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30–534 PDF 2006

TRANSFORMING THE FEDERAL HOUSING

ADMINISTRATION FOR THE 21ST CENTURY

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 5, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–82

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

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 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice Chairman 

RICHARD H. BAKER, Louisiana 

WALTER B. JONES, JR., North Carolina 

CHRISTOPHER SHAYS, Connecticut 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

STEVAN, PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

CAMPBELL, JOHN, California 

MICHAEL G. OXLEY, Ohio 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 5, 2006 ..................................................................................................... 1

Appendix: 

April 5, 2006 ..................................................................................................... 39

WITNESSES 

WEDNESDAY, APRIL 5, 2006

Adams, Stella, board member, National Community Reinvestment Coalition .. 21

Howard, Gerald M., Executive Vice President and CEO, National Association 

of Home Builders .................................................................................................. 22

Lowrie, Regina M., Chairwoman, Mortgage Bankers Association ...................... 24

Montgomery, Hon. Brian D., Assistant Secretary for Housing, Federal Housing Commissioner, Department of Housing and Urban Development ............ 6

Pickel, A.W. III, past President, National Association of Mortgage Brokers ..... 26

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 40

Ney, Hon. Robert .............................................................................................. 42

Miller, Hon. Gary ............................................................................................. 44

Adams, Stella .................................................................................................... 47

Howard, Gerald M. ........................................................................................... 52

Lowrie, Regina M. ............................................................................................ 61

Montgomery, Hon. Brian D. ............................................................................ 74

Pickel, A.W. III ................................................................................................. 80

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Miller, Hon. Gary: 

Statement of National Association of Realtors .............................................. 88

Statement of National Reverse Mortgage Lenders Association .................... 93

Letter from National Multi Housing Council and National Apartment 

Association ..................................................................................................... 96

Letter from NAREB ......................................................................................... 99

Statement of Manufactured Housing Institute, with attachments .............. 101

(1)

TRANSFORMING THE FEDERAL HOUSING 

ADMINISTRATION FOR THE 21ST CENTURY 

Wednesday, April 5, 2006

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 9:05 a.m., in the 

Rayburn House Office Building, Hon. Gary Miller presiding. 

Present: Representatives Miller of California, Neugebauer, 

Fitzpatrick, Waters, Velazquez, Lee, Miller of North Carolina, 

Scott, and Cleaver. 

Ex officio: Representative Frank. 

Mr. MILLER OF CALIFORNIA. [presiding] Good morning. The meeting is called to order. The Subcommittee on Housing and Community Opportunity is meeting to consider the Administration’s proposal on FHA, single-family mortgage insurance activities. And 

Commissioner Montgomery, we are glad to have you here today 

with us. 

We welcome you today, and would like to commend you for your 

work to ensure that the FHA program becomes, once again, a viable option for low- and moderate income home buyers. Leadership 

and vision has already resulted in many regulatory improvements, 

and we encourage you to look at this program, and to understand 

that we wholeheartedly agree with what you’re trying to do. 

We think that it is underutilized. We think there is an opportunity here to create brokers and lenders in a—where they have 

the ability to participate in FHA, where we currently think they’re 

pretty much restricted, based on the amounts in the past that we 

have been able to lend and to guarantee for. 

Today, FHA is no longer a useful product for prospective home 

buyers. Working families such as teachers, police officers, firefighters, nurses, and others are faced with situations where they 

are unable to own a home in communities where they serve. 

While FHA—created more than 70 years ago to meet the needs 

of those underserved by the private sector—today is not living up 

to its mission, and working families are left out without an affordable alternative to finance their homes. 

Statutory limitations preclude the FHA from adapting to a rapidly changing marketplace. As a private sector mortgage market 

has become more efficient, the FHA program’s inflexible rules and 

requirements have left it virtually irrelevant to the financing options. 

2

In high-cost areas, this is especially true, where statutory loan 

limits eliminate the programs as an option for the purchase of the 

entry-level home. Under the current limits, FHA products are not 

available for home buyers in high-cost areas of the country because 

the maximum mortgage limits aren’t much more than the housing 

prices. 

Working families who need to qualify for FHA are effectively 

kept out of the program because of where they live, and where they 

work. In fact, I introduced H.R. 176 with Barney Frank this past 

year, which would raise the limits, and, I think, go a long way toward making the program a workable program. 

We are looking forward today to hearing your testimony on what 

the Administration is planning to do. We hope you are open to suggestions. We would like to see this program work. I recognize Mr. 

Frank, who is not here. Mr. Miller you are recognized for 5 minutes. No opening statement? Mr. Scott? 

Mr. SCOTT. Thank you, Mr. Miller. And I certainly want to thank 

you and Chairman Ney and Ranking Member Waters for holding 

this hearing on the future of the Federal Housing Administration. 

We should continue to evaluate the program, and to ensure that it 

reaches more potential homeowners. 

And lenders claim that FHA requirements to obtain FHA loans 

have created a disadvantage for the loans, compared to conventional markets. It is possible that the reduction of FHA loans has 

created less competition for predatory lenders. There have also 

been concerns that FHA has not adapted to the modern condominium market. 

In addition to considering policy changes to the FHA, Congress 

should also be concerned with increases in the cost of the program. 

The fiscal year 2007 budget proposed by the Administration would 

increase the current annual loan fee of FHA, multi-family rental 

housing loans, as well as loans for healthcare facilities. Many housing associations oppose these fees, due to their fears that these 

costs could inflate the cost of housing. 

The FHA programs are designed to help increase home ownership among low-income Americans. And one way to help increase 

home ownership is to lower the downpayment required for FHA 

loans. 

Congressman Tiberi and I have introduced the Zero Downpayment Pilot Program Act, which would do just that. Last Congress, 

a similar bill passed this committee, but was not ultimately approved by Congress. I urge my colleagues to move forward and support this important innovation. 

While home ownership has increased in the United States, more 

can be done to help bring the American dream to all segments of 

our society. I look forward to the hearing from the witnesses today 

to understand how the FHA can increase its participation in the 

housing market. Thank you, Mr. Chairman. 

