of us would 

want to get to. 

So how do we avoid that? And I think that is what we are talking about doing. You raised the point, and we have a chart over 

here and I think you will agree with what the point of this chart 

is, is that is the point of the correlation of default rate to the risk 

that is there. 

And what we are looking at—and this is why I dropped in my 

legislation, because I have been concerned with this for several 

months; and this comes out of not just my thinking on it, it is also 

your own actuarial reports that says, ‘‘Based on previous economic 

studies and mortgage behavior, a borrower’s equity position in a 

mortgaged house is one of the most important drivers of default behavior’’—and I emphasize that point—‘‘and the larger the equity 

position a borrower has, the greater the incentive to avoid default 

on the loan.’’ 

That is from your own reports, and I think you would agree with 

that as well because I know you said during your testimony that 

there is no single characteristic that is a driver. But your report 

states that this is probably the most important driver that is out 

there. 

And as you see—and let me just give you a little information on 

the numbers that are here—this is like plain—these are plain vanilla numbers here, basically, purchase price; primary house; single 

family; very high, good FICO score over 700; full documentation; 

full amortization; and as we said in the bottom, enclose the volume 

or the sales from the sand States, or the States where you are having problems. 

So this is the good stuff. And these show that those borrowers 

who put zero down are more than twice as likely to default as opposed to who put a downpayment of 5 percent. Twice as much. I 

mean, that is—I think that is significant. 

And to take a page out of Mr. Hensarling’s comment, we were 

here also when the GSE discussions were made several years ago, 

and some of us were arguing that it could be a systemic risk. And 

we were told not to worry about it, for the quotes that Mr. Hensarling made, and also from the chairman as well. 

But now we are down $120 billion out of taxpayers’ money. So 

some of us are, arguably or realistically, a little skeptical when we 

hear, ‘‘don’t worry.’’ And that is why I put in the legislation. 

So let me just throw the question to you: What do you think of 

the legislation to simply say that we should have skin in the game; 

we are at 31⁄2 percent right now, to go up to 5 percent; balancing 

everything out, trying to get the housing market to go again, would 

actually be beneficial to going forward? 

Secretary DONOVAN. Well, first of all, Congressman, I would just 

like to clarify. I don’t think anybody here today has said, ‘‘don’t 

worry.’’ 

Mr. GARRETT. Okay. 

25 

Secretary DONOVAN. I don’t think we have said we shouldn’t take 

action. In fact, we have detailed actions today, and also talked 

about further actions that we will take. And on one of those, I 

think we agree: Increasing skin in the game for borrowers, as I 

said, is an important step. 

What I want to make sure that we do is to do it in the right way 

based on the facts, and not to exclude borrowers who can be successful homeowners at very high rates, but to make sure that we 

target our actions on those who are most likely to default. 

So what I would suggest, I would love to be able to come and sit 

down with you to go through detailed performance data as we are 

finalizing these changes, and to be able to give you a sense of our 

thinking on that, and get some feedback from you about the best 

way to implement this. I think all we are saying today is without 

the full facts on what those criteria should be, it isn’t enough just 

to look at downpayment as the single factor, or even the single 

most important factor. 

Mr. GARRETT. Well, reclaiming my time—I see we are coming to 

the end here—I think these facts are pretty substantial, when you 

see the default rate twice as much for just simply between 5 percent and zero percent. So really, even with all the other factors in 

consideration, I find that hard to argue. But I will be glad to sit 

down with you. 

Secretary DONOVAN. I think it is—just one point I would make 

is the difference in performance between 97 percent and 100 percent is dramatic. And you don’t have the 97 percent. I think what 

you are reflecting there is the performance of the downpayment assistance loans, which we no longer make. 

Mr. GARRETT. Right. 

Secretary DONOVAN. And so, again, I think it is important to get 

to the details of this so that we can show exactly what that performance looks like. 

Mr. GARRETT. Right. And may I enter into the record, since the 

time has expired, two documents. One is from the Wall Street Journal, an article by Robert Pozen—which goes to the point Ms. Capito 

raised and I would have liked to have gone into—entitled, ‘‘The 

Homebuyer Tax Credits Threaten the FHA;’’ and another report by 

Amherst Securities Group, dated November 23rd, ‘‘Negative Equity 

Trumps Unemployment in Predicting Defaults,’’ which basically 

goes to the point of the importance of having skin in the game as 

far as unemployment and other factors. So if I may enter those in 

the record as well. 

Mrs. MCCARTHY OF NEW YORK. Certainly. I guess the question 

would be also— 

Mr. GARRETT. If unanimous consent? 

Mrs. MCCARTHY OF NEW YORK. Unanimous consent to put those 

into the record. 

Mr. GARRETT. Thank you. 

Mrs. MCCARTHY OF NEW YORK. I guess the question would be, 

and it would be interesting, how many of those that had the ‘‘zerodown’’ downpayments on some of their second homes because they 

had excellent scores at that particular time. That is something 

maybe we could look into for the future. 

Mr. Green? 

26 

Mr. GREEN. Thank you, Madam Chairwoman, and thank you, 

Mr. Secretary and Mr. Commissioner. 

Mr. Secretary, I heard some of your comments just a moment 

ago, and perhaps they were addressing a concern that you and I 

have been talking about with reference to downpayment assistance, 

seller-assisted. My thinking is you indicated that there are details 

that we need to take a closer look at as we explore the possibility 

of working with such programs, as I came in, as you were speaking. I am not sure what the entirety of your comments were, so I 

would like for you, if you would, to simply reiterate. I heard the 

comment about ‘‘skin-in-the-game,’’ but reiterate if you would some 

of what you said about the downpayment assistance so that I might 

get some clarity. And I apologize to you for my late arrival. I have 

truly been engaged in some housing business in another sense. But 

thank you so much, and if you would? 

Secretary DONOVAN. I think you probably heard the entirety of 

them. I was simply focusing on the details of the performance that 

was there and pointing out that the 100 percent loan to value performance there would have included the downpayment assistance 

loans, which no longer are an option within the FHA portfolio. So 

that was—I am guessing that you heard the entirety of my comments. 

