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THE FUTURE OF THE FEDERAL HOUSING 

ADMINISTRATION’S CAPITAL RESERVES: 

ASSUMPTIONS, PREDICTIONS, 

AND IMPLICATIONS FOR HOMEBUYERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 8, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–87 

( 

(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) 

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

JOE DONNELLY, Indiana 

MICHAEL E. CAPUANO, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

LUIS V. GUTIERREZ, Illinois 

STEVE DRIEHAUS, Ohio 

MARY JO KILROY, Ohio 

JIM HIMES, Connecticut 

DAN MAFFEI, New York 

SHELLEY MOORE CAPITO, West Virginia 

THADDEUS G. McCOTTER, Michigan 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

RANDY NEUGEBAUER, Texas 

WALTER B. JONES, JR., North Carolina 

ADAM PUTNAM, Florida 

KENNY MARCHANT, Texas 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 8, 2009 ................................................................................................. 1 

Appendix: 

October 8, 2009 ................................................................................................. 37 

WITNESSES 

THURSDAY, OCTOBER 8, 2009 

Bell, Peter H., President, National Reverse Mortgage Lenders Association 

(NRMLA) ............................................................................................................... 27 

Bryce, Teresa, President, Radian Guaranty Inc., on behalf of the Mortgage 

Insurance Companies of America (MICA) .......................................................... 29 

Campbell, Boyd J., member, Executive Committee of the Maryland Association of Realtors; member, GSE Presidential Advisory Group, National Association of Realtors (NAR) ..................................................................................... 22 

Councilman, John L., CMC, CRMS, FHA Committee Chair, National Association of Mortgage Brokers (NAMB) ...................................................................... 25 

Kittle, David G., CMB, Chairman, Mortgage Bankers Association (MBA) ........ 23 

Newport, Patrick, U.S. Economist, Director of Macroeconomic Forecasting, 

IHS Global Insight ............................................................................................... 19 

Pinto, Edward J., Real Estate Financial Services Consultant ............................. 20 

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

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

APPENDIX 

Prepared statements: 

Bell, Peter ......................................................................................................... 38 

Bryce, Teresa .................................................................................................... 45 

Campbell, Boyd J. ............................................................................................. 54 

Councilman, John L. ........................................................................................ 69 

Kittle, David G. ................................................................................................. 85 

Newport, Patrick .............................................................................................. 95 

Pinto, Edward J. ............................................................................................... 99 

Stevens, Hon. David H. .................................................................................... 192 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Responses to questions submitted to Peter Bell ............................................ 204 

Responses to questions submitted to Teresa Bryce ....................................... 208 

Responses to questions submitted to Boyd Campbell .................................... 210 

Responses to questions submitted to David Kittle ........................................ 212 

Responses to questions submitted to Edward Pinto ...................................... 214 

Written statement of NID Housing Counseling Agency ............................... 218 

Capito, Hon. Shelley Moore: 

Written statement of Dr. Andrew Caplin, New York University ................. 220 

(1) 

THE FUTURE OF THE FEDERAL HOUSING 

ADMINISTRATION’S CAPITAL RESERVES: 

ASSUMPTIONS, PREDICTIONS, 

AND IMPLICATIONS FOR HOMEBUYERS 

Thursday, October 8, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the subcommittee] presiding. 

Members present: Representatives Waters, Green; Capito, Miller 

of California, and Lee. 

Also present: Representative Garrett. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. 

Good afternoon, ladies and gentlemen. I would like to thank the 

ranking member and other members of the Subcommittee on Housing and Community Opportunity for joining me today for this hearing on, ‘‘The Future of the Federal Housing Administration’s Capital Reserves: Assumptions, Predictions, and Implications for 

Homebuyers.’’ 

Before I begin, I would like to note that, without objection, Representative Scott Garrett will be considered a member of the subcommittee for the duration of this hearing. Without objection, it is 

so ordered. 

The Federal Housing Administration was created during our last 

major housing crisis, the Great Depression. At that time, 50 percent of mortgages were in default or foreclosure. Today, we face a 

housing crisis that is perhaps less severe, but still considerably 

grave for millions of American families facing foreclosure or trying 

to buy a home. 

Markets have contracted, and homebuyers have limited options 

when trying to get a mortgage. As a result, FHA has stepped into 

the void left by the private market. Today FHA is increasingly the 

only option for most potential American homebuyers, those who 

don’t have 20 percent for a downpayment. While FHA market 

share was around 3 percent of lending activity dollar volume as of 

2006, it has increased to nearly 30 percent of all mortgages originated today. With this drastic increase in market share, we must 

2 

continue to maintain the integrity of FHA mortgage insurance programs. 

I have long been committed to ensuring that FHA remains an 

available, affordable, and safe option for all families. I wrote legislation ensuring that FHA could provide an alternative to subprime 

lenders, the Expanding American Homeownership Act of 2007, 

which was ultimately included in the Housing and Economic Recovery Act of 2008. Also, in May, the President signed the Helping 

Families Save Their Homes Act of 2009, which included a provision 

I authored to ensure that FHA programs remained out of bounds 

for the worst predatory lenders who created our mortgage crisis. 

It is a myth that the FHA is the new subprime and has adopted 

lower underwriting standards and other worse abuses of the 

subprime market; in fact, just the opposite is true. A recent Federal 

Reserve report indicates that over 60 percent of the increase in 

FHA purchase activity between 2007 and 2008 was to borrowers 

with prime-quality FICO scores. Additionally, the percentage of 

loans in FHA’s portfolio with loan-to-value ratios above 95 percent 

has fallen from 72 percent in 2007 to 67 percent in 2008. And unlike the subprime market, all of FHA’s mortgages require full documentation and verification of the borrower’s income and assets. 

Let us be clear: Without FHA, there would be no mortgage market right now. Private mortgage insurance companies have raised 

prices and tightened standards to a level that leaves out many potential homebuyers. With 30 percent of the overall market and 

nearly 80 percent of the first-time homebuyer market, the FHA is 

a crucial tool for ensuring a housing recovery. 

I am eager to hear from Commissioner Stevens about the steps 

he has taken to ensure the long-term future of the FHA. I understand the concerns that have been raised regarding reports that 

the FHA’s capital reserve ratio will fall below the 2 percent threshold mandated by Congress. Though we do not know yet the exact 

level of the capital reserve ratio for Fiscal Year 2009, we know that 

the economic downturn has affected FHA. I am also interested to 

hear our witnesses comment on how overall economic conditions 

will continue to affect FHA, and how industry groups are responding to FHA’s increased market share. 

I look forward to hearing the testimony of today’s witnesses. 

And now, I would like to recognize our subcommittee’s ranking 

member to make an opening statement. Mrs. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. Thank you for 

holding this hearing today on recent reports considering the financial health of the Federal Housing Administration. 

The financial stability of the FHA program is a key factor to reviving the housing market and to our economic recovery. Since the 

subprime collapse, the FHA has emerged as the major mortgage 

market participant. In fact, as the chairwoman has stated, FHA insures 23 percent of all new single-family mortgage loans this year 

and currently backs a total of 5.2 million home loans. 

As we wait for the private securitization market to recover, prospective homeowners and specifically first-time homebuyers have 

come to relay on the FHA program as a source of mortgage credit. 

Last month, on September 18th, FHA Commissioner David Stevens, our witness here, announced that an upcoming actuarial 

3 

study of the health of the FHA would show the Mutual Mortgage 

Insurance Fund’s capital reserve ratio will drop below the congressionally mandated threshold of 2 percent. At the same time, Commissioner Stevens was quick to assure us that the FHA Insurance 

Fund has ample reserves to cover future losses and will not require 

a taxpayer bailout. And I am certain we will hear more about that 

as we move through the hearing. 

I am encouraged that HUD has announced several key changes 

designed to enhance its ability to manage risk, and specifically the 

decision to hire a chief risk officer—probably way overdue, in your 

opinion. 

While these recently announced measures are important steps, I 

continue to be concerned about the FHA’s viability and its ability 

to administer the program in a safe and sound manner. Much has 

been said and written about the need for the FHA to upgrade its 

technology and staff. With the significant increase in the FHA’s 

book of business, modern technology and highly skilled staff are 

fundamental to the future viability of the program, and I look forward to hearing today about the steps being taken to bring FHA 

into the 21st Century. 

I would like to commend Congressmen Lee and Adler on their 

bill, H.R. 3146, the 21st Century FHA Housing Act of 2009, designed to provide the HUD Secretary with the flexibility to hire 

new employees necessary to ensure the FHA is run in a manner 

that ensures its financial stability. This legislation also includes 

provisions designed to target fraud and abuse within the FHA system. 

As FHA’s market share has grown, more bad actors have attempted to gain entry into the program. Originators with poor underwriting standards or who have engaged in mortgage fraud 

should not be FHA-approved mortgagees. The FHA must improve 

its monitoring of mortgagees to make sure that all FHA-approved 

lenders are conforming to the program’s underwriting standards. 

I am anxious to hear from Commissioner Stevens what steps the 

Department is taking to root out fraud and abuse in the system. 

Are the current FHA matrix appropriate for the current markets? 

We have all heard about these mortgages where not even the 

first payment has been made. Does FHA monitor first payment default rates? If so, what statistics do you have on these defaults? 

And what recourse do you have with the lender that makes such 

a loan? 

In late 2007, FHA issued regulations to implement a risk-based 

pricing program, yet Congress implemented a moratorium through 

the HERA legislation, which initially prevents HUD from implementing any risk-based pricing through October 31, 2009. Does 

HUD intend to implement a risk-based pricing program once the 

moratorium expires? If not, then why not? 

Finally, perhaps the Commissioner could give us an update on 

the seller-funded downpayment book of business. These loans have 

been banned at HUD’s request because HUD said that these loans 

were problematic and causing a drain on the fund. How much of 

a drain on the fund have these loans been, and when will their impact begin to diminish? 

4 

I want to welcome Commissioner Stevens back to our subcommittee. The FHA program is important, and Congress and 

HUD need to do whatever is necessary to make sure these programs run in a manner that does not expose the taxpayer to yet 

another bailout. I look forward to hearing from all of our witnesses 

today on how best to ensure the future viability of the FHA program. 

Again, I would like to thank the chairwoman for holding this 

hearing, and I look forward to hearing from our panels. Thank you. 

Chairwoman WATERS. Thank you very much. 

Mr. Green is recognized for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. And, Madam 

Chairwoman, I thank you for the work that you have done to not 

only help people acquire affordable housing, but also to maintain 

the affordable housing that they may acquire. It has been a labor 

of love for you, and you have worked to make sure that people are 

qualified for the housing that they ultimately acquire. And that, I 

think, speaks well for your work in Congress. 

Commissioner, I thank you for being here today. I am eager to 

hear your testimony as well. If I don’t hear it all here, I will hear 

it from someplace. I will have to leave at some point. 

I, too, as was indicated by the Chair, am appreciative of what the 

FHA has done because it has been an alternative to the subprime 

market, which means that it has been an alternative to teaser 

rates, it has been an alternative to prepayment penalties, it has 

been an alternative to 3/27s and 2/28s. It has been a means by 

which persons did not have to subject themselves to yield-spread 

premiums that they were not aware of. FHA has been a straightforward, fair process. 

I was saddened to see that the ratio may drop below the 2 percent threshold mandated, but by the same token, I have read 

where you have indicated that we still have $30 billion in reserves, 

and that $30 billion will take us through the next several years 

wherein the crisis that we are having to cope with may at some 

point bottom, and we may find ourselves on an upswing. 