Mr. MILLER OF CALIFORNIA. Mr. Frank, you are recognized for 5 

minutes. 

Mr. FRANK. Thank you, Mr. Chairman. I want to say that I appreciate very much your role in this issue. I know the chairman 

has taken the lead by introducing the bill, and I have enjoyed 

3

working with him in the housing area, and I look forward to our 

working together. 

I hope that this is a bill that we will, with some changes—not 

huge ones—be able to pass, and get enacted. I think it is a good 

piece of legislation. I appreciate the Administration’s taking the 

initiative, listening to some of the suggestions we have had, and I 

know, given the gentleman from California’s commitment here, we 

have a very good chance on this. 

And let me say that, as is often the case, you tend to take for 

granted the places you agree and focus on the areas of disagreement. So I just wanted to say at the outset, I am in overwhelming 

agreement with this bill on most of the points. There is just one 

area that I want to raise, and I am glad that we’re moving in this 

direction, but I would suggest that we move in a little different 

way, and that is on the risk-based premium for the lower-end people. 

I very much applaud this. We have talked about increasing home 

ownership. And, obviously, you’re not going to do that unless we 

reach out to people who find themselves in some difficulty. 

And you know, one of the things I want to stress, when we got 

the data, people said, ‘‘Well, it is true that if you’re black or Hispanic, the percentages show you’re going to be maybe paying more 

for a loan, or having more difficulty in getting a loan. But that’s 

not because of racism, it’s because of the economic fact.’’ 

Well, having said that, we haven’t solved the problem. Explaining that racial disparity is, in part, because of economic disparity 

doesn’t mean we can all go home for dinner. It means that we then 

look at ways of dealing with that economic issue, because having 

this kind of racial disparity in access to home ownership isn’t fair, 

and it’s not healthy for our society and the kind of society we want 

to continue to build. And FHA, obviously, gives us a chance to deal 

with that. 

My only concern is—and I appreciate when you say, Mr. Secretary, that the risk-based premium we will be charging people in 

the lower-end would still be lower than they would get in the private market. And as you say on page four, ‘‘The higher premiums 

that FHA will charge some types of borrowers are still substantially lower than they would pay for sub-prime financing,’’ and I 

think that’s a good thing. 

But I think that they could be even lower. Here is the deal. Obviously, in extending these loans to people who would otherwise be 

into the sub-prime market, we are assuming that the great majority of them will be able to pay their loans. Otherwise, you wouldn’t 

get into it. What we are saying is that there will be a higher percentage of default there. 

So, the question is, okay, we are going to extend this, and a percentage of the people who get these, we know, will default because 

of their economic circumstance. But most of them won’t. So then 

the question I would pose in public policy terms is this. Who should 

subsidize the fact that we are going to be lending money to people 

where there is a higher rate of default? 

And my answer is that we should not ask the people who are not 

going to default in this stratum to subsidize the people who do. 

Let’s subsidize them from somewhere else. 

4

In other words, let’s say to the low-income people, ‘‘Okay, we’re 

going to lend you the money, and yes, some of the people who borrow are going to default in higher numbers, and we need to find 

that somewhere.’’ 

But why not cross subsidize? I don’t think we need to look at this 

and say, ‘‘Each segment of the market has to be economically selfsufficient,’’ especially since, as I read the budget for this bill, the 

project is that if we were to pass the bill exactly as is, it would be 

$845 million per year, I assume, in increased revenue. Although, 

in our budget terms, revenue is called a negative subsidy. That is, 

we are—negative subsidy means we are sucking money out of the 

borrowers, rather than giving it to them. 

And I think it’s a good idea for us to be able to raise some more 

money. But it’s obviously more than we need. So the one point of 

difference I have—and I have spoken to the gentleman from California about this—is, look, I think it’s a very good idea to try and 

reach out to this low-end segment, and it will help us in the predatory area. 

Actually, we’re working on sub-prime lending, and predatory 

lending, but I’m a great believer in capitalism. One of the best 

ways that we can get the private market to lower the rates it 

charges sub-prime people is to compete with them, by having an alternative place where they can go. I am all for that. 

The only thing I think is—and I understand why the private 

market would have to charge the low-income borrowers more than 

high-income borrowers for interest, because of the risk of default. 

And let’s be clear what we’re talking about. We are saying given 

the way a rental—a loan market works, the poorer you are, the 

more you’re going to have to pay for your house. Not a happy situation. We understand that’s unavoidable in the private market; but 

it’s not unavoidable in the public sector. 

We, the Federal Government, have the ability, I think, to say, 

‘‘You know what? We are not going to charge low-income people 

more for the loans, because some of them are going to default. We 

are going to find a way to make’’—we want to take the risk of that 

default, and we will find the funds to take care of that somewhere 

else. 

So, with that one difference—and I think we need to work it out, 

because I don’t want to destroy flexibility and the staff of the committee have pointed out there are some broader considerations 

here. But if we can find a way to protect the low-income borrowers 

from having to pay more for the loans, then I think we have a bill 

that will be, I hope, overwhelmingly supported, and I appreciate 

the Administration’s putting a very pro-housing responsible bill together. Thank you, Mr. Chairman. 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Frank. The bottom 

line is to make the FHA program a viable mortgage option. We 

must ensure that the program allows for the purchase of entrylevel homes. 

This includes not only the elimination of the geographic barriers 

to utilize the program in high-cost areas, but also facilitating the 

purchase of entry-level homes including condos and manufactured 

housing. These forms of housing are an affordable option in entry 

level home ownership, and they should be included under this proVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
5

gram, if we truly want to make it help families climb the rung on 

the ladder of home ownership. 

In addition to reforming what can be purchased in the program, 

we must also consider the competitiveness of FHA products are 

currently structured among the mortgage options available. In 

other words, we must explore the reasons that the program is 

being utilized—its available mortgage products for a potential 

home buyer. The answer is it’s inflexible today, and burdensome 

processes have left many in the industry hesitant or actually unable to offer FHA products to their clients. 