Mr. GREEN. Well, in that case, let us just for a moment talk 

about the seller-assisted program that we have been dialoguing on. 

Having looked at some of the statistical information, I understand 

why there can be a great deal of consternation. My hope is that the 

program, while it has had some concerns that have to be addressed, there may be a means by which we can continue to work 

to see if there is a way to have some program, not the program 

that we had before, but start anew and let us develop a program 

that can be successful for persons who can pay for a home but who 

are without the necessary downpayment. 

Secretary DONOVAN. Congressman Miller, who was here earlier, 

talked a little bit about this. As I said at that point, I think the 

biggest concern and issue is about having an interested party in 

the transaction providing a downpayment. Certainly under our 

rules, we allow a family member to provide it. There are certain 

State housing agencies or others that can provide it effectively. I 

have seen that in my own experience. But the most significant 

issue has been that you have an interested party, the seller, providing that downpayment, and that has been I think what has led 

to the incentives that drove the program in the wrong direction. 

Mr. GREEN. I understand, and there are ways to deal with the 

interests that you have called to our attention. We have talked 

about the blind pool appraisal process. There are other ways that 

it can be dealt with. So my concern is that we continue to look at 

means by which we can accomplish this so that we do not find ourselves with persons who truly cannot afford to pay for homes and 

just lock them out because they do not have that downpayment assistance. And I greatly appreciate family-supported downpayments, 

and there are municipalities that are into this, as I understand it, 

and other agencies as well. But there are some people who but for 

that downpayment could afford to make a mortgage payment. In 

fact, I am sure you can cite examples, as can I, of persons who are 

27 

paying more in rent than they would pay for a mortgage if given 

the opportunity to have one. That is where we are. 

And I do not think that we are that far apart. I think that we 

just need to continue the dialogue. I appreciate the way you have 

embraced this in terms of working with us to help us move forward 

and hopefully come up with something that will assure us that we 

will not have a flawed program but rather a program that benefits 

the intended parties in such a way as not to allow some of the 

things that occurred prior to this moment to occur again. 

With that, Madam Chairwoman, I will yield back. 

Mrs. MCCARTHY OF NEW YORK. Thank you. Mr. Posey? 

Mr. POSEY. Thank you, Madam Chairwoman. Mr. Secretary, I 

wonder if you could take just about 30 seconds and summarize 

with me your focus on manufactured housing? 

Secretary DONOVAN. Is there any particular aspect of it that you 

are— 

Mr. POSEY. No, just what your focus is on it right now? 

Secretary DONOVAN. I would turn to Commissioner Stevens for 

further details on it. I think there are effectively two major areas 

that we are focused on. One is the implementation of our regulatory oversight responsibilities around it. And the second is obviously the significant lack of financing in the market that exists 

today and whether there are ways that we can effectively ensure 

better financing options for manufactured housing. 

So those are I think the two most significant areas of regulatory 

responsibility and other responsibility that we have to sort of guide 

our involvement, if you will. 

Mr. POSEY. Do you consider it a priority? 

Secretary DONOVAN. I do consider it a priority. I would say that 

given the nature of the foreclosure crisis and the current condition 

of the fund, I think our primary focus has been, as we have talked 

about today, stepping up the quality of the lending that we are 

making as well as the important return of the capital fund above 

2 percent. So I would say that that has been my primary focus 

within FHA. 

Mr. POSEY. As you are aware, the position of the appointed noncareer administrator for the HUD manufactured housing program 

as authorized by Congress in the Manufactured Housing Improvement Act of 2000 still remains vacant to this day, I understand. 

And obviously, this affects everything relating to federally-regulated manufactured housing, including financing. And I just wonder if you ever plan to appoint anybody? 

Mr. STEVENS. First of all, I appreciate the question, and the 

manufactured housing issue is an area that we have spent a great 

deal amount of time talking about. I have met with Mr. Ghorbani 

several times. It is a difficult subject in terms of the Schedule C 

request that Mr. Ghorbani is asking for as it relates specifically to 

the manufactured housing piece. 

Mr. POSEY. Who is asking for it? 

Mr. STEVENS. The representative of the manufactured housing 

trade organization. 

Mr. POSEY. I have never talked to them. 

Mr. STEVENS. Okay. But just to put it in perspective, of the 

roughly 2 million transactions done in the single-family business in 

28 

Fiscal Year 2009, 46,000 of those were manufactured housing 

transactions. Our regulatory group, we have a regulatory team that 

focuses in a significant way on the manufactured housing issues 

from inspectors to requirements, both from the manufacturers and 

the property owners who lease out land for manufactured housing 

properties to reside on. So we do focus on the issue quite a bit. The 

question is whether a specific political appointee is needed to run 

that organization, which is the one issue that we have been discussing with the industry, and that is the area that we are continuing to discuss with them. 

Mr. POSEY. Well, it was authorized by Congress in 2000. You 

have studies for 8 years. Do you have an opinion yet? 

Mr. STEVENS. Quite frankly, I would say that I am not confident 

that having a political appointee, Schedule C, given the limited 

number of those positions that are allocated to the Department is 

warranted by the manufactured housing industry. 

Mr. POSEY. Okay. 

Mr. STEVENS. But I will tell you this, I am agnostic, I am very 

open, and I continue to listen to it. I have spoken about it briefly 

with the Secretary. We continue to look at the issue. The question 

is, would creating a Schedule C position have a measurable impact 

that would improve the outcome for the manufactured housing considering the vast number of resources and time that we all spend 

focused on this? 

Mr. POSEY. So you think Congress is wrong in authorizing the 

position then; you think it was stupid of Congress to do that? 

Mr. STEVENS. No, I think it was—I greatly appreciate the opportunity which says we may appoint, the Secretary may appoint, and 

we clearly would absolutely take advantage of that if the need was 

prevalent. And based on when the legislation was passed versus 

the state of the manufactured housing industry today and the vast 

number of resources we have working on the subject, from the General Counsel—in fact, the General Counsel and I have had discussions on this particular issue as recently as this morning. It is a 

question of whether that is warranted given the limited number of 

Schedule C’s allocated for the Department. 