But I do look forward to your testimony, and I am a fan and supporter of FHA. It has been an option for some, but for many it was 

the only fair option alternative, if you will, to the subprime market 

that was so devastating to so many people who actually qualified 

for better loans than they received. 

I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. 

Mr. Miller is recognized for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Commissioner Stevens, welcome. It 

is good to see you again today; we talked yesterday. 

I will say what a difference a day makes. I look back, and between 2000 and 2005 in my district, FHA loans dropped by 99 percent. They were just worse than finding hens’ teeth at that point 

in time. Nobody had them. The reason was the rates that you could 

loan were so low that you couldn’t be active in a high-cost area. 

And in about 2000, I started working to raise conforming loan limits in high-cost areas and FHA loan limits, because it seemed like 

high-cost areas were discriminated against. We only had one type 

5 

of loan available. The GSEs really couldn’t compete. FHA was just 

nonexistent. 

I know we have gone through turmoil in recent years, FHA went 

through some problems, but not unlike the reverse mortgage industry did. The GSE loans had trouble, home equity loans had trouble. 

And you have made a real gallant effort to revamp these areas and 

take the problems out that existed, such as subprime. Defining 

subprime versus predatory was something that was talked about 

for the last 8 or 9 years; we could never get any traction in doing 

that. Recently, people realized that has to be dealt with, and I 

think you have done an effective job dealing with that. 

And it seems like you have restructured FHA. You have looked 

at the appraisal problems you had in the past. You have looked at 

the underwriting problems, default codes. You have gone through 

it, and I think you have done an excellent job determining how to 

make FHA profitable and viable in the future, and I think you are 

probably going to explain that today. But I think many people don’t 

realize what you have made changes on, the problem areas, and 

that FHA is probably going to be profitable in the last year’s loans 

you have made, which would put you in a different situation than 

many think you are in. 

But we have had tremendous problems in this country in the 

housing industry, and if it weren’t for GSEs and FHA—for example, you are making about 95 percent of all the loans in the marketplace. I don’t think many people who are buying houses and 

selling houses today, when they go through Bank of America or 

Wells Fargo, realize that their loan is ending up with Freddie Mac 

and Fannie Mae, and the FHA is involved in so many areas that 

people think it is what it used to be, and it is not. If it wasn’t for 

FHA and GSEs, there would be no housing market today, in my 

opinion. 

People are in a very difficult situation. People who own homes 

have lost tremendous amounts of equity. People who want to buy 

homes are at a point where they can finally afford to buy a home. 

But if it wasn’t for the work you are doing in the marketplace and 

the GSEs, those opportunities would never be available. I can’t 

imagine what level housing prices would be today if you weren’t 

serving the people you are serving, because when you have far too 

many homes on the market, and there are just no loans available, 

the value of homes just continues to drop. 

I have never seen a time in the years I have been in the development industry—over 35 years—where banks didn’t want to lend 

money and banks didn’t want deposits. For a bank to take a private deposit from an individual, if it is a large amount of money, 

it is a liability. It seems like banks today are just holding on to liquidity, concerned about what is going to happen in the future in 

further foreclosures and what is going to happen in the commercial 

industrial foreclosure sector. 

So I applaud you for being aggressive in the marketplace. I think 

you are being very prudent in what you are doing. When I say aggressive, I don’t mean aggressive in a risky fashion; I think you 

have been very cautious. You have looked at the situation and you 

say, what were our problems in the past, and let us look to the future. 

6 

I think the $8,000 tax credit helped tremendously. And we talked 

yesterday about looking at the Down Payment Assistance Program 

that the private sector has had in the past and saying let us find 

the problems that have existed in the past in that area, and let us 

rectify those, get the bad players out. And let us look to the future; 

how can we do this in a way to create more opportunity and continued opportunity for people who need the assistance of a downpayment, yet knowing that we are making loans to people who can 

repay those loans, that underwriting standards are consistent with 

what FHA does. And I applaud you in your willingness to look in 

that direction. 

When you met with us, none of us wanted to do anything that 

was inappropriate, nor anything that would put the government 

and the FHA at risk. I think we all understood that. And I think, 

working together, we can come up with some guidelines and parameters that will work and be viable. I look forward to doing that, 

and I look forward to your testimony. 

Thank you, and I yield back. 

Chairwoman WATERS. Thank you very much, Mr. Miller. 

I am pleased to welcome our first distinguished guest for our 

first panel. Our first witness will be the Honorable David Stevens, 

Assistant Secretary for Housing, and Federal Housing Administration Commissioner, U.S. Department of Housing and Urban Development. 

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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. STEVENS. Thank you, Chairwoman Waters, Ranking Member 

Capito, and members of the subcommittee. Thank you for the opportunity to testify on behalf of the Federal Housing Administration to talk about the capital reserve ratio. 

As you know, the FHA is playing a critical role in the housing 

market and our economy right now, insuring one-third of all homepurchase mortgages, and 80 percent of its purchase loans are for 

first-home homebuyers. But as you know, FHA recently announced 

that our independent, nongovernmental actuarial review is expected to predict that FHA’s capital reserve will fall below 2 percent. 

There has been considerable confusion about what this announcement means for FHA’s overall health, whether this means 

the taxpayer will bear any responsibility going forward. And so I 

welcome this opportunity to clarify our situation and discuss the 

proactive steps being taken to ensure that FHA remains financially 

sound so that we can continue to support and revive our housing 

market. 

Let me simply state at the outset that based on current projections, absent any catastrophic further home price decline, FHA will 

not need to ask Congress and the American taxpayer for extraordinary assistance. We will not need a bailout. 

FHA has two reserve accounts, which combined currently hold a 

record level of more than $30 billion in cash reserves, which is 

more than 4.4 percent of our insurance in force. FHA holds reserves for projected losses over the next 30 years. This is far more 

7 

conservative than international standards for banks or other financial institutions. 

The capital reserve account is a surplus reserve account that 

holds cash reserves in excess of the cash reserves held in our financing account, FHA’s primary reserve account. The FHA financing account is required to hold reserves for losses projected over a 

full 30-year period. Excess funds above and beyond that are held 

in a capital reserve account. This is somewhat analogous to a 

checking and savings account scenario. The financing account, or 

checking account, holds reserves to pay default claims and losses 

and receives any payments from premiums, while the capital reserve, the savings account, holds surplus cash. 

So why is the capital reserve ratio predicted to fall below 2 percent? That is because the capital reserve ratio only measures how 

much capital is in that secondary reserve account. In light of the 

severe decline in home prices, overall performance of the economy, 

and future housing price projections, FHA expects higher net losses 

than previously estimated on outstanding loan guarantees over the 

next 30 years. As a result, surplus funds will be transferred from 

the capital reserve account to the financing account. That change 

will drive that secondary account ratio down below 2 percent. However, there will still be substantial funds remaining in the capital 

reserve account over and above the necessary reserves held in the 

financing account to meet future expected losses. 

This is not a semantic point. While these funds were transferred 

from the capital reserve account to the financing account, they 

have not been spent. In fact, even as we experience historically low 

exceptional conditions in the housing market, FHA still has current 

reserves of more than $30 billion in its combined financing and 

capital reserve accounts. 

I hope this visual helps, but if you look at the capital reserve, 

the combined accounts, as of September 30th, the capital reserve 

portion was well above the 2 percent threshold as of the last report. 

The financing account held the amount of funds needed to pay forecasted losses based on that independent actuarial review. Now that 

there has been an updated forecast with future home price declines 

expected, changes in the discount rate, loss severity differences, 

etc., money will transfer from the capital reserve account into the 

financing account, thus putting more money in the financing account to pay expected losses. Less money will remain in the capital 

reserve account, putting it below that 2 percent threshold requirement. Yet overall the combination of our capital reserve will be 

higher than it has ever been. 

While private mortgage insurers, lenders, Wall Street firms, and 

the GSEs participated in both owner-occupied and investor-owned 

markets, they were exposed to exotic mortgages, such as option 

ARMs, interest-only loans, and some tolerated lax underwriting 

standards, FHA stuck to the basics during the housing boom: 30- 

year, fixed-rate, traditional loan programs with standard underwriting. 

Indeed, while some have compared FHA’s practices to those of 

Fannie Mae and Freddie Mac, FHA covers a much narrower, more 

conservative segment of the market. It only insures owner-occupied 

residences, and has never insured exotic, subprime, Alt-A or ‘‘no 

8 

doc loans.’’ FHA has never wavered from requiring full documentation of employment and income when underwriting for home purchases. This responsible approach has allowed us to limit losses 

during the economic crisis and fulfill our mission of providing safe 

opportunities for homeownership to those who can afford a home. 

Still, I am committed to ensuring that the agency takes every 

step possible to provide a clear direction for FHA to address this 

mortgage crisis. In support of the President and Secretary Donovan’s policy and vision to remain financially healthy for the long 

term, I have already begun to improve portfolio analysis and risk 

management, tighten our risk controls, and overhaul our targeting 

and monitoring practices. 

We have made more significant credit policy changes in my first 

2 months here than FHA has made in decades. We have brought 

on new leadership with broader and deeper knowledge of skills and 

a tighter set of risk controls for the agency, recently hiring a new 

Deputy Assistant Secretary for Single-Family Housing, who started 

this week, and we are in the process of hiring a Chief Risk Officer 

to oversee the single-family division that we want devoted solely to 

managing and mitigating risk to the insurance fund. 

With Congress’ help, we are working to modernize our information technology systems so that we can develop a set of commonly 

used fraud-detection tools and fully automated underwriting systems to help us focus our attention on the loan files that are most 

likely to contain serious deficiencies. I have included more detail on 

each of these topics in my written testimony, and I would be glad 

to answer any of those today. 

So even as FHA is once again playing a critical countercyclical 

role in the economy, stepping up to ensure housing markets function where the private sector cannot on its own, as it did during 

the Great Depression and during the Oil Patch crisis of the 1980’s, 

we are taking nothing for granted. FHA is working aggressively to 

make sure our reserves reach congressionally mandated levels over 

projected future losses, and to ensure that we keep affordable, responsible loans flowing, our housing market viable, and our economy on the road to recovery. 

Once again, I would like to thank you for the opportunity to participate in today’s hearing and for your continued leadership. And 

with that, I am happy to answer any questions. 

[The prepared statement of Assistant Secretary Stevens can be 

found on page 192 of the appendix.] 

Chairwoman WATERS. Well, thank you very much. 

I am very pleased that you are here today, and your statement 

is very clear. And I think that should allay a lot of the fears that 

seem to have been generated after the initial announcement was 

made about the level of the capital reserve fund, I believe it is. 

I think those of us who have watched FHA and its performance 

for quite some time now and understand very well that FHA was 

undermined basically by a lot of the subprime lenders who put 

those exotic products out into the marketplace that you alluded to, 

the ‘‘no doc’’ loans, the Alt-A loans, all those exotic products. And 

people fell into getting into those mortgages, many of whom did not 

understand what they were doing, and it really undermined the 

work of FHA. However, since the meltdown, we find that FHA is 

9 

not only providing those mortgages, but we are all depending on 

FHA to keep this mortgage market going. And we think that so far 

a good job is being done, and, as you can see, just judging from the 

testimony of Mr. Miller, that there is bipartisan support for FHA. 

And so we are delighted that you are here today. 