Technological deficiencies must be addressed. While the rest of 

the mortgage industry is electronically driven, the FHA program 

remains a dinosaur, still trying to convert from a peer-based process to an efficient electronic one. Lack of flexibility and downpayment amounts to tremendous amounts of—FHA used to be the best 

option for low- and moderate-income home buyers, because it had 

the lowest downpayment requirement. This is no longer the case. 

Although the private market has developed flexible downpayment arrangements to meet the need of borrowers, the FHA programs’ downpayment requirements are fixed to 3 percent. 

While other mortgage products have recognized that the ability 

to accumulate enough cash for the downpayment assistance is universally considered to be the greatest single barrier to home ownership, the FHA program does not offer flexibility in the downpayment level. While the private mortgage insurers have adopted a 

risk-based premium structure, FHA does not set its insurance premiums according to the risk of the loan. As a result, low-risk borrowers pay higher premiums to subsidize the high-risk borrowers. 

More Americans could qualify for a mortgage if their monthly 

payment were lower. To make mortgages more affordable, the FHA 

should have the flexibility to offer mortgages with longer terms 

than the traditional 30 years. In this way, borrowers would be able 

to purchase a home with a mortgage product that is less risky than 

the interest-only product that has become more popular in the 

housing market. 

Cost-prohibitive and time consuming, financial audits and net 

worth requirement limits mortgage brokers’ participation in the 

program. This means that FHA is not made available to some borrowers who would get a better deal under the program, under the 

sub-prime loan. 

America is a home of people of different origins and different 

make-ups, and we need to make sure that this program fits their 

needs. 

Mr. Cleaver from Missouri? You are recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. I would like to thank 

the chairman and ranking member for successfully scheduling this 

hearing today. And I would like to also thank our witnesses for 

joining us this morning. 

We face a tremendous challenge at this moment in our Nation’s 

history. And one of our great challenges is to provide every American a safe and affordable place to call home. 

We met last week to discuss the countless deficiencies in the 

HUD budget proposed by the Administration, and we will see toVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
6

morrow and Friday what happens to the House budget resolution 

when it is considered on the Floor. 

But I believe all of us agree that we have got to be creative in 

finding additional ways to provide homes to every American who 

needs one. Revitalizing FHA is a timely undertaking, and I believe 

that we can provide more housing to low- and moderate income 

Americans if FHA is in full operation. FHA, created in 1934, at the 

very height of the Depression, was a very valuable tool then, and 

I think it can be again. 

I met last week with a Missouri brokers association, and they 

mentioned some of the remarks that you recently made about FHA. 

And they are concerned today that the FHA program, which once 

had 40 percent of the market share, now only has 3 percent. I don’t 

know if those numbers are accurate or not. That’s what they gave 

me. 

And it seems to me that FHA could help us address some of the 

pressing housing needs, particularly for low-income Americans. 

And so, I look forward to your comments today, and for an opportunity to exchange some views with you. Thank you, Mr. Chairman. 

Mr. MILLER OF CALIFORNIA. Thank you. For the record, I would 

like to enter the statements of the National Association of Realtors; 

the Manufactured Housing Institute; the Manufactured Home 

Ownership Association for Regulatory Reform; the National Reverse Lenders Association; the National Multi-Housing Council; 

and the National Association of Real Estate Brokers Investment 

Division. Without objection, those are entered into the record. 

Brian Montgomery is the Assistant Secretary of Housing for 

HUD. He is the Federal Housing Commissioner at the Department 

of Housing and Urban Development. Prior to joining HUD, Mr. 

Montgomery was the Deputy Assistant to the President at the 

White House. 

From 1995 to 1999, he served in the administration of Governor 

George W. Bush as communications director at the Texas Department of Housing and Community Affairs and the Texas Department of Economic Development. Welcome, Mr. Montgomery. 

STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, 

ASSISTANT SECRETARY FOR HOUSING, FEDERAL HOUSING 

COMMISSIONER, DEPARTMENT OF HOUSING AND URBAN 

DEVELOPMENT 

Mr. MONTGOMERY. Thank you very much. Thank you, Chairman 

Miller and Ranking Member Waters. I would also like to thank 

Ranking Member Frank for inviting me here today to testify in the 

Administration’s FHA Modernization Act. I ask that my written 

testimony be entered for the record. 

The bill itself is really very simple, the proposal straightforward. 

It does just what the name suggests. It modernizes the 72-year-old 

Federal Housing Administration, and restores the agency to its intended place in the mortgage market. Nothing more, nothing less. 

Yet the impact of this bill, we believe, will be tremendous. And let 

me explain. 

FHA was created in 1934 to serve as an innovator in the mortgage market, to meet the needs of citizens otherwise underserved 

7

by the private sector, to stabilize local and regional housing markets, and to support the national economy. This mission is still 

very relevant, perhaps now more so than ever. And most of us 

would agree that FHA can and should continue to play its important role. 

Unfortunately, over the last several years, the housing agency 

that helped bring the Nation out of the Depression, the agency that 

helped our grandparents and helped our parents buy their first 

homes, the agency that stood by the oil States and the rust belt 

States in the 1980’s was falling way behind. 

For example, over the last 5 years, in Congressman Tiberi’s district, FHA volume dropped 44 percent. For Congresswoman Harris, 

volume dropped 74 percent. And for Ranking Member Waters, volume has all but disappeared, declining 98 percent. 

Without a viable FHA, many home buyers, first-time home buyers, minority home buyers, and home buyers with less than perfect 

credit, were left with fewer safe and affordable options. Many home 

buyers turned to high-cost financing, and non-traditional loan products to afford their first homes. 

All that said, the FHA Modernization Act is part of the solution. 

FHA reform is designed to give home buyers who can’t qualify for 

prime financing a choice again—we believe, a better alternative. 

Now, let me explain the simple changes we’re proposing. For one, 

we are proposing to eliminate the complicated downpayment calculation, and the traditional cash investment. 