Mr. POSEY. Four to 6,000 is not a small number. 

Mrs. MCCARTHY OF NEW YORK. The gentleman’s time has expired. 

Mr. POSEY. To most people really. 

Secretary DONOVAN. If I could just add one other thing. First of 

all, to be fair to Commissioner Stevens, he has been on the job just 

a few months, so this is not something that he had a significant 

amount of time to consider. But also I would say one of our primary focuses has been that we were given new authority under 

HERA to be able to make a substantial number of improvements 

in our approach to manufactured housing, which we have gone 

ahead and implemented. And I think have made a real difference. 

So that has been the primary focus of the work that we have done 

on manufactured housing this year, and I do think we were able 

to accelerate substantially the implementation of those provisions 

compared to what the prior Administration had been doing. So, 

thank you. 

Mrs. MCCARTHY OF NEW YORK. Ms. Waters? 

29 

Ms. WATERS. Thank you very much, Madam Chairwoman. I 

would like to thank Secretary Donovan and Commissioner Stevens 

for being here today. It is so busy. People are running all over the 

place, and we are committed to several committees at a time. But, 

as you know, I am extremely supportive of FHA. And I am concerned. 

And I think, Commissioner, when you testified before, we did 

know that FHA’s capital ratio was going to be what it is. We 

thought it was going to be a little bit stronger than that, and so 

we really do have to take whatever steps are necessary in order to 

make sure that we have the capital ratios that we should have. But 

let me ask you this: I understand that you have the authority and 

the ability to determine the credit scores that would be eligible for 

FHA financing, is that correct? 

I suppose that as you consider what restructuring you are going 

to do or what changes you are going to do, you will take that into 

consideration. But given all of this, I would like to just share with 

you a part of the testimony that I had prepared, which says, ‘‘Given 

FHA’s historical success at bringing homeownership to millions of 

households, I do not believe that strong oversight should be confused with the need to curtail the role of FHA to the point where 

a housing recovery becomes impossible and only the most affluent 

households have access to homeownership. We need to be careful 

that any changes we propose would actually improve FHA’s solvency rather than simply drive away qualified borrowers.’’ 

I read you this part of my statement because in essence, that 

sums it up. And we think that in this economic crisis that we are 

in, where we have an unprecedented number of people whose jobs 

are being downsized or are losing jobs, we could easily get confused 

and think, oh, we cannot do anything much anymore. But I think 

that FHA’s history is much stronger than that, and we should use 

every opportunity to figure out how to keep FHA going and going 

strong and making it available to all of these people who deserve 

it at the same time managing in ways that will not drive us deeper 

into capital ratio problems, okay. 

Thank you very much. I yield back. 

Secretary DONOVAN. Madam Chairwoman, it is great to see you, 

and thank you for being here. If I could make just two brief comments on that? 

Ms. WATERS. Yes. 

Secretary DONOVAN. First of all, I think you highlight the very, 

very important point that homeownership should be available to responsible buyers who can be successful at doing it, and that we 

have to, as I said in my testimony, keep an eye on FHA’s historic 

role in doing that. 

One of the reasons why we have focused so heavily on enforcement is that what it allows us to do is to very clearly target those 

loans that will be most likely to cause problems for the strength 

of the FHA fund without disqualifying any deserving borrowers. So 

that is a first important step. 

Second of all, as you may not have heard in some of my earlier 

discussion, we have to be very careful about using just a blunt instrument in terms of the way that we set our policies. We have to 

look at the combination of factors that lead to high risk and not 

30 

just whether it be on loan to value or on some single characteristic, 

like a FICO score, that is the only criteria that we are taking into 

account. And so that is why we are looking very carefully at the 

combination of factors. I think it would be important that we come 

and sit down with you and talk in more detail about our thinking 

on that so that you can get a clear picture of our thinking, and we 

can get your input on that as we go forward on these changes. 

Ms. WATERS. Thank you very much. 

Mrs. MCCARTHY OF NEW YORK. Thank you. I want to thank Secretary Donovan and Commissioner Stevens for your testimony 

today. I happen to agree with you, Secretary Donovan, that there 

are a lot of people out there who could actually buy a house who 

probably have not gone forward because they are afraid they cannot buy a house. I have to remember when I first bought my first 

home, it was my parent’s home, and I think the price of it when 

they bought it was $12,000. When I bought it, I think it was 

$85,000. Right now, so they tell me, it is worth about $525,000. I 

am sure that has gone down. Unfortunately, my taxes have not 

gone down on that. 

But I think when you look at people who actually work hard, 

their dream is to have a home. Those who have been living in 

apartments, paying their bills, utilities and everything else that 

goes with it, actually usually end up being good customers even 

when they are buying a house. These are unusual times. People are 

losing their jobs. And for the first time, they are finding themselves 

in financial problems, so hopefully we can work that out and get 

this economy going. Get the jobs back. And I think then we will 

see the housing turn around. 

Thank you for your testimony. We appreciate it. 

If the second panel would come forward. The Chair notes that 

some members may have additional questions for this panel which 

they may wish to submit in writing. Without objection, the hearing 

record will remain open for 30 days for members to submit written 

questions to these witnesses and to place their responses in the 

record. 

I want to thank the second panel for your patience. I know Ms. 

Waters touched upon it. There are many, many hearings going on 

throughout the House. There is also a caucus meeting going on 

where a lot of members are. So I thank you for your patience as 

we go through that. 

I would first like to introduce Ms. Ann B. Schnare. Am I pronouncing that correctly, ‘‘Schnare?’’ Ms. Janis Bowdler, Ms. Vicki 

Golder, and Mr. Robert Story. You will see members coming in and 

out, as you probably have noticed, as they get free time. 

With that, if you would start, Ms. Schnare? 