I don’t have any real questions about whether or not you are viable. You said very clearly that you are not coming here asking us 

for any extraordinary bailout, and that should be made clear. But 

I do want to ask you about one area that I was interested in and 

try to correct the problem, and that is this: I discovered some time 

ago that there were those bad actors out there who, in my estimation, were trying to take advantage of FHA and whom we knew 

had committed certain atrocities, who continued to come back time 

and time again. I hope that the amendment that I was able to put 

forward will stop them and give you the support that is needed at 

FHA to keep you from having to do business with them. Have you 

paid attention to this, and what is happening with the bad actors? 

Mr. STEVENS. I do appreciate the question. And I very much appreciate your support, particularly our ability to hopefully invest 

the dollars needed to create fraud-protection tools and have the 

personnel to support that effort. 

Let me just try to articulate what happened as a result of the 

housing crisis in the mortgage finance system, and how it affected 

FHA, and how that has transitioned since then. 

In the fall of 2007, starting around August, with the beginning 

of American Home, which ultimately led to the collapses of Lehman 

and AIG and others in the industry that were engaged in the 

subprime marketplace particularly, the sudden collapse in the industry affected this loan officer pool which was prevalent across 

the country originating those kinds of mortgages. And what I saw 

when I was in the outside world running large financial institutions was a sudden migration almost overnight of what I would describe as rogue players on the margin, who went to the industry 

to originate any loans that they could originate, many of whom migrated to the FHA program to originate loans that were in the 

manually underwritten band of the product, which allowed them to 

do subjective decisionmaking to do those loans. That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet and 

has a direct impact on this capital environment that we are in 

today. 

A lot has changed since then. First and foremost, most financial 

institutions started by putting credit score floors onto their book of 

business. But FHA, as well, saw other things that they were doing 

to improve that book of business. Most importantly are the changes 

that we have put into place in recent weeks. In my first 2 weeks 

on the job, we suspended Taylor, Bean & Whitaker, which had a 

much lower credit portfolio profile compared to other institutions in 

our portfolio. 

That was an institution I had watched on the outside. And when 

I came in, we immediately began a deeper investigation, only to 

find that they had not submitted timely financials and that their 

behavior was not acceptable to the FHA standards. We suspended 

10 

them within 24 hours. They had to close their doors, which shows 

the weakness of that institution. 

The changes that I made around capital that we are proposing 

by rulemaking now that will change the capital standards for the 

industry will do two things. One, it will eliminate thinly capitalized 

mortgage participants who should not be in the business and cannot back up representations and warranties. The second thing that 

changing the capital will do is it will allow our team, which is very 

qualified but has resource limitations, to focus on the remaining 

sector of the industry to make sure that their manufacturing loans 

according to the quality expected of the FHA. 

Chairwoman WATERS. I thank you very much. Basically what 

you are telling us is that the quality of the loans that you are making gives you the confidence that we don’t have to worry about extraordinary requests anytime soon. 

Mr. STEVENS. Yes. Let me just be very clear. The quality of the 

2009 book is very different than the quality of previous books. That 

is not just in our data or the actuarial data. It is in the HMDA 

data, it is on the Federal Reserve Board side. Our average credit 

score is up significantly over previous years, bordering near 690 

from about 630. The percentage of our business below 620 FICOs, 

which are the worst performing loans in the book, has dropped 

from approximately 50 percent down to about 10 percent. So we are 

not getting that kind of ‘‘tail risk’’ in the business, as we would call 

it in the credit risk management world. And the overall data portfolio is very different. 

I do want to articulate, however, that I am making certain that 

we take every step necessary to get the capital level to where it 

needs to be. These steps that I announced just in the past few 

weeks, in my opinion, were very clear immediate steps that needed 

to be taken to make sure that we do things above and beyond what 

FHA’s product quality would naturally do to get the credit characteristics improved. If that is not enough, we will make additional 

changes. 

Chairwoman WATERS. Thank you very much. Mrs. Capito? 

Mrs. CAPITO. Thank you. And I applaud you for the changes that 

you have been making and look forward to more in reaction to the 

changing market. 

I had a couple of questions in my opening statement. I am going 

to go to the first one. I asked about the risk-based pricing program 

which is on a moratorium through the end of this month. And I 

wanted to know what your intentions were to—do you intend to implement the risk-based pricing after the moratorium expires, and 

why or why not would you be doing that? 

Mr. STEVENS. I am going to answer your question this way. First 

of all, I am well aware of the risk-based pricing, and in my professional opinion, looking at the role that FHA plays in the market, 

our primary focus and the Secretary’s primary focus is to ensure 

that the housing market gets back on track. 

Today as we look at the portfolio, the need for risk-based pricing 

is not clear and, in our professional view, looking at the credit 

characteristics and the demographic characteristics of those who 

need and obtain FHA insurance for their mortgages to buy their 

11 

home, we believe there could be adverse selection and adverse impact to those who most need FHA the greatest. 

So currently I am not planning to implement the risk-based pricing, although we will look at it as we will look at every characteristic associated with risk in the portfolio. And we will address 

those items as we go forward. 

Mrs. CAPITO. So the answer to that is you are going to keep the 

moratorium on. Do you anticipate that having a hiring of the overall risk officer would have some relationship to whether you move 

in this direction or not? 

Mr. STEVENS. It will absolutely. The risk officer who we are hoping will join FHA is an extremely strong, well-known risk manager 

in the industry. And this individual will play a role to help be an 

arbiter, an independent objective advisor, solely focused on credit 

risk management. When this individual comes in, we will take that 

data review, how he builds his team, and take that into judgment, 

without question, in terms of decisions that are made going forward. 

Mrs. CAPITO. Let me ask you about the two reserve accounts that 

you have. You have indicated that FHA has $30 billion in reserves 

in the capital reserve account. Can you pull your little chart up 

there? So that is the green part, right? 

Mr. STEVENS. Let me just cover them both. The green is the financing account. And it is this account that the 2 percent capital 

reserve does not apply to on both sides. The capital reserve is 

measured off of the secondary account, which is really by law stated to be excess reserves above and beyond the reserves that need 

to be held to pay for forecasted claims. 

Mrs. CAPITO. But it is mandated by Congress to stay at the 2 

percent or above level, correct? 

Mr. STEVENS. That is correct. 

Mrs. CAPITO. And the second one, it falls below that because you 

are scraping the money off to meet what you anticipate future 

losses may be? 

Mr. STEVENS. That is correct. 

Mrs. CAPITO. Let me ask you: Where is this money? Is it actually 

in an account somewhere where you can draw down on it, or is it 

like the Social Security Trust Fund, just sort of out there? 

Mr. STEVENS. The money is held in the Treasury. Is it held in 

a special account designed solely for this capital reserve? 

Mrs. CAPITO. Yes. 

Mr. STEVENS. We would have to ask the Treasury how they hold 

those funds. Here is what I would tell you, and I think it is critical 

and I have talked about this with other interagencies within the 

government. This is true excess capital that was generated through 

the MMI collections at FHA that are held—that are not being applied to losses. Those funds in any financial services standard 

would be real capital. 

So how the Treasury deploys capital: just like a bank. A bank 

will hold capital reserves. If every individual went to withdraw tomorrow their money from the bank, would the bank have that 

money in the balance sheet? I cannot answer that question nor can 

I attest to what the Treasury holds in its reserves today related to 

obligated funds. But I will tell you that it is real capital and it is 

12 

real excess reserves, and it is tracked specifically. And in fact, the 

moves that we take shift money from the capital reserve account 

to the financing account. 

Mrs. CAPITO. So we are still not really sure where it is, though. 

Let me ask you, then—pull your chart back up there. I want to 

make sure I understand this. So you are over on the second area 

right now where it is anticipated you are going to be. How do you 

anticipate moving that blue line up to the 2 percent if you are anticipating that the losses—that the possible losses that you could 

incur—we are looking at a market here now where we have rising 

unemployment, we have people who are defaulting on their mortgages, and I am certain that your default rate and your delinquency rate is up higher, I believe, than it has been. 

Mr. STEVENS. Yes. 

Mrs. CAPITO. And certainly that is a reflection, I don’t think of 

FHA, but it is just a reflection of the economy in general. How do 

you anticipate moving that blue line up and at what point—is that 

years into the future? And how long can that point stay below 2 

percent with a congressionally mandated level of 2 percent? 

Mr. STEVENS. Right. So the remedy—and we can talk about that 

maybe secondarily under Cranston-Gonzalez—gives the role of the 

Secretary to get it back above 2 percent. 

But before I go there, let me just answer the real core to your 

question. The independent actuarial review, although it is not complete because it doesn’t have the final fiscal year close September 

numbers in it, we don’t expect it to vary significantly. But the independent actuarial review is going to show that the FHA MMI fund 

will get back above 2 percent on its own, above 2 percent within 

the next 2 to 3 years. And the reason for that is the way that the 

capital will grow is that it will grow because new insurance is coming into the balance sheet at record levels, with credit characteristics that are significantly different than past book years, particularly 2007 and 2008. 

And let me just share with you a couple of factors that the actuarial audit took into account when they were coming up with this— 

when they were looking at the forecast of the fund. They assumed 

several key dynamics, but I want to share a couple of dynamics. 

They assumed that claims on the 2007 book of business, ultimate 

30-year lifetime claims, would run at 24 percent, more than double 

the worst year in history, almost. And that the 2004— 

Mrs. CAPITO. Claims on full mortgages that are defaulted; am I 

understanding that correctly? 

Mr. STEVENS. That lifetime claims on the 2007 book in total 

would be 24 percent. 

Mrs. CAPITO. So one in every four? 

Mr. STEVENS. That is right. Correct. And that its claims on the 

2008 book would run at about 20 percent. We will see those numbers may vary slightly based on their final forecast. But it is going 

to be close to that level that we expect to be in the review. 

The second thing it is going to use, it is going to use a forecast 

received from Global Insight—who I believe is on the next panel— 

that did a home price appreciation forecast. They will revise— 

Mrs. CAPITO. Appreciation? 

Mr. STEVENS. Home price forecast. 

13 

Mrs. CAPITO. Depreciation or appreciation? 

Mr. STEVENS. In this case it is a depreciation forecast. Thank 

you. This was a significant change over the previous forecast. 

A year ago when the audit was completed and provided to Congress, it used Global Insight’s forecast, which forecasted that the 

home price market would bottom out towards the end of this calendar year. In the forecast that is being used for this upcoming 

audit by our independent auditor, the forecast is based on information from about a month ago which shows that home prices will not 

bottom out until somewhere in the end of the first quarter of 2009. 

And home prices will— 

Mrs. CAPITO. 2010? 

Mr. STEVENS. Home prices will continue to decline approximately— 

Mrs. CAPITO. You said 2009. 

Mr. STEVENS. Excuse me, 2010. Thank you. 

And that home prices will continue to drop approximately 81⁄2

percent from now until then. And so that revision in that home 

price forecast, which is somewhat conservative based on many 

other forecasts we are hearing as of late, which I think is a wellfounded way to look and evaluate the strength of the fund, that additional forecast is overlaid onto that on top of our claim rate. 

The third item that I just want to highlight is what we call recovery rates, or we call it loss severity rates; in other words, the 

amount you recover when homes go into foreclosure. And the actuarial study is assuming that the recovery rates after foreclosure 

will also be significantly lower. 

So even with that 24 percent claim rate on 2007, 20 percent on 

2008, worst home price appreciation and worst recovery rates, it is 

still forecasted that the capital ratio—it is that number that the 

audit will say needs to be transferred into the financing account to 

cover losses. 

Mrs. CAPITO. Well, my next question—which I don’t have time 

for another question—was going to be what are you modeling this 

on, but you already answered that. So thank you very much. Thank 

you. 

Chairwoman WATERS. Thank you very much. Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. 