Last year, 43 percent of first-time home buyers purchased their 

homes with no downpayment. Of those who did put money down, 

the majority put down 2 percent or less. The downpayment is the 

biggest barrier to home ownership in this country, and this Act 

proposes to permit borrowers to choose how much to put down, 

from no money down to 1- or 2-, or perhaps even 10 percent. 

The bill also proposes to provide FHA the flexibility to set the 

FHA insurance premiums commensurate with the risk. We would 

charge lower credit risk borrowers a lower insurance premium and 

higher credit risk borrowers a slightly higher premium. 

With this risk-based premium structure, we can reach hardworking credit-worthy borrowers such as store clerks, mechanics, 

librarians, bus drivers, and social workers, who, for a variety of 

reasons, do not qualify for prime financing. The higher premiums 

that FHA will charge some types of borrowers are still substantially lower than they would pay for sub-prime financing. 

Another change proposed in the FHA Modernization Act is to increase our loan limits. The loan limits in the high-cost areas would 

rise from 87 to 100 percent of the GSE conforming loan limit, and 

in lower cost areas, from 48 to 65 percent of the conforming loan 

limit. This change is extremely important, and crucial in today’s 

housing market. Because of rising costs, FHA insured only 5,000 

loans in the entire State of California last year, compared to 

127,000 in 1999. 

We are also proposing some changes to specific FHA products, insuring mortgages on condominiums under its standard single-family product, modernizing the Title I manufactured housing program, and expanding the home equity conversion mortgage program, also known as reverse mortgages. 

8

Let me assure you that the changes we are proposing will not increase the overall risk of the MMI fund, or impose a potential cost 

on taxpayers. We are proposing to continue managing the fund in 

a financially prudent manner, beginning with a change in FHA 

pricing to match premiums with risk. 

I know I have talked a lot here today, but I want to convey to 

you just how passionate I am about the proposed changes. When 

people ask me, ‘‘Why are we proposing these changes,’’ I tell them 

these exact words: families need a safe deal at a fair price. Families need a way to take part in the American dream without putting themselves at risk. Families need FHA. 

I want to thank you again for providing me the opportunity to 

testify here today on this Act, and I look forward to working with 

all of you to make these reforms a reality. Thank you. 

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

page 74 of the appendix.] 

Mr. MILLER OF CALIFORNIA. Thank you. Would HUD support affordable housing goals for FHA programs similar to Fannie Mae 

and Freddie Mac? 

Mr. MONTGOMERY. Well, certainly, Mr. Chairman, all of our 

housing products serve families of lower to moderate incomes. If 

you’re asking would we put similar targets on FHA? I’m sorry? 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. MONTGOMERY. Okay. 

Mr. MILLER OF CALIFORNIA. Yes, similar targets. 

Mr. MONTGOMERY. That’s— 

Mr. MILLER OF CALIFORNIA. California and high cost areas—I 

know in Barney Frank’s area and in mine—FHA doesn’t exist. In 

Maxine Waters area, which is pretty much contiguous with mine, 

it doesn’t exist because the limits are so low, that we just—nobody 

can buy a house that cheap in the marketplace. So FHA is completely driven out of the marketplace. 

We just reformed in last year’s bill—if it ever gets out of the Senate—on GSE’s, where they can go into high-cost areas like ours, 

and they can compete up to medium, 150 percent above their normal loan limit, but not to exceed medium. I mean, we need something like that for FHA and high-cost areas, because it just isn’t 

there. 

Mr. MONTGOMERY. And certainly, Mr. Chairman, that’s what the 

bill proposes. And probably a really striking example is you look at 

Ranking Member Waters’s district. In the year 2000, we made 

2,200 loans in her district. Last year we did 34. We are not a product in the Nation’s most populous State. 

Alternatively, because of housing prices, we are an extremely viable product in the Nation’s second largest State, in Texas. But right 

now, unless you live in the Midwest, certain parts of the lower East 

Coast, and in the South, we just can’t serve lower to moderate income home buyers. 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. MONTGOMERY. And we just think it’s time to reform the conforming loan limits. 

Mr. MILLER OF CALIFORNIA. There are some who have tried to 

make the argument that what we’re trying to do will hinder the 

9

ability of the conventional marketplace to work with minimal competition from FHA. I disagree with that. What’s your opinion? 

Mr. MONTGOMERY. Well, again, we are a mortgage insurance 

product. We don’t loan money. 

Mr. MILLER OF CALIFORNIA. No, you don’t, but you guarantee, 

which enables people to be able to get into a low-cost loan. 

Mr. MONTGOMERY. Absolutely. We have a 100 percent iron-clad 

guarantee. Some people have said that we’re trying to compete 

more with the conventional market. Our Congressional mandate 

from the 1930’s is not obsolete. We think it’s more important today 

than it was even back then. We just think the product is a little 

obsolete and needs to be modernized. 

Mr. MILLER OF CALIFORNIA. Well, the jumbo marketplace, or conventional marketplace, has grown tremendously, because they’re 

picking up a sector that you’re not in, GSE’s were not in. 

And what practical impact do you think that the loan limit increase will have on home buyers in high-cost areas to be able to 

purchase an entry-level home? Do you see a tremendous benefit by 

your changing your way of doing business? 

Mr. MONTGOMERY. Yes, Mr. Chairman. I will give you a good example. And I will use California and even Massachusetts again. If 

you can’t—by the way, if you can qualify for prime financing, God 

bless you, that’s a great thing. And we want everyone to do that. 

But if you can’t do that right now, if you’re in a high-cost State, 

and if you—if you’re a lower income home buyer with a few blemishes on your credit, your only option is sub-prime lending. 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. MONTGOMERY. Which, inherently, is not a bad product. 

Mr. MILLER OF CALIFORNIA. More expensive— 

Mr. MONTGOMERY. The way that it was used is bad. So that 

leaves what is a very safe product, which has one of the best loss 

mitigation programs around, out of the playing field in the Nation’s 

most populous State. 

Now, if you look at Marin County in the Bay Area last year, we 

did a total of six loans. Five of those were reverse mortgages. You 

go to Webb County, Texas, which most people have never heard of, 

unless you’re from Texas. We did over 1,500 loans. 