STATEMENT OF ANN B. SCHNARE, PARTNER, EMPIRIS LLC 

Ms. SCHNARE. Thank you, and good afternoon. I would like to 

thank the chairman and the ranking member for inviting me here 

today. My name is Ann Schnare. I am a Ph.D. economist who specializes in housing and mortgage finance. 

Last year, I co-authored a study that predicted that FHA would 

fall below its 2 percent capital requirement by the end of Fiscal 

Year 2009. 

31 

Let me begin by emphasizing the critical role that FHA is playing today. I fully agree with what the Secretary said about FHA’s 

continued presence in the market and how it is essential to housing 

recovery. At the same time, there are clear indications that FHA 

is under stress. Delinquencies continue to rise, the share of loans 

in troubled housing markets continues to grow, and many FHA 

mortgages continue to be originated at loan-to-value ratios that are 

close to 100 percent. While credit scores are rising, this may not 

be enough to protect the fund. 

The recently released audit found that the fund has basically run 

through most of its capital reserves and no longer meets its mandatory 2 percent threshold. Under the base case scenario, the capital 

ratio is about 0.53 percent, which from a statistical point of view, 

is not much different than zero. Although I have not attempted to 

replicate this year’s audit, I believe that the base case projections 

are probably optimistic and that the fund is most likely facing a 

significant capital shortfall. 

One of the major shortcomings of the audit is that it did not consider the current delinquency status of FHA loans. The audit 

projects that roughly 116,000 loans will default in Fiscal Year 

2010. Yet, 108,000 loans are already in the foreclosure process and 

new foreclosure starts have been averaging about 11,000 loans per 

month. Unless one assumes that a higher percentage of these loans 

will cure, which seems highly unlikely, the claim rates projected in 

the baseline projections appear to be too low. 

In addition, the audit projects future house price trends at the 

national level, not the regional level, and as a result, might not be 

capturing the impact of the changing geographic distribution of 

funds. In the audit that we did last year, we found that further increased the projected losses of the fund. 

And last but not least, the economic assumptions that underpin 

the audit may prove to be optimistic, particularly as they relate to 

house price trends in 2011 and beyond. For all of these factors, I 

think that FHA is at best running on empty and probably is facing 

a negative capital situation. 

I applaud the Secretary for his announcements that he made 

today, and I believe that HUD is moving in the right direction. 

I would like to use my remaining time to reiterate some of the 

recommendations that are presented in my written report. The first 

is to make FHA’s financial condition more transparent. Waiting another year for the next financial audit is unacceptable in the current environment. FHA also needs to provide more meaningful reports on its risk exposure on the ongoing performance of its loans. 

This should become a priority at HUD and it should be disclosed 

to the public. 

Second, FHA should increase its downpayment requirements. 

While FHA borrowers are required to put 3.5 percent down today, 

they are allowed to finance the up-front premium and a portion of 

their closing cost. As a result, many FHA borrowers go into their 

homes with little, if any, equity. HUD’s announcement that it will 

begin to require more skin-in-game will be good for borrowers and 

neighborhoods alike. 

Third, FHA should begin to recapitalize the fund by enacting a 

modest increase in its insurance premium. In my view, increasing 

32 

the annual premium is the way to go. When we looked at this issue 

last year, we estimated that a roughly 20 to 25 basis point increase 

would have enabled the fund to remain in compliance with this 

capital requirement. Something along these lines would probably 

be appropriate today. 

Fourth, FHA needs to audit every loan that defaults within its 

first 12 months. Early payment defaults typically stem from shoddy 

underwriting practices or outright fraud. Rather than routinely 

paying claims, FHA should take steps to ensure that applicable 

guidelines have been met and crack down on offending lenders. The 

provisions contained in H.R. 3146 are an important step as are the 

announcements that the Secretary made today. 

Finally, the role and structure of FHA needs to be reconsidered. 

FHA has long been plagued by resource constraints, an inability to 

attract and maintain qualified staff, and a lack of autonomy. Going 

forward, it is critical to give FHA the resources, flexibility, and 

oversight it needs to serve its public purposes and maintain the integrity of the fund. 

When I prepared my comments for this hearing, HUD had already taken important steps to improve its risk management controls and return to quality underwriting. The announcements made 

today provide further support for these basic objectives. 

In closing, I would like to thank you again for giving me the opportunity to express my views. I am a long-time supporter of both 

FHA and affordable lending. I hope my comments can make a contribution. 

[The prepared statement of Ms. Schnare can be found on page 76 

of the appendix.] 

Mrs. MCCARTHY OF NEW YORK. Thank you very much. 

Ms. Bowdler? 

STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, 

WEALTH-BUILDING POLICY PROJECT, NATIONAL COUNCIL 

OF LA RAZA (NCLR) 

Ms. BOWDLER. Good afternoon. My name is Janis Bowdler. I am 

the deputy director of the Wealth-Building Policy Project at the National Council of La Raza. 

NCLR is committed to strengthening America by promoting the 

advancement of Latino families. I would like to thank the chairman 

and ranking member for inviting me here today. 

FHA has a critical role to play in helping our Nation’s economy 

recover, which has been discussed at length today. We have done 

a lot for the lending industry, but unfortunately, we really have not 

done enough to help average everyday Americans get back on their 

feet. We are seriously concerned about the lack of progress in stabilizing Latino communities. Our families continue to be hit hard by 

foreclosures and unemployment. 

We know that middle- and working-class families will not recover 

until jobs return to their neighborhoods and the housing market is 

stable. On this last point, there is much that FHA can do. 

In my testimony today, I will discuss the role of FHA in improving housing conditions for all families. And I will close with recommendations on how we can strengthen the program. 

33 

FHA is a critical government tool that is mission-driven to open 

homeownership opportunities and protect families from foreclosure. 

The program has seen its share of challenges over the course of its 

history. Still, FHA has been a standard bearer for affordable lending to low-income families. By providing mortgage insurance, it has 

reduced downpayments and standardized the 30-year fixed-rate 

mortgage. Perhaps its greatest success is teaching the private market how to lend sustainability to those of modest means. 