Let me start by complimenting you on the risk mitigation efforts 

that you are endeavoring to put in place. If you would, as briefly 

as you can, because I have another area that I would like to go 

into, tell me how this will function with the risk mitigation officer. 

How will that person function in your scheme of things, the type 

of access a person will have? And I compliment you because you 

are taking an affirmative step to do what we are having to mandate in some other areas. 

Mr. STEVENS. Thank you. And I appreciate your support of the 

moves we are making. 

I have worked in a variety of financial institutions. I was a senior vice president at Freddie Mac. I was an executive vice president 

at Wells Fargo. I have never been in a financial institution that 

hasn’t had a chief risk officer. That was the first move I promoted 

in coming into FHA. And the chief risk officer in FHA will function 

at an equal level to any direct report I have at the Deputy AssistVerDate Nov 24 2008 14:17 Apr 20, 2010 Jkt 055813 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\55813.TXT TERRIE
14 

ant Secretary level, and will also be directly involved in risk management discussions with the Secretary and other senior leaders 

within HUD and any interadministration discussions as we talk 

about risk management. So this individual will be coming in at a 

direct report position to me. 

This individual will also act as a completely independent organization within FHA. And I will be coming back with requests to create a broader organization under this individual over time to ensure that this organization is resourced to the level needed to appropriately analyze and impact risk management with policy recommendations over time. 

Mr. GREEN. Thank you. That may be a vote. If it is, I would like 

to be fair to my colleagues, so I will be brief with my next question. 

The net worth requirements for the mortgagees, I see that you 

are seeking to make sure that they are properly capitalized. Would 

you give just a brief explanation of how you plan to perfect this, 

please? 

Mr. STEVENS. Congressman, I appreciate the question. As you 

know, this is in—this is a rulemaking procedure, so it will go out 

for public comment. What we have proposed is as follows: that the 

minimum capital requirements for mortgage lenders will increase 

to $1 million. That is consistent with how other industry players, 

including Freddie Mac and Fannie Mae, set capital levels. There is 

a capital breakdown of tangible versus nontangible capital, which 

I would be glad to talk about in further discussions. 

But we have analyzed the ability to back up representations and 

warranties made by an institution. In my estimation, a million dollars should be the minimum in today’s mortgage industry market 

with the loan sizes that we experience today in the marketplace. 

That amount of capital is needed just to back up a limited number 

of claims that an institution may have to support should they manufacture a loan incorrectly. 

Mr. GREEN. You also are moving to do something with the loan 

correspondence to make sure that they are properly, shall we say, 

within the system. Can you please explain? 

Mr. STEVENS. Correct. Yes. A loan correspondent by definition at 

FHA is a mortgage broker. Mortgage brokers do not underwrite 

their loans or fund their loans, particularly do not fund their own 

mortgages. Those loans are sold on a wholesale basis and underwritten and funded by a wholesale lender, albeit Wells Fargo or 

Bank of America or whomever is ultimately funding those loans for 

them. Mortgage brokers act essentially as an extension of a lender. 

And to that extent, for FHA to be in the position of monitoring institutions that are clients of banks is not a position we should play 

in a quasi-secondary marketplace in the industry. 

Just to put it in perspective, Freddie Mac and Fannie Mae never 

monitor or approve mortgage brokers. They only approve direct 

sellers, and it really comes down to resource capacity, and the ability to have those resources be able to inspect that level of institution in the marketplace. There are tens of thousands of mortgage 

brokerage companies in America. If they had to all be approved by 

FHA, we would have to come to Congress and ask for a staff of 

thousands to be able to monitor an industry of this size. 

15 

We believe that the net effect will be that well-run, well-managed mortgage brokers, more of them will have access to the FHA 

program through their sponsoring lender. But it will remove the 

obligation and risk to the taxpayer and the government to have to 

monitor these tens of thousands of mortgage brokers who do not actually underwrite or fund their mortgages. So we believe it will be 

expansive to the marketplace as a net effect. But at the same time, 

it will control risk and fraud by putting that responsibility on the 

backs of the institutions that have the capital to back up representations and warranties. 

Mr. GREEN. Thank you, Madam Chairwoman. I yield back. 

Chairwoman WATERS. Thank you very much. Mr. Miller, before 

we go to vote, we will hear from you. 

Mr. MILLER OF CALIFORNIA. I appreciate your explanation on 

how your real capital reserves are handled and where they are at. 

The problem I have is not you, it is us. We have on-line budgeting, 

which is general fund monies. And we have off-line, which is Social 

Security, which we can’t spend. Then we send it to Treasury, and 

it becomes a unified budget and we spend it all. So we have probably already spent your reserves. Therefore, if you needed more, we 

would just write you a check, you would give it back to us, and we 

would spend it too. So I don’t think it matters where we go. In the 

end, it is the same. 

But you talked about increasing capital reserves for loan originators. Is that banks, mortgage brokers and such? How much have 

you increased? Is that the 5 percent we have talked about? 

Mr. STEVENS. In terms of capital reserves, the current standard for FHA is lenders can get an FHA Eagle with as little as $250,000 

in capital, of which only 20 percent has to be tangible. So for 

roughly— 

Mr. MILLER OF CALIFORNIA. Even if 5 percent of my loan is— 

Mr. STEVENS. We are taking it from $250,000 to a million dollars. 

Mr. MILLER OF CALIFORNIA. Okay. We have talked about in the past the $8,000. I kind of consider that a downpayment assistance 

program, through the government, of giving people $8,000 for firsttime home buyers. How successful has that been in the marketplace today? 

Mr. STEVENS. The downpayment assistance—excuse me, the tax, 

not the downpayment assistance. 

Mr. MILLER OF CALIFORNIA. Same thing. 

Mr. STEVENS. I think it is important to distinguish. The one rule 

that FHA made as it relates to the tax credit, is this tax credit 

could not be used for the 3.5 percent minimum downpayment requirement. It can be used for additional funds outside of that. 

We think it has had some impact on first-time home buyer access 

to the market place. I think the exact impact is being measured 

right now by the Administration and we will see, as we reflect 

back, the ultimate impact on that program. 

Mr. MILLER OF CALIFORNIA. Now, we have increased loan limits 

in high-cost areas. Has that had any impact on your capital reserves? 

Mr. STEVENS. Interestingly, the high-cost limits have not had an 

impact on capital reserves, but they have had an impact on certain 

markets. So just to give you a perspective on that, at FHA in our 

16 

total portfolio, loans over $417,000 are about 2 percent of our portfolio. So very little use of the high-dollar limits has been used. 

However in California, for example, 13 percent of the loans are 

FHA that we are seeing right now. So in high-cost markets, I believe FHA is having a profound impact. 

Mr. MILLER OF CALIFORNIA. A positive impact? 

Mr. STEVENS. Positive impact. 

And to use an example from your State, if you are looking at a 

$500,000 sales price today, and you are a family who wants to buy 

a home, they are qualified, they have income, they have good credit. But for lack of a $50,000 downpayment—which would be 10 percent—or a $100,000 downpayment—which would be 20 percent— 

they can’t buy a home and that could retard the recovery of communities. So with about a $20,000 downpayment, they can buy that 

home through FHA. 

And remember, these are fully documented borrowers with jobs 

and good credit. There is no stated income, nothing but a 30-year 

fixed rate mortgage in the program. 

So we believe that the program in markets such as California 

and other high-cost markets is having a direct impact. But it is not 

having a big impact on our portfolio. 

Mr. MILLER OF CALIFORNIA. There are some of us who fought on 

that issue for 8 years to get that to occur, because we really felt 

there would be a true benefit in these high-cost areas. 

What is your opinion on making that permanent? And also the 

home buyer tax credit, extending it to anybody who wants to buy, 

rather than just first-time home buyers, but anybody who is buying 

a home in this marketplace. On those two issues, what would be 

the current opinion? 

Mr. STEVENS. Let me separate them both. And first, the Administration is looking very closely at both of them, and we are working 

very closely with the data and we talk about it and look at the impact on the markets very carefully, and others who are testifying 

here today will have their own opinion. We believe that the higher 

limits have had a direct impact. 

And with the absence of capital, on nonconforming loans, we believe there could be an impact if private market capital is not readily available on loan amounts over the traditional conforming loan 

limits. So we do think at this point it has had an impact and we 

will look to see what the results are of that extension. 

As it relates to the first-time home buyer tax credit, there is a 

variety of data that we have been looking at, both in our own data, 

and the National Association of Realtors has published a great deal 

of data about it. We do know there has been a large number of 

first-time home buyers. We do know that 80 percent of our purchase transactions within FHA this year are first-time home buyers. So FHA is having a large impact on the first-time home buyer 

market. 

As it relates to specifically the impact of the tax credit and how 

that would impact the market going forward, that has not been 

measured to my satisfaction yet. 

Mr. MILLER OF CALIFORNIA. My last question is, the changes you 

made in appraisal standards and underwriting standards, what 

17 

benefit in the long run do you think those are going to have on the 

FHA system and GSEs and whatever throughout the marketplace? 

Mr. STEVENS. I think it will have a profound impact. I think it 

is going to be very important. We have the Home Evaluation Code 

of Conduct, which is a highly contentious rule that has been put 

out in the industry, primarily by Freddie Mac and Fannie Mae, has 

done—the most important thing that it did to help the industry 

was it separated influence in the transaction from a commission 

earning salesperson to the individual examining that collateral. 

And to that extent, having that arm’s length separation, I will tell 

you from my professional experience of almost 3 decades in this industry, was a very important move. 

Our announcement takes away some of the impacts that people 

have been most concerned with. One, it clearly states that the use 

of an AMC, an appraisal management company, is not required. It 

doesn’t prohibit, nor does it require, but it encourages the use and 

payment to appraisers that is common to the industry and it encourages that— 

Mr. MILLER OF CALIFORNIA. I do think we need some clarification, So we need to talk about that. But I thank you for your time. 

Chairwoman WATERS. You are certainly welcome. We are going 

to hear from Mr. Lee. We will be able to finish this panel and we 

will go take our vote and we will come back and take the second 

panel. Mr. Lee? 

Mr. LEE. I will be very brief, and I appreciate the chance to ask 

a quick question. 

I come from western New York, where we never really had a 

housing boom to bust, and it is a very conservative area where people are careful with how they spend their money. One of the concerns I hear over and over again is fraud and abuse and what we 

are trying to do to rein that in. I believe Mrs. Capito had mentioned the fact that myself and John Adler had gone together on 

a bill, H.R. 3146, to help provide some needed flexibility and support for you to amend some of this or ferret out some of the fraud 

and abuse. Unfortunately, right now this is languishing in the Senate. 

Specifically, what procedures do you currently have in place at 

the FHA to help identify fraudulent FHA lenders? 

Mr. STEVENS. Let me first respond by saying, again, we very 

much appreciate the support for building fraud tools. And at 

FHA—what I would strongly articulate for everybody who has concerns about this housing finance system is that without a strong 

FHA and well-managed FHA, this housing recovery would not be 

occurring, or any signs of recovery would not be occurring. And 

first-time home buyers would be literally, I believe, locked out of 

the market in a broad way, and minorities would be locked out of 

the market in a broad way. In order for it to remain strong, it must 

have risk management and fraud tools in place that are state-ofthe-art. And today, we have an exceptional group that does counter 

party risk management. Our Inspector General, as well, does audits. 

We work very closely in communicating information back and 

forth. We review institutions based on data that comes in on a 

monthly basis through our system, and we act on those instituVerDate Nov 24 2008 14:17 Apr 20, 2010 Jkt 055813 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\55813.TXT TERRIE
18 

tions. I do believe that support for expanding our technology, our 

systems, and our personnel is critical to the long-term performance 

of FHA and particularly critical to ensuring that we have enough 

resource capacity to weed out fraud in the marketplace. 