That, to me, says we need to do something. And it doesn’t matter 

whether I’m visiting with a Democrat Member or a Republican 

Member. If you’re in a high-cost State, they all tell me, ‘‘Do something about the loan limits,’’ and that’s what this bill proposes. 

Mr. MILLER OF CALIFORNIA. And there is a perception out there 

that somehow the Federal Government is subsidizing individuals 

with these loans. Would you please address that? Because this 

turns revenue into the general fund. 

Mr. MONTGOMERY. Well, and there are no taxpayer funds used 

in that. In fact, other than working capital fund monies and salary 

and expenses money, FHA doesn’t receive any appropriation. We’re 

a self-supporting entity. It’s supported by the people who pay the 

insurance premiums, and that’s the way it’s been for 72 years. 

Mr. MILLER OF CALIFORNIA. What’s the current health of the 

FHA mutual mortgage insurance fund? 

Mr. MONTGOMERY. Well, Congress has a mandated 2 percent capital reserve. Right now it’s a little over 6 percent. So we are finanVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
10

cially sound. We have had clean audits the last 12 years, and the 

fund is financially sound. 

Mr. MILLER OF CALIFORNIA. How do you ensure proper underwriting? 

Mr. MONTGOMERY. Well, we have some of the best underwriting 

standards around. And bear in mind, since we are an insurance 

premium, we guarantee the product. It allows families to have a 

more affordable interest rate. And it’s a very transparent product, 

unlike what you see in some predatory lending. And we think it’s 

a darn good product. It’s just time to modernize. 

Mr. MILLER OF CALIFORNIA. So you can justify what we’re attempting to do here? 

Mr. MONTGOMERY. Yes, sir, absolutely. We feel very passionate 

about this, and believe it’s good public policy, and long overdue. 

Mr. MILLER OF CALIFORNIA. Thank you, sir. Mr. Frank, you are 

recognized for 5 minutes. 

Mr. FRANK. Thank you. Mr. Secretary, I really appreciate your 

elaboration on the high-cost situation, because we have people, I 

think, quite ignorantly—maybe out of good faith, but ignorantly—

criticizing the increase in the loan limits, and saying, ‘‘Well, you’re 

moving away from the segment you’re supposed to serve.’’ 

And I think you made it very clear that if we don’t increase the 

loan limits in much of the country, you cannot serve that segment, 

that we are talking not about getting to a higher-end in the income 

spectrum, but reaching precisely the part of the spectrum that 

FHA is supposed to reach in places where it is now priced out of 

the market. 

I was particularly struck by your comments about our colleague 

from California, Ms. Water’s, district, the fact that FHA has virtually disappeared. So that when we talk about raising the limits, 

we’re still not going to hit Santa Monica. You’re still not going to 

hit, you know, much of the Bay Area. 

We are not talking about reaching the high-end areas in California or in Massachusetts. There are parts of my district, the City 

of Newton, where I live myself, where I don’t think the limit is 

going to come close, even at the higher level, to them. But there 

are other parts of my State, and of California, where it will. So I 

really appreciate that, and I hope we will hold firm on this. 

And there are some competitors who don’t like the idea. But 

again, we want to be clear that we are not changing the mission 

of FHA. 

And is it also the case, by every projection we have, that if you 

are able to do that, if you are able to go with a higher loan limit 

based on the house price, that this will increase the negative subsidy, i.e., make money for us? 

Mr. MONTGOMERY. Well, as you know, Ranking Member Frank, 

we’re required to operate in a negative subsidy environment. And 

we think by, again, spreading the risk out, we can continue to operate in this environment. And we just think that it’s time to price 

the product, which we think is a good product, commensurate with 

the risk, and that’s what this bill does. 

Mr. FRANK. I appreciate that. The other thing I would say is this. 

You know, some of what we favor is, I think, going to increase the 

return to the Treasury, just by increasing the amount of volume. 

11

But we have a fund that is now in an actuarially sound position. 

Is that correct? 

Mr. MONTGOMERY. Yes. Yes, sir, it is. 

Mr. FRANK. All right. And it is returning over and above what’s 

needed to be actuarially sound, some surplus to the Treasury? 

Mr. MONTGOMERY. That is correct. 

Mr. FRANK. Okay. Well, in that case, that’s why I think the gentleman from California and I are somewhat skeptical that you need 

all of the increases that are in this bill. 

I mean, when we have got an actuarially sound fund, and it’s already making money, an additional $845 million seems to me to be 

more than we need on this program. And that’s why, in particular, 

I will be working to try and—I don’t want to take away the flexibility for pricing. 

We don’t want to have a situation where things could go bad and 

we would be in some trouble. But particularly at the low end, I 

want to stress again that I think this is a very good forum now in 

which we, the Federal Government, can help low-income people. 

And again, we are agreeing that when you extend the loans 

downward, you are going to hit people who are higher risk, not because of any moral deficiency on their part, just because they have 

less money, they have less margin, etc. And then the question becomes, for public policy, who should subsidize them? 

And again, I think that’s the way to focus it. And I think the answer should be we that do not expect the majority of lower income 

people who would be reached here to have to bear a lot of the burden of the subsidy for the minority who aren’t going to pay up. 

Let’s find another way to do that. We have budgetary flexibility 

here, because we’re in the FHA structure. And I am pretty sure 

there is no requirement that any particular class of loans has to 

bottom out, has to be in overall balance. So I would look very closely at that. 

And yes, it would be nice if you made a little bit more money. 

Frankly, some of us believe that the surplus that is generated, 

while in budget terms it’s not a free gift to use it for housing, it 

justifies housing. 

That is, when you look at the housing budget of America, as you 

look at the amount we expend from the Treasury and HUD, we 

ought to keep in mind that we are making some money as an offset 

to that in the housing area from FHA. And while it doesn’t make 

it a free gift of money in the pay-go sense, it does, I think—it 

should have some public policy goals. 