During the subprime boom, FHA’s share of the market dropped 

dramatically. While the reasons for this may up for debate, the impact is clear: Millions of families who could have qualified for an 

FHA loan ended up with a toxic mortgage. Arguably, many would 

not be facing foreclosure today had they been steered towards a 

FHA loan instead of a predatory one. 

This year alone, 700,000 Latino and African-American households will lose their primary source of financial security, their 

home, to foreclosure. This is unacceptable. We need a robust FHA 

program that can offer a competitive alternative to predatory loans. 

And, of course, the silver lining of the housing bubble is that 

many are finding homes in their price range for the first time. Unfortunately, at the same time, credit is drying up and many qualified families cannot get a loan. 

I am sure you can imagine the frustration in our communities 

and working-class neighborhoods across the country who are facing 

high foreclosure rates, record job loss, and skyrocketing debt, and 

now families who are otherwise qualified cannot take advantage of 

the affordable market. Neighborhoods in this position are really 

looking at defeat. Distressed communities are seeing ownership opportunities slip away and investors and speculators are moving in 

to take advantage. This is where FHA can help. 

NCLR is pleased with the progress they have made so far and 

with many of the recommendations that have been announced. 

They moved quickly to lend where the market would not and, as 

the Secretary mentioned, 45 percent of Latino borrowers used an 

FHA loan last year. 

The importance of this cannot be understated. We understand 

concerns around the increased claims rates, but FHA cannot let 

tough economic times jeopardize its mission to serve first-time 

home buyers. This is not to say that there is not room for improvement. We are outlining three areas of the FHA program that can 

be strengthened to better serve borrowers and taxpayers. The first 

has been discussed at great lengths and that is looking at how we 

can crack down on fraud and predatory lenders that have moved 

out of the subprime market, which does not exist, and into the 

FHA system. Most of the claims are due to economic conditions and 

to some bad lender behavior, not necessarily the product itself. We 

should really focus on cleaning up the originator eligibility list. 

Second, is the product design. FHA’s success has largely been 

due to the product’s flexibility. And the low downpayment requirements, for example, have made FHA accessible to millions of 

Latino and borrowers of all backgrounds. Such aspects of the program should be maintained. However, several years ago, FHA removed an important risk deterrent, the requirement for first-time 

home buyers to attend homeownership counseling. Buyers that atVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
34 

tend counseling are far less likely to default. NCLR recommends 

creating incentive in the form of a premium discount for those who 

attend pre-purchase housing counseling with a HUD-approved 

agency. 

And, finally, something that has not been talked a lot about is 

their loss mitigation strategy. FHA has some of the best tools to 

prevent foreclosures, but unfortunately, not all FHA borrowers are 

able to take advantage of them. While FHA servicers are required 

to make these available, there is little monitoring to make sure it 

happens and even less enforcement. NCLR recommends that 

servicers be required to prove to FHA that all foreclosure prevention options have been exhausted before they are able to file a 

claim. 

Thank you, and I will be happy to answer any questions. 

[The prepared statement of Ms. Bowdler can be found on page 

45 of the appendix.] 

Mrs. MCCARTHY OF NEW YORK. Thank you very much. 

Ms. Golder? 

STATEMENT OF VICKI COX GOLDER, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS 

Ms. GOLDER. Thank you, Madam Chairwoman, and members of 

the committee. 

Mrs. MCCARTHY OF NEW YORK. Would you put the microphone 

on? 

Ms. GOLDER. There we go, it is on. Thank you, Madam Chairwoman, and members of the committee. My name is Vicki Cox 

Golder, and I am the 2010 president of the National Association of 

Realtors. I own Vicki Cox and Associates in Tucson, Arizona, and 

I am here to testify on behalf of 1.2 million members of the National Association of Realtors regarding the audit that the Federal 

Housing Administration mortgage insurance program just had. 

I am going to summarize three main points of my written testimony: One, FHA is a critical part of American housing markets; 

two, FHA is fiscally sound with responsible underwriting; and 

three, FHA needs enhancements, not radical reform. 

With the collapse of the private mortgage market, the importance 

of FHA has never been more apparent. Thus far in 2009, nearly 80 

percent of the FHA purchasers were first-time home buyers. In 

2008, more than 60 percent of home purchase loans and almost 40 

percent of refinanced loans were to African-American home buyers 

and were from either the FHA or the VA financing system. Nearly 

50 percent of non-white, Hispanic borrowers used FHA or VA for 

home purchase loans and 21 percent used FHA or VA to finance 

a home loan. 

If you take a closer look at the numbers, you will see that the 

FHA is doing exactly what they were designed to do, which is to 

serve the underserved. FHA is perfectly serving its role to fill the 

gap during this current crisis that we heard so much about by Mr. 

Donovan. And, of course, the mortgage insurance is so important 

and available to all qualified people and in all economic times, so 

it is important in good times and in bad. 

In my home State of Arizona, you all know that we were hit very 

hard by the foreclosure crisis. FHA sales have grown more than 

35 

600 percent. If it were not for FHA, we probably would not have 

any market in Arizona right now. Without FHA mortgage insurance, we just would not be able to recover in our State. 

Much has been made recently of the fact that the FHA’s Capital 

Reserve Fund has fallen below the congressionally-mandated 2 percent ratio. While this is a sobering fact, it must be evaluated in its 

proper context. The decrease in reserves is not tied to excessive increases in defaults or unsound underwriting practices. Quite the 

opposite, FHA borrowers have higher FICO scores and lower loanto-value ratios than ever. The overall decline in reserves is simply 

a reflection of the projected change in home price values. According 

to the audit, if FHA makes no changes to the way they do business 

today, the reserves will actually exceed 2 percent in the next several years. FHA has sufficient reserves. The cash reserves and capital reserves give the agency combined assets of $30.4 billion, 

enough to pay all claims over a 30 year period with excess above 

that. By comparison, the Financial Accounting Standards Board 

only requires financial institutions to hold reserves for losses over 

the next 12 months. In short, FHA has 30 times the level required 

by the FASB. 