Mr. LEE. Let me just briefly—because I know we are running out 

of time. But through that analysis—and you have found now, 

through analysis, that you have a lender that is less than scrupulous, and we want to remove them, what specific steps are taken, 

then, to get them out of this program? 

Mr. STEVENS. It will depend on the nature of what we uncover 

with these companies. 

I would just like to back up. I think the SAFE Act in tandem 

with fraud tools is going to be a valuable tool; because what happens is often it is a rogue loan officer working for an institution 

who may perpetuate the fraud. And when we go after the institution, which we often do, that loan officer can simply walk across 

the street and start working for another company, without any 

monitoring. 

The SAFE Act, which goes into effect over the next year, will 

have a direct impact on monitoring those loan officers. I think to 

that extent it is critical. What we do is we have a mortgagee review 

board, which I chair. It includes the Inspector General, it includes 

the General Counsel, and it includes some of the key business participants. And we review those institutions on a frequent basis and 

we take action against those institutions. 

We have done a series of those in my first couple of months here. 

Taylor, Bean & Whitaker was obviously the big headline news, but 

there have been many others that we have taken action against. 

Mr. LEE. Thank you. With that, I will yield back. 

Chairwoman WATERS. Thank you very much. Thank you very 

much, Commissioner Stevens, for being here today. 

As Chair of the Subcommittee on Housing and Community Opportunity, I want you to know I am extremely pleased with what 

you have done in the short period of time that you have been there. 

We look forward to working with you. We believe, most of us, that 

FHA is extremely important for creating opportunities for people 

who could not otherwise get into the mortgage market, and we 

know that you will continue to do a good job. 

Thank you very much, and we are going to go and take a vote 

now and we will call on the next panel when we come back. Thank 

you. 

Mr. STEVENS. Thank you. 

[recess] 

Chairwoman WATERS. We will resume our hearing in this Subcommittee on Housing and Community Opportunity. And we will 

call up our second panel. I would like to welcome our distinguished 

second panel. 

Our first witness will be Mr. Patrick Newport, U.S. economist, 

IHS Global Insight. 

Our second witness will be Mr. Edward Pinto, real estate financial services consultant. 

Our third witness will be Mr. Boyd Campbell, member of the executive committee of the Maryland Association of Realtors, on behalf of the National Association of Realtors. 

19 

Our fourth witness will be Mr. David Kittle, chairman, Mortgage 

Bankers Association. 

Our fifth witness will be Mr. John L. Councilman, Federal Housing Committee chair, National Association of Mortgage Brokers. 

Our sixth witness will be Mr. Peter Bell, president of National 

Reverse Mortgage Lenders Association. 

And our seventh witness will be Ms. Teresa Bryce, president, Radian Guaranty, Incorporated, on behalf of the Mortgage Insurance 

Companies of America. 

Without objection, your written statements will be made a part 

of the record. You will now be recognized for a 5-minute summary 

of your testimony, starting with our first witness, Mr. Patrick Newport. 

STATEMENT OF PATRICK NEWPORT, U.S. ECONOMIST, DIRECTOR OF MACROECONOMIC FORECASTING, IHS GLOBAL INSIGHT 

Mr. NEWPORT. Thank you. My presentation includes charts that 

are on the last page of the handout. 

My name is Patrick Newport, and I am the director of long-term 

forecasting at IHS Global Insight, an economic forecasting and consulting company based in Lexington, Massachusetts. I have been 

with IHS Global Insight since 1998 and am part of the U.S. Macroeconomic Service where I cover the national housing market. I have 

a Ph.D. in economics from Harvard University and an undergraduate degree from Louisiana State University. Thank you for 

inviting to us this hearing. 

I have been asked to discuss IHS Global Insight’s U.S. housing 

outlook with a focus on housing crisis and the tax credit for firsttime home buyers. 

I want to start by discussing housing prices. According to a number of measures, housing prices are stabilizing. They are stabilizing 

nationally and across most large cities. They are stabilizing across 

the world. You can see this in the first chart which tracks the Federal Housing Finance Agency’s seasonally adjusted, Purchase-Only 

House Price Index at a monthly interval. 

Over the period from 2000 through 2006, inflation-adjusted 

house prices rose about 33 percent, peaking in March 2006. Since 

then, real prices have dropped 14 percent and are now 13 percent 

above their average value in 2000. Nominal housing prices, which 

are not adjusted for inflation, rose 63 percent over the same period 

of 2006 and have dropped about 11 percent from their peak. The 

FHFA House Price Index bottomed out in April 2009 and has risen 

now for 3 straight months. 

A second measure of house prices, the Case-Shiller House Price 

Index, is showing a similar pattern. In July, seasonally-adjusted 

prices increased in 17 of the 20 cities that Case-Shiller covers. Nine 

cities saw prices rise for the third straight month. Las Vegas was 

the only city reporting a steep decline. The key reason for this recent stabilization, which I would characterize as occurring much 

sooner than expected, is the decline in long-term interest rates. 

My third chart plots the yield on the 10-year Treasury note, 

which, as you can see, is near its lowest level since 1960. 

20 

The fourth chart tracks long-term fixed mortgage rates, which 

are also near historical lows. There are more reasons that prices 

are stabilizing. One is that prices have fallen so far that, by some 

yardsticks, they are below their long-run equilibrium value. 

A third reason is a tax credit for first-time home buyers which 

has stimulated demand. I would like to briefly discuss this factor 

because it plays an important role in IHS Global Insight’s housing 

outlook for 2009 and 2010. 

According to recent surveys of real estate agents by Campbell 

surveys, about 1.6 million of the 3.9 million homes sold through 

mid-September went to first-time home buyers. If one extrapolates 

these numbers, first-time home buyers will total about 2 million in 

2009 and about 400,000 of these, according to the survey’s methodology, will be incremental buyers; that is, buyers who would not 

have bought a home this year without the tax credit. The impact 

of the tax credit thus is not trivial. 

The main effect of the tax credit is to shift demand from 2010 

into 2009; therefore, once the tax credit expires, demand will take 

a hit, home sales will drop, and house prices will resume their 

downward course, depressed by the weight of rising foreclosures 

and rising unemployment rates. Our view is that home prices will 

drop another 5 percent from current levels, hitting bottom in 2010. 

My fifth chart is the forecast for home sales. As you can see, the 

pace has accelerated since bottoming out in the first quarter of this 

year, and we expect it to reach about a 6 million unit pace in the 

fourth quarter of 2009. The drop that you see in 2010 is a result 

of the tax credit expiring. We expect sales to tail off to about 5.5 

million in 2010. 

Although we don’t see bond yields heading substantially higher 

over the long run, it is too early for a bear market to begin, since 

we judge the economy as too weak, inflation too distant a threat. 

Markets appear to have taken this view, and yields are now below 

3.5 percent. And we expect them to remain below 4 percent in 2010 

and most of 2011. 

[The prepared statement of Mr. Newport can be found on page 

95 of the appendix.] 

Chairwoman WATERS. Thank you. Your time has expired. And 

we will get back to you with questions. 

We will now move to our second witness. That is Mr. Edward 

pinto, real estate financial services consultant. 

STATEMENT OF EDWARD J. PINTO, REAL ESTATE FINANCIAL 

SERVICES CONSULTANT 

Mr. PINTO. Thank you, Chairwoman Waters, Ranking Member 

Capito. Thank you for the opportunity to testify today. 

I have 35 years experience in all facets of housing finance. I am 

here to advise you of the growing crisis at FHA so that this subcommittee will not be able to say that no one told them. 

FHA’s annual rate of new foreclosure starts increased from 0.15 

percent in 1951, to 2.36 percent in 1998, to an estimated 4.4 percent in 2009. This is a 30-fold increase, an increase that would 

have been much greater but for the massive recent growth of FHA. 

This trend will continue as millions of recently insured high-risk 

loans start foreclosing in greater numbers. 

21 

FHA’s lending practices negatively impact each and every neighborhood in all of your districts. The reduction in downpayments 

over the past decades has helped fuel the rising foreclosure rates 

that have plagued FHA and conventional lending. 

Why does FHA appear destined for a taxpayer bailout? Number 

one, the FHA and the VA now account for over 90 percent of all 

low-down-payment loans. I have seen dozens of cases where market 

share expanded into a vacuum created by exiting players, and all 

ended badly. Two, FHA’s dollar volume has exploded and is running 4 times its volume in 2006. Three, FHA’s top dollar limit is 

now $729,000, double last year’s limit, and it just was raised in 

time as the high end of the home market comes under increasing 

stress. 

Yes, FHA’s average FICO score has increased from 631 to 672 in 

the last 2 years, and in August it was even higher at 692. Two 

notes of caution. August rates of 692 FICO about equals Fannie 

and Freddie’s FICO average of 695 on their combined $400 billion 

portfolio of low, low-down-payment fixed-rate loans that were 

owner-occupied, generally full-doc, many of the characteristics that 

FHA has. This portfolio is performing extremely poorly. Fair Isaac 

Corporation, producer of FICO scores, reports that a 690 FICO on 

mortgages originated in October 2008 performs like a 630 FICO in 

2005–2007. On a FICO basis, FHA’s risk has not improved. 

FHA’s early warning database shows loan performance is deteriorating. Its early warning default rate has increased by 57 percent since 3 years ago. If volume hadn’t grown so rapidly, it would 

have gone up even more. Its cure rate has dropped from 50 percent 

3 years ago to 19 percent today. Last month’s changes, such as an 

increase in lender net worth, are little more than Band-Aids. The 

issue has moved beyond net worth to FHA’s business being concentrated among four ‘‘too-big-to-fail’’ lenders. In August of 2009, 

Wells Fargo, Bank of America, Chase Home Finance, and Citi 

Mortgage were responsible for 85 percent of all FHA loans added. 

FHA has two reserve funds. You have heard that reported earlier. I estimate that the losses embedded in FHA’s $725 billion in 

single-family risk-in-force at $70 billion. Interestingly, Commissioner Stevens had some of the same numbers I came up with, 

about a 20 percent loss rate or default rate, and I used a 50 percent loss rate on those, yielding a 10 percent total loss yielding the 

$70 billion. The premiums charged on FHA loans are something 

under 5 percent. Therefore, there is a big shortfall. 

I don’t expect the audit to project the losses I am showing. I believe their assumptions will be overly optimistic both as to the loss 

mitigation benefits of loan modifications and recent and proposed 

underwriting changes. In my prepared remarks, I talk about the 

problems that the loan modification problems that FHA has had, 

are having, and continue to have, and I believe they are worth your 

study. 

There are four positive changes that would provide more consumer protection, police FHA lenders, and end FHA’s nightmare of 

foreclosures. First, set a minimum downpayment of 10 percent. 

Second, limit FHA’s volume to 5 to 10 percent market share. Third, 

reduce the dollar limit to a level consistent with the FHA’s lowVerDate Nov 24 2008 14:17 Apr 20, 2010 Jkt 055813 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\55813.TXT TERRIE
22 

and moderate-income housing mission. And, fourth, require FHA 

lenders to have skin in the game. 

I have also outlined in my prepared remarks a specific program 

on how to help homebuyers save the requisite 10 percent downpayment over a 5-year plan, and I would ask that you look at that 

also. Thank you very much. 

[The prepared statement of Mr. Pinto can be found on page 99 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Campbell? 