So, I again want to thank the Administration. This is a very good 

bill, and I hope we can move forward on it with the one change 

that I discussed. And as I said, I particularly appreciate—and we 

will be talking more about—your helping us justify the high-end. 

I guess the best way to put it—to go back to the high-end thing—

if you believe that there ought to be economic guidelines for where 

the FHA can lend, then you ought to believe that we adjust those 

for region. The notion that you would set a limit based on the cost 

of housing, and ignore the very wide variations in the cost of housing, just doesn’t make any sense economically. Thank you, Mr. 

Chairman. 

12

Mr. MILLER OF CALIFORNIA. Thank you. Mr. Frank, when this 

program changes, there are areas of San Francisco, like the 

Bayview Area Redevelopment Sector, that are going to tremendously benefit from this program. Ms. Lee, you are recognized for 

5 minutes. 

Ms. LEE. Thank you very much. Good to see you. And let me just 

ask you, going to the Bay Area, of course my area is Oakland, the 

East Bay, across from San Francisco. And right now, the median 

price of an existing single-family detached home, just in California 

in general, is about $551,000. That’s a 13 percent increase. 

And of course, the median price of homes in my county, in Ala- meda County, during January of 2006 was $570,000. Now, that’s 

$570,000 for a small house. The FHA loan limit, I believe, in my 

district for a one unit house is about $362,000. So, I think we all 

agree that these loan limits need to be raised. 

But I’m not sure, with that big of a gap between the median 

price and even the loan limit being raised, what in the world are 

we going to do to ensure that people who deserve to purchase and 

participate with FHA will be eligible? 

I also wanted to know just—I believe in this legislation you presented—and this is the second question—that there is no provision 

for fair housing and non-discrimination reforms in the FHA program. And I’m wondering what you’re doing to ensure that all lenders are in compliance with fair housing laws, and if you have a 

breakdown of the demographics of FHA homeowners, specifically 

African American, Latino, and Asian Pacific American homeowners, under the FHA program. 

Mr. MONTGOMERY. Thank you very much for your question. And 

I will answer the last part first. 

We work very closely with Assistant Secretary Kim Kendrick in 

fair housing issues, and I think FHA is a leader in that area, and 

especially as we’re celebrating Fair Housing Month in the month 

of April. 

Relative to the conforming loan limit cost, we— 

Ms. LEE. Let me just ask you though, Mr. Secretary, in this legislation, in the legislation that’s being proposed, shouldn’t there be 

some provision reaffirming that? 

Mr. MONTGOMERY. We will make sure it is. The intent—and I 

will go back and look a the legislation—is not to supplant what is 

in there now, but we will certainly—and I give you my word—to 

make sure that is in there. 

Ms. LEE. Great. And we will work with you on that also. 

Mr. MONTGOMERY. Thank you. 

Ms. LEE. Thank you. Okay, continue. 

Mr. MONTGOMERY. But relative to the conforming loan limits, I 

am often struck by the fact that in the Nation’s most populous 

State, the median home price is north of $550,000. In the second 

most populous State, Texas, it’s only about $175,000. 

Now, there are plenty of homes—right now we can’t exceed $362,000—but by going to 100 percent, we can go to $417,000. And 

while we may not be able to get parts of the Bay Area, there are 

certainly other parts of California and other high-cost States. There 

are a lot of homes being built between $362,000 and $417,000, 

which is a 100 percent limit. 

13

It’s difficult for us, speaking for FHA, to address beyond that. 

But we certainly recognize that it’s a concern in many parts of the 

country. 

Ms. LEE. But let me ask you. It is a concern. And you just laid 

out what the issue is, and what the problem is, and what we’re 

going to see, of course, is de facto segregation. 

You’re going to see areas such as the Bay Area become upper 

middle income white areas. You’re going to see people moving, 

which we’re seeing now, out of places such as Oakland and San 

Francisco, primarily minority potential homeowners, minority constituencies and populations leaving. And we’re going to have a 

major crisis on our hands, in terms of the further segregation of 

America, based on, now, the fact that people cannot qualify because 

we know, historically, income levels are lower in communities of 

color, and they can’t afford these houses. 

And so, it’s a vicious cycle. And how do we break that cycle, is 

what I’m asking you. 

Mr. MONTGOMERY. Well, speaking for FHA, it’s difficult for us to 

address people who—where home prices exceed what we are required by law to stick to. 

And I certainly agree with your premise, that there is a concern 

about construction of affordable housing in many parts of the country. And I would say that’s most pronounced, unfortunately, and 

probably, in your district, that what sort of incentive is there for 

people to build homes of more moderate cost, versus higher-cost 

homes. 

There are certainly regulatory barriers, local codes that certainly 

drive up the cost. Real estate values just continue to increase in 

many cases out of sight, to be very blunt. 

But we think, relative to low- to moderate-income home buyers, 

by making this step at least to 100 percent, that we can at least 

serve more families who are not being served right now, or at least 

serve them with a much safer product. 

Mr. MILLER OF CALIFORNIA. The gentlelady’s time is up. One of 

the largest originators of loans we have out there is the mortgage 

brokers. Yet, in many cases, they are not allowed to offer FHA type 

of loans. Are you addressing that in any way? 

Mr. MONTGOMERY. We have been working very closely with the 

mortgage brokers and other groups. 

In fact, my first day on the job, when we realized we needed to 

fix FHA, we sat down and met with every group, from low-income 

housing advocates to realtors, home builders, brokers, and bankers. 

And I know some of them have concerns about the audit requirements, and we are in communication with them to see if we can 

resolve that, because they are originating between 60 and 67 percent of all loans right now, and I don’t like using this term, but 

they are, in effect, our sales force. 

Mr. MILLER OF CALIFORNIA. Yes, they are. 

Mr. MONTGOMERY. And— 

Mr. MILLER OF CALIFORNIA. We had a hearing last year when the 

bankers came forth and testified that they are one of their major 

resources in processing loans, and yet they are not really able to 

work in the FHA arena. 