Realtors strongly believe that FHA is taking necessary steps to 

assure its financial solvency. Specifically, we applaud the hiring of 

an experienced chief risk officer to oversee FHA’s efforts to mitigate risk. Realtors also support FHA’s net benefit requirement to 

ensure consumers are refinancing without receiving any benefit. 

We also support FHA’s aggressive stance against abusive lending. 

We urge Congress and the Administration to tread lightly before 

making changes to a program that has such a profound impact on 

our economic recovery and serves such a critical role to our Nation’s families. We strongly oppose H.R. 3706, the FHA Taxpayer 

Protection Act of 2009, which proposes increasing FHA’s downpayment requirement. Such action would not add a penny to FHA’s reserves, yet it would certainly put homeownership out of the reach 

of many creditworthy borrowers. 

Realtors believe that the best way to ensure FHA’s success is to 

strengthen it. A special thanks to Chairman Frank and other members of this committee for passing legislation to extend the loan 

limits through 2010. But, as the chairman understands, these need 

to be made permanent. Realtors strongly support legislation by 

committee members Sherman and Miller, H.R. 2483, which would 

do just that. 

While some have argued that higher loan limits put the fund at 

further risk, in fact the opposite is true, and we heard that from 

Secretary Donovan today. FHA’s audit demonstrated that higher 

balance loans perform better than lower balance loans. And despite 

long-held beliefs, higher loan limits are not just for California, New 

York, and a few other States. There are currently 246 counties in 

28 States that have high cost limits. So this is truly a national 

issue. I know in my own State of Arizona, we have one county that 

would be considered a high-cost county. 

In conclusion, I want to thank officials at HUD and FHA for the 

tremendous leadership and strength they have shown during the 

current housing crisis. I especially want to thank Congress for the 

36 

recent law to extend and expand the home buyer tax credit. Without it, our housing recovery would have stalled, as all of you know. 

Realtors know that they can trust FHA to help serve the needs 

of hard-working American families who wish to purchase a home. 

And I want to thank you all for allowing me this opportunity to 

testify. Thank you. 

[The prepared statement of Ms. Golder can be found on page 64 

of the appendix.] 

Mrs. MCCARTHY OF NEW YORK. Thank you very much. 

Mr. Story? 

STATEMENT OF ROBERT E. STORY, JR., CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. STORY. Thank you, Madam Chairwoman. My name is Robert 

Story. I am the chairman of the Mortgage Bankers Association and 

also the CEO and president of Seattle Financial Group. 

Given the heightened role FHA is playing in our country’s housing market, today’s hearing is both timely and vitally important. 

Last month’s report on FHA’s financial situation was a wake-up 

call to all of us. It raised the urgency for strengthening the important agency so they can continue to serve borrowers and provide 

liquidity to our struggling economy. 

At MBA, we have set forth a plan that we believe will help to 

strengthen and modernize FHA. And, today, I will provide some 

brief points on our proposal. 

The report issued by FHA in November revealed that FHA’s capital ratio has fallen well below the required 2 percent. But given 

the state of the economy, this should not surprise anyone. FHA is 

not immune from the problems that have hit the entire housing 

sector from small mortgage firms to giants like Fannie Mae and 

Freddie Mac. 

Additionally, rising unemployment has led more FHA borrowers 

to fall behind on their mortgages. Falling home prices have resulted in more foreclosures and greater losses on each property. 

Add to that FHA’s mission of helping underserved borrowers, and 

you can understand why the agency’s reserves are being affected. 

While an analysis of the report raises serious concerns with 

FHA, there are also reasons to be optimistic. FHA has taken a 

number of proactive steps to improve its risk management. And I 

want to commend Secretary Donovan and Commissioner Stevens 

for their aggressive approach. Improvements to FHA’s appraisal 

procedures, the streamlined refinance program and lender approvals are all intended to put FHA on a sounder financial footing. We 

also look forward to reviewing the proposals Secretary Donovan 

laid out this afternoon. 

I would also note that FHA no longer insures loans with sellerfunded downpayment assistance. The report found these loans bear 

primary responsibility for FHA’s decline in reserves. If we are to 

remove these loans entirely from the analysis, FHA’s capital reserves would be above the required 2 percent. 

Even with stronger underwriting and a ban on seller-funded 

downpayments, it is clear that more needs to be done. In recognition of this, MBA has put forward a proposal that will help bring 

37 

FHA into the 21st Century, and we are working on additional recommendations. 

First, Congress needs to appropriate the funding it authorized 

under HERA for FHA staffing and technology needs. Also, allowing 

FHA to hire additional staff to keep up with is growing loan volume and good management. FHA makes money for the Federal 

Government. It should be allowed to use some of its money for its 

own staffing and technology needs. FHA should also be permitted 

to compensate its staff at the same pay scales used by other Federal financial regulators. 

I want to commend this committee for supporting H.R. 3146, the 

21st Century FHA Housing Act, which authorizes an additional 

$72 million annually for FHA. Now, we need to redouble our efforts 

to make certain this money is appropriated. 

Second, we need to improve the quality of FHA originations. One 

way to protect the soundness of FHA is to ensure that FHA mortgage lenders and brokers are equipped to protect consumers and 

taxpayers from undue loss. At MBA, we strongly believe that rigorous licensing and registration requirements, as well as increased 

net worth and minimum bonding requirements, are essential components of any framework. 

Madam Chairwoman, my company has been making FHA loans 

since the 1950’s. In all of our experience, I cannot think of a more 

important time in FHA’s history than now. MBA appreciates all 

that FHA is doing to provide stability, liquidity, and affordability 

during this difficult economic downturn. I would not want to envision a mortgage market without it. Were it not for FHA, many 

Americans would not have access to record low interest rates, tax 

credits, and other measures intended to preserve homeownership 

and jump-start lending. 