STATEMENT OF BOYD CAMPBELL, MEMBER, EXECUTIVE COMMITTEE, MARYLAND ASSOCIATION OF REALTORS; MEMBER, 

GSE PRESIDENTIAL ADVISORY GROUP, NATIONAL ASSOCIATION OF REALTORS (NAR) 

Mr. CAMPBELL. Madam Chairwoman, Ranking Member Capito, 

and members of the subcommittee, thank you for the opportunity 

to share our views of the importance of FHA mortgage insurance. 

My name is Boyd Campbell, and I am a managing partner and associate broker for Century 21 Home Center in Lanham, Maryland. 

I serve on the Maryland Association of Realtors Executive Committee and as a member of the National Association of Realtors 

Presidential Advisory Board on Government-Sponsored Enterprises. I have worked extensively with FHA and consumers who 

would not be able to purchase a home without it. I testify today on 

behalf of 1.2 million members of the National Association of Realtors. 

The Federal Housing Administration is more important than 

ever to homebuyers. In the wake of a collapsing private mortgage 

market, FHA has played a critical role removing inventory from 

the market and stabilizing home prices. For this reason and many 

more, the strength and solvency of the FHA is a top priority for Realtors who work every day building our Nation’s communities. We 

continue to believe in the financial stability of FHA and think their 

solid underwriting and prudent policies have helped them withstand the housing collapse. 

Although FHA’s capital reserves have fallen, it is important to 

remember that this is not the result of irresponsible lending or 

high default rates. Instead, it is simply the result of falling housing 

prices for the loans in their portfolios. The overall reserves of FHA 

have never been stronger, and their borrowers have higher credit 

scores and higher equity than ever before. 

We support what FHA is doing to make appropriate changes to 

ensure its continuedviability. Under the leadership of Dave Stevens, FHA is well poised to continue to meet its mission of making 

available safe, affordable mortgage financing to American families 

without risk to the taxpayer. 

NAR supports several enhancements to the FHA program to ensure that more homeowners can take advantage of their program 

to purchase affordable properties. First, NAR strongly supports increased funding for FHA to upgrade their technology and the flexibility to hire appropriate staff and expert consultants to work on 

specific program areas within FHA’s operations. 

23 

The House recently passed H.R. 3146, the 21st Century FHA 

Housing Act of 2009, which would upgrade outdated systems and 

allow flexibility for hiring. We also understand funding for technology has been included in the appropriations bill for HUD. We 

urge that funding be included in the final version of the fiscal year 

2010 appropriation for HUD. 

NAR also recommends several changes to FHA’s requirements 

related to condominium purchases, which are the most affordable 

housing option for purchasers. Specifically we ask that FHA eliminate their owner occupancy requirements, increase or suspend the 

FHA concentration limit, eliminate the presale requirement, clarify 

the condo reserve study, and eliminate the spot loan approval process. All of these changes would help consumers with more affordable choices when purchasing a home, would help strengthen our 

communities, and reduce inventory and stabilize home prices. 

Finally, Realtors strongly support making permanent the FHA 

loan limits that are currently in effect. The current loan limits are 

set to expire in just a few months, on December 31, 2009. We believe lowering the loan limits will further restrict liquidity and 

make mortgages more expensive for households nationwide. Committee members Brad Sherman and Gary Miller have introduced a 

bill, H.R. 2483, that would make the current loan limits permanent. We urge the subcommittee to quickly consider this important 

legislation. 

In addition to strengthening FHA, NAR asks that Congress consider two other courses of action to ensure the housing market recovers. First, Realtors ask that you extend the $8,000 first-time 

homebuyer tax credit through 2010. NAR’s research shows that 

350,000 sales this year can be directly attributed to the availability 

of the credit. Retaining the tax credit will sustain our economic 

turnaround and build a stronger recovery. 

Second, we ask Congress to urge the Obama Administration to 

quickly implement the new Foreclosure Alternative Program, which 

would help to promote and improve short sales, giving more families a viable alternative to foreclosure. 

The National Association of Realtors believe in the importance of 

FHA and think it has shown tremendous leadership and strength 

during the current crises. We believe Congress and the Administration are taking the right steps to facilitate the economic recovery. 

Now is not the time to pull back. Additional resources are needed 

to ensure the housing market and our national economy recovers. 

Thank you for this opportunity to testify. We stand ready to work 

with you to accomplish our recommended proposals. 

[The prepared statement of Mr. Campbell can be found on page 

54 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Our fourth witness will be Mr. David Kittle. 

STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. KITTLE. Thank you, Chairwoman Waters and Ranking Member Capito. MBA greatly appreciates the continued attention this 

subcommittee has focused on FHA. We are here today because 

after withering on the vine for so much of this decade, the FHA is 

24 

back, and is now insuring upwards of a third of the mortgage market. FHA is serving as a vital source of liquidity during the current 

downturn, and it was this committee working on a truly bipartisan 

basis that helped pave the way for FHA’s resurgence with the passage of last year’s landmark Housing and Economic Recovery Act. 

Today, amidst much good news about FHA’s renaissance, there 

is also cause for concern, which is what brings us here this afternoon. FHA’s capital reserve ratio has dropped to a dangerous new 

low, and some are starting to wonder whether taxpayers will be required to step in and, dare I say, bail out FHA. So I think it would 

be beneficial to first examine why FHA is at a crossroads. 

Like the rest of the mortgage finance industry, FHA has not been 

immune from the economic disruptions that have roiled the entire 

housing sector. A rapidly rising unemployment rate has led more 

FHA borrowers to fall behind on their mortgages, while plummeting home prices have resulted in more foreclosures and greater 

losses on each property. Add to that FHA’s mission, which is to 

help borrowers who are underserved by the markets, those with 

lower incomes, less than stellar credit, or insufficient 

downpayments. The result is that 13.7 percent of FHA loans are 

past due with a foreclosure rate of just under 3 percent. As more 

loans mature, and if this current trend in employment and home 

prices are not quickly reversed, we anticipate both of those figures 

to increase, placing FHA in even greater peril. 

So what do we do about it? We can sit back and hope for the 

best, or we can be proactive and take the necessary steps to build 

a more solid foundation so FHA can continue to fulfill its important 

mission of opening doors to affordable homeownership. 

MBA has put forward a comprehensive agenda that will build on 

the important reforms contained in HERA. First, Congress needs 

to appropriate the funding it authorized under HERA for FHA 

staffing and technology needs. Allowing FHA to hire additional 

staff to keep up with its growing loan volume is good management, 

and it is a step we can take right away. FHA makes money for the 

Federal Government. It should be allowed to use some of it for 

staffing and technology needs. And FHA should be permitted to 

compensate its staff at the same pay scales used by other Federal 

financial regulators like the FDIC and the SEC. 

I want to commend this committee for shepherding through the 

full House H.R. 3146, the 21st Century FHA Housing Act, which 

authorizes up to $72 million annually for FHA. We need to redouble our efforts to make certain this money is appropriated. We need 

to improve the quality of FHA originations. One way to protect the 

soundness of the FHA is to ensure that the mortgage lenders and 

mortgage brokers who participate in the program and originate 

FHA-insured mortgages have the competence and wherewithal to 

protect consumers and taxpayers from undue loss. 

We believe that rigorous licensing and registration requirements 

as well as net worth minimum bonding requirements are essential 

components of any protective framework. We continue to support 

increased net worth and bonding requirements for mortgage bankers and brokers. Net worth requirements serve to assure that an 

originator has a stake in the industry. 

25 

Third, Congress needs to make permanent higher loan limits 

that would otherwise expire in December. While it may seem 

counterintuitive at first, higher loan balances actually perform better than those at the lower end of the spectrum. They require higher downpayments and bring in higher premiums, and they are essential to ensuring the availability of financing in many areas of 

the country where there are no other options. 

Chairwoman Waters, I would like to close on a personal note. I 

have been in the mortgage business and working with FHA-insured 

loans since 1978. I bought my first house with an FHA mortgage. 

I have seen the highs, and I have seen the lows, and I have never 

given up on FHA. MBA members understand the value of FHA, 

and we are committed to making sure the agency weathers the current downturn. We stand ready to work with this committee as 

well as the very capable leadership at HUD to take the necessary 

steps to protect and strengthen its important programs. Thank you. 

[The prepared statement of Mr. Kittle can be found on page 85 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Councilman. 

STATEMENT OF JOHN L. COUNCILMAN, CMC, CRMS, FHA COMMITTEE CHAIR, NATIONAL ASSOCIATION OF MORTGAGE 

BROKERS (NAMB) 

Mr. COUNCILMAN. Good afternoon, Chairwoman Waters, Ranking 

Member Capito, and members of the subcommittee. I am John 

Councilman, the FHA Committee Chair of the National Association 

of Mortgage Brokers. I am a certified mortgage consultant and certified residential mortgage specialist with over 26 years of experience as a mortgage broker. I would like to thank you for the opportunity to testify today with regard to the future of the Federal 

Housing Administration’s capital reserves. 

Before I address our overall concerns, I must first extinguish 

some false allegations targeted at mortgage brokers. Brokers do not 

create loan products. We do not underwrite the loan or approve the 

loan or the borrower. We provide a consumer with a variety of 

choices, then permit them to choose the loan and loan payments 

that fit their particular needs. A mortgage broker is an independent origination channel helping consumers purchase or refinance their home in communities large and small, urban and rural, 

in all 50 States. Mortgage brokers are defined by FHA as correspondents. Typically, mortgage brokers transfer FHA-insured 

mortgages to sponsoring lenders who underwrite the loan, and then 

the correspondent and the underwriting lender are responsible for 

adhering to all FHA regulations and guidelines. 

NAMB was the first to call for heightened professional standards 

and licensing for all mortgage originators. In July 2008, the Safe 

Act established the very standards we sought. Under the SAFE 

Act, all State-licensed originators are required to undergo criminal 

background investigations, submit fingerprints, and meet minimum 

education and testing standards. This ensures that mortgage originators remain competent, and prevents unqualified individuals 

from entering or working in the mortgage industry. 

26 

We believe FHA rules and policies and recent reforms across the 

entire mortgage industry will prevent the problems leading to the 

collapse of the subprime market from creeping into FHA. The new 

SAFE Act standards, coupled with FHA’s monitoring and approval 

requirements, insulate against that happening. FHA set higher 

standards than the subprime market. FHA does not permit features such as prepayment penalties, no income verification, sharp 

payment rises that were prevalent in so many subprime loans, creating higher risk. As a result, FHA loans have performed better 

than subprime or even Alt-A loans. 

Now, FHA Commissioner Stevens has proposed sweeping policy 

changes to the FHA loan program that greatly impact mortgage 

brokers. NAMB applauds the Commissioner for the work he has 

done; however, we do believe there are some issues to be remedied. 

My written testimony will provide the committee with more detail. 

We do recommend updating the Neighborhood Watch Early 

Warning System, improving the Mortgagee Review Board process, 

increased funding, permanently establishing increased FHA loan 

limits at their current levels, and flexible mortgage insurance premiums. 

There are two areas of particular concern to NAMB members. A 

recent mortgagee letter will force FHA lenders to adopt most of the 

Home Valuation Code of Conduct, the HVCC adopted by Fannie 

Mae and Freddie Mac. It would prohibit mortgage brokers from ordering appraisals. The HVCC purports to enhance the independence and accuracy of appraisals by effectively turning the appraisal 

process over to appraisal management companies, AMCs; however, 

what the HVCC truly accomplishes is a dramatic increase in consumer costs and a decline in appraisal quality, missed closing deadlines, and the virtual extinction of independent appraisers, causing 

a decline in home values and resulting in a loss of local tax revenue. 