14

Mr. MONTGOMERY. Well, there were some rather onerous process 

requirements, Mr. Chairman, that from day one we immediately 

began to modernize. And those were roundly applauded by the 

mortgage brokers and by the mortgage bankers, just streamlining 

our procedures. 

Also, we had some fairly onerous appraisal requirements. And we 

were even, as you know, one of the last entities requiring thick 

case binders full of home documents to be mailed back and forth 

between our home ownership centers and brokers and lenders. 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. MONTGOMERY. And if there was one little error, we had to 

FedEx it back, and it got very expensive. We are now requiring 

them to do that—or saying that they can do it electronically. 

So, a lot of those have been applauded by the industry, including 

the mortgage brokers. 

Mr. MILLER OF CALIFORNIA. Well, in the vein of what Ms. Lee 

was talking about, about low-income families having an opportunity to go and buy a home in the marketplace, many—in many 

cases, mortgage brokers have more time and the ability to represent a low-income family, representing them in a lending environment. And I think that that would go a long way toward addressing these concerns. 

Mr. MONTGOMERY. Yes, sir. 

Mr. MILLER OF CALIFORNIA. Ms. Velazquez, you are recognized 

for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Commissioner Montgomery, this committee approved zero downpayment legislation 

last year that included mandatory counseling. Although this legislation has not passed Congress, does HUD plan to take the advice 

of this committee and require housing counseling for loans that require no downpayment? 

Mr. MONTGOMERY. Well, we certainly think home buying counseling is a very good concept, and a very good program. As you 

know, this Administration has increased home buying counseling 

funds exponentially over the last 5 years. 

Now, as you know, this legislation—I haven’t used the term zero 

down, because zero down would now become one of several options 

that we could offer low- to moderate-income home buyers. And 

again, if we could price it commensurate with the risk, look at the 

borrower’s portfolio, they may qualify for zero down, and maybe a 

half percent down, and maybe 1-, 2-, or 3 percent. 

So, we’re not zeroing in on just zero down, because there may be, 

again, a whole range of products that family—and some families 

may not want to put down more money. They may want to save 

it to furnish the home, or something of that manner. The key thing 

here is flexibility. 

Ms. VELAZQUEZ. But even if you don’t want to call it zero down, 

my question to you is whether you’re going to take the advice of 

this committee and include or require housing counseling for those 

borrowers, especially if we want to tackle the issue of foreclosure, 

predatory lending in our communities, low-income communities, we 

need to educate those consumers. 

15

Under this proposal, would you intend in any way to make sure 

that borrowers will be connected to that type of housing counseling? 

Mr. MONTGOMERY. Well, that is certainly something that we can 

consider, now that we have moved away just from a zero down. It 

wasn’t our intent to not offer families advice on the home buying 

process. But certainly it’s something we can look at. 

And I want to add to that, we also did not have a separate FHA 

website or a call center, which we now have. And we think, to the 

degree that we can’t sit down and do one-on-one counseling, it is 

about time that FHA had the ability for people to access information on the Internet, or pick up the phone and— 

Ms. VELAZQUEZ. But in low-income communities, people might 

not have access to technology. 

Mr. MONTGOMERY. And that’s a very good point. We have, I 

should add, begun a marketing campaign designed specifically at 

Latino and African American communities in 60 communities 

across the country, and we are starting the effort, Representative. 

And we hope with this legislation, to do even more. 

Ms. VELAZQUEZ. Okay. The FHA is generally targeted for minority, low-income, and first-time home buyers. These borrowers will 

likely be charged higher premiums under a differential mortgage 

premium system. 

Can you explain how changing to this system, and imposing 

higher rates, will not push some borrowers out of the program, and 

you will be then defeating the purpose? 

Mr. MONTGOMERY. I think it’s important to put into context the 

amount between the varying percentages of the mortgage insurance premiums. 

I will use an example, a $100,000 home, which while not readily 

available up here, it is in other parts of the country. The payments 

on that home would be about $674 a month for a family that pays 

a 1.5 percent FHA mortgage insurance premium and a .5 percent 

monthly premium. If we charge that family the maximum of 3 percent, again with the .5 percent annual premium, the payment only 

goes up $19 a month. 

Now, compare that to what that family would pay with a standard 9.5% sub-prime loan. The payment is $160 more a month. So, 

even by going up—again, we have to keep a capital reserve that 

Congress mandates—even going to the extreme example of 3 percent, which is the cap we have been working with—it’s still a far, 

far better product, a safer product with no pre-payment penalties, 

than that family would get versus the sub-prime product. 

Ms. VELAZQUEZ. I understand that. But for some, and too many 

families in this country, $20 is a lot. It will make the difference between purchasing a prescription drug or putting food on their table. 

So that’s my point. Thank you. 

Mr. MILLER OF CALIFORNIA. Thank you. FHA proposals contain 

many options, but condominiums seem to be one that is, often 

times, overlooked. And one of the types of housing especially attractive to first-time home buyers, is the condominium. Can you please 

explain how the proposal would make it easier for buyers to use 

FHA to buy a condo? 

16

Mr. MONTGOMERY. Well, condominiums have been in the FHA on 

the multi-family program side for a number of years. And we think 

it’s time to move them into the single-family side, and to put all 

the single-family programs, including condominiums, under the 

MMI fund. 

Mr. MILLER OF CALIFORNIA. So they will all be single-family, attached and detached, under one category, then? 

Mr. MONTGOMERY. That’s correct. It will all go under single family, including condominiums, and be operated under the MMI fund, 

instead of the— 

Mr. MILLER OF CALIFORNIA. So the loan, then, would be pretty 

much pushed by FHA as you would single-family detached? 

Mr. MONTGOMERY. That’s correct. And as many condominiums 

now are springing up in areas closer to city centers, they become 

more viable options for a lot of families. And again, we just think 

it’s time to modernize it, and make condominiums a part of the single family product side. 

Mr. MILLER OF CALIFORNIA. Great, thank you. Mr. Scott, you are 

recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. Mr. Montgomery, the 

FHA is a product of the Franklin Delano Roosevelt Administration. 