I want to close by urging this committee to be proactive and to 

take the steps necessary to make sure FHA is there now and in 

the future serving potential homeowners and supporting our mortgage market. 

Thank you. 

[The prepared statement of Mr. Story can be found on page 82 

of the appendix.] 

Mrs. MCCARTHY OF NEW YORK. Thank you very much for your 

testimony. Thank you all for your testimony. It is interesting sitting here in this chair because you have to basically stay on your 

toes and listen to every word that is being said. But I think it is 

interesting—on a number of things that a lot of you said. When we 

look at the foreclosures that we have unfortunately seen in the last 

year or so, and we talk about the predatory lenders, Ms. Golder, 

you are representing the real estate people, Mr. Story, you are representing the mortgage bankers. And I guess the curious question 

that I have from listening to you, being that so many bad loans 

were made over these years, new products as they call them, I am 

wondering if being that a real estate person usually has to basically bring the buyer to the house, I would take it that a lot of your 

real estate people probably saw some of these people being led 

down the garden path on, yes, you can afford this house with this 

kind of a mortgage. Have you heard any stories where the real esVerDate Nov 24 2008 17:38 May 12, 2010 Jkt 056234 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\56234.TXT TERRIE
38 

tate people really wanted to kind of warn the consumer at that particular point that there were better loans out there for them? 

Ms. GOLDER. Quite frankly, I have not. I am mostly in the land 

business, but you have to realize that Realtors are basically successful based on our reputation. So the skin-in-the-game that we 

have is our reputation within the communities, our involvement 

within the communities. It is not our job also to recognize whether 

someone is qualified. We normally send them to a mortgage lender. 

Mrs. MCCARTHY OF NEW YORK. Right. 

Ms. GOLDER. And it is between them and the lender as far as 

what they are qualified for, and then they tell us what they are 

qualified for and what price to—what house that they want to see. 

And then it is up to once they go into escrow, all of that usually— 

in Arizona at least—is taken care of in an escrow account. I know 

in other States, it is between lawyers, that addresses it. But we do 

not see nor do we ask for that kind of information as far as wanting to— 

Mrs. MCCARTHY OF NEW YORK. No, no. 

Ms. GOLDER. And we also, as the National Association of Realtors, I want you to know we have produced predatory lending brochures. We did that clear back in 2005. So we try to educate our 

members as to exactly what predatory lending is. 

Mrs. MCCARTHY OF NEW YORK. Well, that is basically—I am not 

putting any of this on your shoulders. 

Ms. GOLDER. Yes. 

Mrs. MCCARTHY OF NEW YORK. It is just that I know that I had 

heard from real estate people that they would basically look at 

some of what their consumers were buying, and they would say, 

how are they going to pay for this? I know it is not your—but I 

am just wondering in my own mind that it should not just be one 

person, whether it is the mortgage banker or whoever is looking at 

this, that maybe for the future we need more eyes. 

Ms. Bowdler? 

Ms. BOWDLER. NCLR is a large housing counseling intermediary 

funded by HUD. 

Mrs. MCCARTHY OF NEW YORK. Could you bring your microphone 

a little bit closer? 

Ms. BOWDLER. Sure. NCLR supports housing counseling agencies. We are a HUD housing counseling intermediary. Housing 

counseling agencies across the country really work primarily with 

the same demographic of FHA borrowers. And it was certainly the 

feeling of counselors that they were in the position of, if you could 

say it this way, making the borrower ‘‘eat their veggies,’’ and say— 

you know, give them the hard news of here is what you are going 

to have to do in order to qualify for a loan. And there were certainly plenty of other good actors out there who were doing that. 

And the problem really was, I think what we saw in the market, 

is bad practices really drove out good. So for every housing counselor, real estate agent or lender out there who said, this is a bad 

idea, you had five more brokers who said, ‘‘Why wait? I can get you 

into a house today.’’ And there were no protections in place to prevent that. 

And a lot of times the consumers, it came down to a battle of experts. You have an expert across the table saying, ‘‘Yes, you can 

39 

do this. I can help you do this.’’ They took advice from the wrong 

people. But there were certainly those out there who were giving 

advice to the contrary, counselors, Realtors, brokers, but we could 

not be heard above the roar of the predatory folks. 

Mrs. MCCARTHY OF NEW YORK. And part of the legislation that 

hopefully we will see on the Floor in the next couple of weeks, 

there is going to be a very large part on consumer educational programs, financial literacy. I am a great believer in being educated 

because a lot of us, when we bought our first home, did it the oldfashioned way. You had to show you could afford the taxes, you 

could pay your insurance, and all the other issues that it takes to 

basically run a house. It is not just paying the mortgage. There is 

a lot more responsibility, so I certainly support that. 

Mr. Story, this committee has just approved a systemic risk bill 

that would require lenders and securitizers to retain 5 percent of 

the credit risk of any mortgage they sell. Given the importance of 

FHA to the housing market, should we consider exempting certain 

qualified mortgages, like FHA loans, from risk retention? 

Mr. STORY. Yes, I think that should be a consideration for a 

number of factors. One is that we heard earlier today that the FHA 

is going to do a more stringent underwriting process as well as 

they are going to spend more time evaluating lenders who sell 

them loans and have a list of lenders and their percentage of success I would suggest. The outcome of getting a loan put back to the 

lender is certainly skin-in-the-game if they are asked to repurchase 

a loan in a timely manner. So I think that is sufficient. 

Mrs. MCCARTHY OF NEW YORK. My time is up. Thank you. Mrs. 

Capito? 

Mrs. CAPITO. Yes, thank you. Ms. Schnare, thank you for the 

suggestion, it was your suggestion to have rather than just an annual audit, to have something—and you heard the Secretary’s response. Are you satisfied that—I mean he said they were looking 

at this daily. I asked for maybe a twice-a-year kind of assessment. 

You are in this business. Do you think that is not just a step in 

the right direction but is sufficient to be able to detect what direction we are going and if improvements are being made? 