We find it unconscionable that consumers are paying more for inaccurate appraisals. Many of the AMCs are owned by major lenders, making appraisals an excellent source of revenue for them 

whether a loan closes or not. Appraisers are reportedly getting 

greater pressure from these AMCs than they experienced previously. We urge Congress to quickly pass H.R. 3044, which has 

108 cosponsors. That would put the HVCC on hold while developing a better plan. FHA’s implementation of the core HVCC by 

January 1st should be immediately reversed. 

Our second area of immediate concern is the plan to eliminate 

correspondent mortgagees. Originators of FHA loans would no 

longer be supervised, approved, or monitored by HUD. NAMB 

agrees that an audit for these mortgagees is not needed; however, 

originators need full access to the FHA connection, total scorecard, 

and FHA’s industry outreach. NAMB would welcome the opportunity to work with FHA on this process. 

Studies show that mortgage brokers are the most efficient mortgage distribution channel. They are vital to the health of FHA, and 

our members have proposed many of the changes enacted by FHA 

in recent years. 

NAMB appreciates the opportunity to appear before this committee, and we look forward to continuing to work with you and 

27 

other regulators to craft solutions that face the industry. Thank 

you. I will be happy to answer any questions you may have. 

[The prepared statement of Mr. Councilman can be found on 

page 69 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Bell? 

STATEMENT OF PETER H. BELL, PRESIDENT, NATIONAL 

REVERSE MORTGAGE LENDERS ASSOCIATION (NRMLA) 

Mr. BELL. Madam Chairwoman, and members of the committee, 

thank you for the opportunity to appear at this hearing to discuss 

the often misunderstood topic of reverse mortgages. 

Today, the reverse mortgage market is comprised almost exclusively of the FHA home equity conversion mortgage, commonly 

known as the HECM. 

The FHA insurance provides important protections and benefits 

to homeowners. This insurance enables a lender to advance a significantly higher percentage of a home’s value than would be available in an uninsured reverse mortgage. Furthermore, the insurance 

provides an ironclad guarantee that the homeowner will have uninterrupted access to the reverse mortgage funds if anything should 

occur to disrupt their lender’s operations. 

Many have questions about the risks that the various parties— 

borrowers, lenders, and the FHA—are exposed to under the HECM 

program. For borrowers, risks include primarily taking a HECM 

loan, but ultimately finding out that they cannot sustain the costs 

associated with living in the home, particularly taxes and insurance, and then being forced to move out. These risks can be mitigated by having an effective network of competent counselors, and 

HUD has been working to enhance the counseling that is available 

to reverse mortgage borrowers. 

Risks to lenders exist in a few areas. If a HECM loan is not properly originated, FHA can deny an insurance certificate, leaving the 

lender with a loan that it is obligated to fund, but which does not 

have insurance. 

The risk to FHA can arise from essentially three factors: loans 

remaining outstanding beyond their actuarial expectation; higher 

interest accrual; or a decline of property values. 

To manage the program with greater caution, HUD has taken 

steps to mitigate risk by reducing the funds available to seniors 

through a reverse mortgage. HUD recently implemented a reduction in what is known as the program’s principal limit factors, and 

this has negated the need for credit subsidy, returning the program 

to operating on a net-neutral basis. 

The HECM program has operated on a self-sustaining basis 

throughout its duration, requiring no taxpayer subsidy. Income 

from mortgage insurance premiums has exceeded payouts or 

claims. In fact, according to a recent Congressional Budget Office 

presentation on its 2009 credit reestimate, the HECM program has 

generated a cumulative net gain for FHA of nearly $7 billion since 

its inception. Accordingly, the HECM program has not played a 

role in FHA’s recent capital reserve account losses. 

The question of whether the program will require a positive or 

negative credit subsidy after 2010 has been raised. With the 

28 

changes HUD has made, NRMLA believes that the HECM program 

in years ahead will operate on a break-even-or-better basis. Risk 

has been mitigated by reducing principal limits. However, it should 

be noted that this adjustment comes at great cost to some seniors. 

In some cases the end result is that seniors will not be able to utilize HECM to preserve their ability to continue living in their 

homes, forcing them to move out. 

HUD is also implementing more sophisticated information systems to better monitor HECM program performance and reduce operating costs. If such systems had been in place previously, we believe analysis of the HECM program would have revealed that the 

$798 million in credit subsidy in OMB’s initial projection might not 

have been warranted. Based on our financial modeling of the program, and consistent with home price appreciation assumptions 

and reports put out by Global Insights and other key observers, 

NRMLA feels that to project that subsidy need, one would have to 

make assumptions about home values in the future that are far 

more pessimistic than any of the major forecasters. 

It is also possible that the anticipated duration of loans could be 

overstated in OMB’s calculations. HECM loan duration averages 

fewer than 7 years, with very few loans lasting longer. Loans to 

younger borrowers have durations similar to loans to older borrowers, a counterintuitive outcome. Payoff rates for borrowers who 

take out loans at age 65 are the same as for borrowers at 75: 65- 

year-olds tend to terminate their loans when they sell and move 

out; 75-year-olds tend to terminate their loans after a mortality 

event. 

If expected loan durations are adjusted to reflect actual experience, and future home price assumptions are in line with most of 

the major forecasters, the program could, in our opinion, continue 

to be allowed to operate without the principal limit reductions and 

still not require credit subsidy. 

NRMLA supports efforts to keep the program operating on a selfsustaining basis. However, we also believe that there are other options for achieving this objective, changes that would have a less 

detrimental impact on senior homeowners than reducing the 

amount of money they get. What we have found in looking at the 

impact of the principal limit reductions is that over 20 percent of 

the borrowers in the past year, approximately 23,000 homeowners, 

would have received loan proceeds that were less than their existing indebtedness as a result of the principal limit reductions. This 

means that they would not receive enough money from their reverse mortgage to pay off the existing loan on the property, thus 

they would not be eligible for the HECM, forcing them to sell and 

move or possibly face foreclosure. An alternative we recommend 

would be to adjust the mortgage insurance premiums. 

[The prepared statement of Mr. Bell can be found on page 38 of 

the appendix.] 

Chairwoman WATERS. Ms. Bryce? 

29 

STATEMENT OF TERESA BRYCE, PRESIDENT, RADIAN GUARANTY INC., ON BEHALF OF THE MORTGAGE INSURANCE 

COMPANIES OF AMERICA (MICA) 

Ms. BRYCE. Thank you, Chairwoman Waters and Ranking Member Capito. Also, Congressman Green, it is good to see you again. 

I enjoyed our recent discussion on the housing industry and mortgage insurance. 

I appreciate the opportunity to testify on behalf of the Mortgage 

Insurance Companies of America. This afternoon, I would like to 

make three points. First, private mortgage insurance, or MI, plays 

an important role in stabilizing the current housing market and 

will play a key role in the market’s recovery. MI enables responsible borrowers to buy homes with less than a 20 percent downpayment. Many of these are first-time or lower-income home buyers. 

Since 1957, mortgage insurance has helped over 25 million families buy homes throughout the country. Today, about 9 percent of 

all mortgages held by financial institutions have mortgage insurance. Mortgage insurance is important to the housing recovery. 

With today’s low housing prices and mortgage rates, there is a real 

opportunity for mortgage insurers to help first-time homebuyers 

and help homeowners attempting to refinance, and by doing so, we 

also enable existing homeowners to trade up to purchase a larger 

home. 

I would also note that because mortgage insurance companies 

have their own capital at risk, we have very clear incentives to 

mitigate our losses by taking action to help borrowers avoid foreclosure if at all possible. We understand that one of the worst challenges that a family can experience is the loss of their home 

through foreclosure. 

In addition to implementing the government modification programs in the requested timeframes, mortgage insurance companies 

have implemented a number of programs such as free counseling 

services and advanced partial claim payments to assist borrowers. 

Over the last 18 months, mortgage insurers were able to save almost 200,000 people from losing their homes. 

My second point is that the industry has the resources to pay 

claims on existing loans and insure new loans because of the rigorous State-imposed capital and reserve requirements. These requirements have been in place since the industry’s inception over 

50 years ago and mirror the recommendations made at the recent 

G–20 summit to reform the mortgage securitization market. 

In 2007 and 2008, private mortgage insurers paid over $15 billion in losses and have continued to pay billions of dollars more in 

2009. The backbone of the industry’s financial strength is its StateImposed reserve requirements, and specifically the contingency reserve. Half of each premium dollar earned goes into the contingency reserve and generally cannot be touched by the mortgage insurer for 10 years. This ensures that significant reserves are accumulated during good times to handle claims in bad times. This reserve structure has proven its ability to absorb significant risk. In 

the regional recessions in the 1980’s and 1990’s, mortgage insurers 

paid out over $14 billion in claims. After each recession, we built 

up capital, and were able to meet the next stress period. 

30 

Mortgage insurers and the banks that make the loans face similar mortgage default risk, but only mortgage insurers raise capital 

in this countercyclical manner. In fact, only now are Federal bank 

regulators working to construct a similar system for banks. 

My third and final point is that several of the features of private 

mortgage insurance and the way mortgage insurers manage their 

risk differ from FHA. Congress might want to consider these differences as they consider ways to strengthen FHA. With private 

mortgage insurance, there is private capital at risk. In a foreclosure situation, mortgage insurers take the first dollar of loss and 

typically cover 20 to 25 percent of the loan amount. But this does 

not always cover the entire loss, so lenders and investors are on 

the hook as well. We continually improve our risk analytics and update our underwriting guidelines to respond to market conditions. 

In conclusion, it is important to be clear that, like FHA, mortgage insurance was largely avoided during the boom market when 

50 percent or more of loan originations were done with piggyback 

loans. 

I also want to assure this committee that mortgage insures continue to insure new loans, that we have the capital to pay claims 

on existing loans, and that we are committed to insuring new loans 

that are both affordable for the borrower at closing and sustainable 

over the life of the mortgage. Thank you. 

[The prepared statement of Ms. Bryce can be found on page 45 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

I will use another 5 minutes to ask a few questions of our panelists. I really wanted to get to Mr. Pinto. But before I do that, Ms. 

Bryce, let me ask you if it is true that private mortgage insurers 

are requiring different downpayments depending on locations? Is 

this happening? 

Ms. BRYCE. That has happened in the past. The focus has been 

on making sure that loans were sustainable for borrowers. We have 

moved away from that at this point. 

Chairwoman WATERS. Thank you very much. 

Mr. Pinto, in your testimony you make the case that FHA loans 

are tremendously risky, and that the FHA will require a $54 billion 

bailout. To support your argument, you note that FHA will perform 

like Fannie Mae’s 2006 high loan-to-value book; and in testimony 

before the Committee on Oversight and Government Reform in December of 2008, you described Fannie Mae’s book of business as invested with subprime stated income option, adjustable rates, 

ARMs, and piggyback loans. But isn’t Fannie Mae’s high loan-tovalue 2000 book of business quite different from the FHA’s current 

book of business? 

In contrast to Fannie Mae, FHA insures primarily 30-year fixedrate loans, all of which are amortizing. FHA requires full documentation in all of its purchase and new refinance transaction. 

FHA does not allow ‘‘no downpayment’’ or piggyback loans. 

So we will just stop with that. How then can you compare the 

two? 

Mr. PINTO. Madam Chairwoman, thank you for the opportunity 

to clarify that question. 