Ms. SCHNARE. There are a number of things that should be done, 

which I heard them saying they intended to do. And one is more 

regular updates of the audit. That is a fairly formal process. But 

there are other things that do not now exist at HUD that I understand they are in the process of developing, which are targeted risk 

management reports to give key indicators. Looking at how loans 

are performing by the age of the loans, which I could not get the 

data on. Looking at mark-to-market LTV distributions. I think 

given their backgrounds and experience in the industry, they are 

going to produce monthly reports, weekly reports that give a lot 

more information than they give today, and I think they really 

are—if they do what they said they would, there is going to be a 

huge difference because those kind of reports have not existed at 

HUD. 

Mrs. CAPITO. Well, I will say that the fact that I think they said 

that 70 percent of the non-performing loans now are the older loans 

or that are already on the books or 70 percent of the ones that are 

40 

predicted to default are already there. So I think they are maybe 

looking at certain factors and indicators there. 

The question that I am concerned about, and anybody can answer this, although I think Ms. Golder probably might have the 

better handle on it, is the term of the still-falling real estate prices. 

So if HUD is out there making a $250,000 guarantee—loan on a 

guarantee, and they are in a region of the country where the prices 

are still falling, that to me would further endanger the fund. So 

what kind of comment do you have in terms of how we are looking 

out for this still constantly falling value in our real estate market? 

Ms. GOLDER. Probably the best answer would be to ask Lawrence 

Yun, who is our economist who would know whether or not they 

are falling. But, as we have said, in the last 7 months, we have 

seen prices stabilize and the market starting to improve. And I 

think we are seeing most markets across the country are stabilizing and rebounding, even California where they usually take the 

dive first. The East Coast, where you are familiar, Long Beach and 

up in the Connecticut area, prices have stabilized. So I do not believe you have to worry about prices dropping much more. They do 

appear to be stabilizing clear across the country. 

Mrs. CAPITO. Does anybody else have a comment on that? 

Ms. SCHNARE. I think it varies by market. And one of my concerns is whether or not FHA is increasing its share in markets that 

continue to decline, and I think that is the concern about very high 

LTV loans. If you basically have no money down and the market 

declines, and you lose your job, the only choice you have is really 

to default. 

Mrs. CAPITO. Right. 

Mr. STORY. Yes, I would just say that as an economic consideration it is probably more of a concern given the fact that interest 

rates are at historic lows and most people are being underwritten 

very stringently and going with 30-year fixed-rate mortgages, 

which given the stringent underwriting standards, as long as they 

stay employed they should be able to continue to make their payments. 

Mrs. CAPITO. Could I ask you a question, Mr. Story, then on the 

loans that you have closed over the last, let’s go back to 2005, of 

100 loans, how many of those would have been FHA? And then if 

you look at the end of 2009, where we are now, what percentage 

of that? 

Mr. STORY. For my company? Or in the industry? 

Mrs. CAPITO. Your company, yes. 

Mr. STORY. I think FHA was 2 to 5 percent in 2005, and it is 

anywhere now between 30 and 45 percent. 

Mrs. CAPITO. And what do you attribute that mostly to? 

Mr. STORY. I think a lot of the purchases now are first-time home 

buyers and they are new construction, and those are typically for 

that type of borrower goes into a FHA loan. There are not a lot of— 

terrible amount of products like there once was. There is a limited 

amount of types of loans you can get. And the people who are professionals in our business, a lot of them have been in the business 

for a number of years, do know how to do FHA financing and it 

has become a better option for some people. 

Mrs. CAPITO. I think my time is up. Thank you. 

41 

Mrs. MCCARTHY OF NEW YORK. I am just curious, Mr. Story. 

When you say that you do an awful lot of the FHA loans, we also 

see an awful lot of the banks that are not making any loans. We 

see more certainly, and probably, Ms. Golder, you probably want to 

jump into this too, I know a lot of the community bankers, which 

usually work in the community, the smaller bankers, and they usually know their customers a little bit better, so between the two or 

any of you who are seeing this, are you seeing where it is easier 

for the average person who wants to get into buying a home because the prices have dropped, which is probably evening the market a little bit. I look at my house in Mineola. I could not believe 

that somebody would want to pay $525,000 for it. It is a tiny little 

home. It was my parents’. It was built in 1948. But yet, they were 

telling me at one point, it was worth $575,000. Now, certainly I 

would love to take that, but I do not think that is going to happen. 

Are you seeing with local community bankers are opening up for 

loans or are they still holding back? 

Mr. STORY. Well, my company also has a small community bank. 

Those that are in lending for purchases of homes, I do not see any 

significant holdback other than the standards to qualify are similar 

to what they were prior to some of the issues we have run into. 

So you are required to show that you are employed and you have 

money in the bank and that sort of thing. So that is going back to 

probably when we all got our first loans or whatever. 

Whether or not banks are lending money has a lot to do with 

whether or not they are in a position that they can due to regulatory concerns perhaps, but I think from just the mortgage lending 

aspect, there is plenty of credit available for those people who are 

qualified. 

Ms. GOLDER. I would agree that the community banks are lending. That they are in the community, they are invested in the community, they want to see that money stay in the community. Each 

home that is sold adds $63,000 to the economy within a community. Bankers understand that. And it seems the further away a 

bank or savings and loan gets from the community, the less likely 

that they are going to be involved. So the community banks, at 

least where I am from, are lending. 

Mrs. MCCARTHY OF NEW YORK. I want to thank everybody for 

their testimony. We certainly are going to look at and hopefully get 

this economy turned around. The housing issue is a big issue. Unfortunately, from those economists who are there, they are talking 

about unemployment will probably still continue to go up through 

2010. That is something hopefully we can all work on here to stop 

because that will also stop in my opinion many of the foreclosures 

that we are seeing now, that a lot of people just do not realize they 

are one paycheck away from, unfortunately, being unemployed. 

So with that, I thank you for all of your testimony and your patience on being here with us. Without objection, your written statements will be made a part of the record. 

This hearing is now adjourned. 

[Whereupon, at 3:45 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

December 2, 2009 

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