31 

The $400 billion that I used as the proxy excludes all the loans 

listed by Fannie and Freddie as Alt-A. It excludes loans listed by 

Fannie and Freddie as the other characteristics, negative amortization, etc. It only included the loans that they list as low-down-payment loans. Ninety-three percent, I believe, are fixed rate. They are 

all virtually at the regular rate, much like FHA. They were not at 

super high rates. I believe 94 or 95 percent of them are owner-occupied. I believe that in many respects they are identical to the FHA 

book of business. In fact, as I pointed out, the average FICO score 

on this group was 695. 

And it was interesting that Commissioner Stevens—and I believe 

that the subcommittee should really think about what he said. He 

said that, in 2007, FHA’s book is—the actuaries are estimating 

that 24 percent, or 1 in 4, of their loans that had all these positive 

characteristics that everyone is talking about will go to default. 

And he then said in 2008, 20 percent of all of FHA’s loans originated in that year will go to default. He didn’t talk about 2006. I 

would estimate it would be somewhere between 16 and 18 percent. 

You will note that it is coming pretty close to my 20 percent estimate, which is what I got using the Fannie Mae, Freddie Mac 

numbers. 

Chairwoman WATERS. You indicated that the FHA will require 

$54 billion in a bailout. How did you get to that number? 

Mr. PINTO. I got to it basically by computing what I believe the 

losses will be on their book of business, which as of September 30th 

of this year, was $725 billion in loans. And then I froze that book 

of business, which is what the actuaries would be doing, and then 

I looked for a good proxy for it, which I have described in my testimony and just explained further how it appears to be a good proxy, 

which has a default rate of 20 percent. That yields $140 billion of 

loans that would go bad. 

I then assumed a 50 percent loss. Commissioner Stevens didn’t 

mention a loss rate, but he did mention it has been going up quite 

rapidly, and I believe 50 percent is a reasonable number. You have 

to remember that unlike the private mortgage insurance bids 

where the loss is broken up into two pieces, the private mortgage 

insurance piece is usually to the 20 percent or so. And the investor 

percentage, FHA is responsible for 100 percent of the loss, and that 

is on loans that have an average LTV again, as I think the chairman mentioned, that is in the 96 percent range, something on that 

order. And, therefore, a 50 percent loss is reasonable. That yields 

a $70 billion loss on the book. 

I then looked at the premiums that they would be collecting. I 

generously use 5 percent. I don’t believe their premiums on a lifealone basis add up to 5 percent, but I used that. And that would 

yield a loss something in the order of $35 billion or $40 billion. And 

then I added on top of that the need for a 2 percent congressionally-mandated capital requirement. And, I might add that the way 

that the private mortgage insurers do their capital is actually more 

conservative, I believe, than the way FHA does theirs. So I would 

also take issue with that. 

Chairwoman WATERS. Very interesting. Obviously your testimony is directly opposite of that of our Commissioner. 

32 

So, with that, I am going to go to our ranking member, Mrs. Capito. 

Mrs. CAPITO. Thank you, Madam Chairwoman. 

Your first statement, Mr. Pinto, or at the beginning of your statement you wanted to reassure us that we couldn’t say we didn’t 

know if this, in fact, happens. There are a couple of things that 

have come before this committee about which I wish we could have 

said the same thing; I wish we hadn’t known or had been quicker 

to act. 

I would like to ask the other members of the panel who are 

working with FHA financing instruments and in the mortgage 

business if you share the alarm that Mr. Pinto has expressed with 

us today in terms of the FHA and the financing at the FHA? Does 

anybody want to make a comment directly on that? 

Mr. Kittle? 

Mr. KITTLE. I don’t have Mr. Pinto’s numbers and access to his 

data. I would only say in my testimony, I will read it again, that 

we have concern for the book of businesses out there, including 

what has been originated so far in 2009 and was not tested. And 

the variable that sits out there now is the continued—I think 

which we all addressed and mentioned today—the rising unemployment that continues to rise that will affect it and make it much 

worse. So we do have concerns about what is out there and what 

is coming. 

Mrs. CAPITO. Mr. Newport, in your modeling, do you take in unemployment, rising unemployment as part of your factors when you 

are coming to your graphics? 

Mr. NEWPORT. Definitely. Our view is that the unemployment 

rate is still rising, but the economy is starting to recover. We had 

a very strong third quarter. We are still losing jobs. We think the 

job losses are going to end early next year, and the unemployment 

rate is going to peak somewhere around 10, 10.1 percent in early 

2010. So we are near the worst part of the labor market downturn. 

Mrs. CAPITO. So that is incorporated in the numbers that you reflected with us? 

Mr. NEWPORT. Yes. 

Mrs. CAPITO. Because you mentioned that we are in a recovery. 

I certainly hope that is the case. But a jobless recovery is not going 

to help somebody who is trying to pay their mortgage. If they are 

unemployed, these problems are going to be exacerbated. 

Mr. NEWPORT. It will take time for the labor market to get back 

on track, but the overall economy is starting to grow, and, in fact, 

the residential construction sector is going to grow at a 20 to 30 

percent rate in the third quarter and continue to grow. So the 

housing is starting to contribute to growth. But the good news is 

that the recession is behind us, the economy is starting to grow. 

We are still losing jobs, but eventually growth will help us start 

adding to job growth. 

Mrs. CAPITO. Mr. Kittle, your organization has testified before 

this committee that the MBA is concerned with the less scrupulous 

lenders who once specialized in the lucrative subprime market. 

This is kind of a theme we have had going through our testimony 

on our committee and turning our attention now to FHA lending, 

and we are extremely concerned. I know Mr. Lee has a bill out 

33 

there. But we are extremely concerned about fraud and abuse and 

unscrupulous lending behaviors. 

The FHA—our Commissioner mentioned that he had moved in 

certain directions to have higher capital requirements for mortgagees who are using FHA. Do you share this concern? Do you see 

any specific evidence of any mortgage bankers or brokers who want 

to exploit FHA’s market and take advantage of borrowers who they 

may feel their choices are limited? And do you think that the improvements that he mentioned in his statement will—what kind of 

desired effect do you think that will have? 

Mr. KITTLE. To answer one part of your question, in my testimony we certainly support higher net worth requirements for mortgage bankers and mortgage brokers, licensing requirements. We 

would like to see preemption, which would really help lower the 

cost, and have one set of licensing requirements for everybody instead of State by State. We think education requirements are necessary. Clearly when you have, what the term is now out there is 

‘‘skin in the game,’’ then you take a higher sense of duty to originate the loans properly. So we fully support Mr. Stevens on that 

effect. 

I don’t know, to answer specifically to your question, of any specific mortgage bankers or brokers that are manipulating borrowers 

today, but we do know that mortgage fraud is rampant and has 

been rampant for years. And MBA has supported a stop mortgage 

fraud bill for the last 5 or 6 years. 

Mrs. CAPITO. And finally, I would like to ask unanimous consent 

to put the testimony of Dr. Andrew Caplin, a professor of economics 

at New York University, into the record. 

Chairwoman WATERS. Without objection, it is so ordered. 

Mrs. CAPITO. Thank you. 

Chairwoman WATERS. Mr. Green? 

Mr. GREEN. Yes. Thank you. And I thank the witnesses for appearing. 

Ms. Bryce, do you have some product that you would like to 

share with us that might be of help with FHA in terms of mortgage 

insurance? 

Ms. BRYCE. I don’t think there is a particular product that we 

could offer at this time. I think that we have looked at whether 

there is some help that we could give in terms of the risk analytics. 

As you heard Commissioner Stevens say, they are starting to focus 

more of the risk that they are taking and making sure that they 

have the right underwriting guidelines and credit criteria. And I 

think in that regard, the mortgage insurers would be more than 

happy to give our assistance as they evaluate those issues. 

Mr. GREEN. And, Mr. Pinto, thank you for your testimony as 

well. Because your testimony is so far afield from some of the other 

testimony we have heard, out of fairness to you, I am trying to ascertain whether you are the canary in the coal mine or the person 

who believes the sky is falling because something falls out of the 

tree. And that is not to demean you, but in a metaphorical sense, 

that is what we are trying to ascertain. So how much credence do 

you give unemployment and falling prices to the foreclosures that 

we have at FHA? 

34 

Mr. PINTO. I appreciate those comments, Mr. Green, and the opportunity to answer your question. 

I start from a little different perspective, and I start from the 

perspective that 25 million loans out of approximately 52 million 

loans in the United States are nonprime. And prime is a large misnomer in the United States, because Fannie and Freddie define 

themselves as prime, and so everything they did they basically said 

was prime. And we now know that 10 million of their 25 million 

loans were not. 

And so I start with the fact that 25 million loans are out there 

that are nonprime. A small minority, about 25 percent, 30 percent, 

are what you call subprime, what I call self-denominated subprime. 

The rest are these high LTV loans, these other loans. So you start 

with that. And then if you layer unemployment— 

Mr. GREEN. Let me just intercede. You start with that, but how 

much of that are you attributing to FHA? 

Mr. PINTO. FHA is a quarter of that. FHA is a quarter of that 

25 million. Fannie and Freddie have 10 million. 

Mr. GREEN. Let me use other language. You are indicating that 

25 percent of the 25 million would be what we will call bad to poor 

loans that FHA has on its books? 

Mr. PINTO. FHA—again, based on the statements by the Commissioner. When you have a 25 percent default rate on the 2007 

book and 20 percent in the 2008, that is a bad book of business. 

It is hard to define it into good and bad; it is just bad, because that 

is an extraordinarily high default rate. That is up there with 

subprime fixed rate. 

Mr. GREEN. But now how do you conclude that it is just because 

the loans are bad, when we have prime loans that are defaulting 

because of the unemployment and because of the decline in house 

prices? How do you separate that? 

Mr. PINTO. Again, I have looked at these 25 million loans which 

I call nonprime, many of which were subprime, and 80 percent— 

80 percent of all the losses are in that group. 

Mr. GREEN. But it seems to me that you need some empirical evidence with reference to job losses so that you can correlate that to 

the foreclosures. If you don’t add the job losses and know whether 

it was a job loss or whether it was just a bad loan, how do you distinguish between the two? Then you have to also factor in the declining values, because the declining values also impact whether or 

not persons stay with their homes. 

Mr. PINTO. FHA, as in any mortgage lending, is partly an actuarial business, which is why they do an actuarial study. And higher-risk loans are more susceptible to the impacts of job losses and 

housing price declines, and that is why the 80-plus percent of all 

of the foreclosures that are occurring today are within this subgroup of loans that I call nonprime. They have characteristics that 

make them nonprime. They are high loan to value, impaired credit, 

etc., and then all the crazy stuff that was done in addition to what 

I just described. And so that is what makes them susceptible. And 

so even if you go back to 1998 and you look at how high LTV loans 

performed then in a very strong market, they were 6 to 7 times 

more likely to go into default than a traditionally underwritten 

lower LTV loan. 

35 

When everybody is going up in value, yes, a rising tide raises all 

ships. The problem this country has ended up with is we have 25 

million high-risk loans out of 52 million loans. We have never had 

that situation before. And 80-plus percent of all of the foreclosures 

are in that high-risk group, and that high-risk group is most susceptible to the impact of job loss and housing price declines. So 

there is a direct connection, and that is why this is an actuarial 

business. 

Mr. GREEN. Thank you. I yield back. 

Chairwoman WATERS. Without objection, I would like to enter 

into the record a communication from NID Housing Counseling 

Agency, Oakland, California. 

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 would like to thank all of our panelists for being here and participating today. We certainly appreciated your testimony. 

This panel is now dismissed. The meeting is adjourned. 

[Whereupon, at 4:30 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

October 8, 2009 

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