It was birthed during the Depression to serve those needs that 

were not met by the private sector, correct? And recently, the FHA 

loans have started to decline. Is that—when did that decline start? 

Mr. MONTGOMERY. Well, FHA volume has always ebbed and 

flowed, depending on factors, certainly to include economic factors. 

But the percentage of our market share has been steadily declining 

for about the last 6 years. 

Mr. SCOTT. Was there any given—up to the last 6 years, it’s been 

going on since 1934. So from 1934 to about 2000, we’re moving 

along pretty good, up and down, ebbing and flowing, but pretty 

good. What happened 6 years ago? Was there some economic activity, some event that happened that started this downward slip? 

Mr. MONTGOMERY. Sir, I would say a lot of our traditional borrowers that would have gone with FHA, if you look at the data and 

statistics, they moved toward sub-prime loans. 

And I can’t speak for the past, but I can say you’ve got a perfect 

storm, sadly, of an outdated FHA product, and not a lot of consumer awareness of the product. You had onerous requirements. 

You had outdated technology that we were using. And a lot of realtors and lenders didn’t want to use FHA. We were cumbersome and 

unwieldy, and we’re working to change that. I didn’t blame them 

for not wanting to use the product. We didn’t make it easy on 

them. 

And between other products marketing themselves well, that we 

weren’t able to do, a lot of families made decisions, they wanted to 

buy a home—God bless them for doing that—but our concern is 

that some of those families made poor decisions. 

Mr. SCOTT. And you believe passage of this legislation you’re proposing and supporting would help put us back on the right track, 

moving upward? 

Mr. MONTGOMERY. Absolutely, sir. 

Mr. SCOTT. Would moving FHA to a risk-based pricing formula 

make it closer in nature to the sub-prime market? 

17

Mr. MONTGOMERY. Sir, just about the entire mortgage industry, 

and other forms of insurance—which is what we are—price based 

on risk. 

One thing I think it’s important to note is that, yes, for some, 

the premiums will go up. But for a lot, they will go down. And we 

will look at the totality of a borrower’s profile: their income; their 

debt; their FICO score. You have a lot of immigrant families who 

don’t have a lot of credit, but perhaps have a lot for a downpayment. Now we can price a product to their risk, and it may be, 

based on their downpayment, they pay very little insurance premium. 

Right now, it’s a one-size-fits-all that drives away many borrowers. And we think it’s just time to modernize it, and bring it 

into this century. 

Mr. SCOTT. Do you and your Administration support the TiberiScott bill for zero downpayment? It is that downpayment that is 

the most cumbersome, difficult stumbling block to home ownership. 

And Congressman Tiberi and I have been working on this bill, and 

it has got some good movement. Do you all support this bill? 

Mr. MONTGOMERY. We absolutely support the concept of zero 

down. And this legislation, though, goes a little step further, in 

that, again, pricing it to a family’s risk or profile, it may be that 

they can qualify for a half percent. And as I mentioned previously, 

maybe a family who could go zero down decides, ‘‘Well, we would 

rather keep some of the money to furnish the home, or buy a refrigerator,’’ or whatever. And again, we can have that flexibility that 

we don’t have today. 

So, we certainly support that concept, Congressman. But I also 

think that by implementing this bill, we can have a whole range 

of downpayment scenarios, again, to match a family’s profile 

Mr. SCOTT. Okay. Let me just, for—go back for a minute on the 

condominiums, because that is a big issue. Can you give us a little 

bit more information on the demographics served by the condominium market? 

Mr. MONTGOMERY. Well, sir, I can get you more specific information after this as to the demographics. But we think it’s time to 

modernize, since condominiums are increasing dramatically as an 

option for families, especially those who want to continue to live 

near city centers. We just think it’s time to modernize, to be able 

to offer a more affordable product to many families who choose to 

live in condominiums. But we can get you the demographic— 

Mr. MILLER OF CALIFORNIA. The gentleman’s time is expired. 

Thank you. 

H.R. 4804, sir, a bill introduced to modernize FHA Title I manufactured housing program, was recently referred to this committee. 

The Administration’s proposal also contained a number of Title I 

reforms, with the goal of making the purchase of a manufactured 

home more affordable and increasing Ginnie Mae’s participation in 

Title I programs. What Title I reform does the proposal address? 

Mr. MONTGOMERY. Well, for one, we think moving away from the 

10 percent portfolio—right now, a lot of—we can’t pay claims that 

exceed the 10 percent of a lender’s portfolio. We think it’s time to 

move away from that, to make it more mirror Title II. 

18

We think by raising the prices—right now, for a manufactured 

home, you are limited to $48,000. The median price for a manufactured home today is a little more than $58,000. So we would propose to raise the conforming loan limits for manufactured homes on 

a lot, or separate, or even for property improvements. And we just 

think it’s time to modernize Title I, as well. 

Mr. MILLER OF CALIFORNIA. And you don’t think this creates a 

greater risk for FHA? 

Mr. MONTGOMERY. No, sir. We don’t. As a matter of fact, we 

think that the more it could mirror Title II, the less risky it would 

be. 

Mr. MILLER OF CALIFORNIA. Okay. 

Mr. MONTGOMERY. I mean, volume right now we’re doing on Title 

I, because interest rates are so high, that there is no definite guarantee that we’re going to pay the claim, and— 

Mr. MILLER OF CALIFORNIA. I agree. I just wanted to hear you 

say it, that’s all. 

Mr. MONTGOMERY. We’re doing less than 2,000 loans now. The 

volume has all but disappeared. 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. MONTGOMERY. And 22 million Americans live in manufactured homes. That’s 8 percent of our population. We think we need 

to make it a more affordable product, especially for families who 

live in rural communities. 

Mr. MILLER OF CALIFORNIA. I agree. Mr. Cleaver, you’re recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Montgomery, first, 

if you could, tell me, please, what the FHA share of the market is, 

presently. 

Mr. MONTGOMERY. It’s somewhere between 3.25 and 3.75 percent. 

Mr. CLEAVER. Well, are the mortgage folks accurate that FHA 

once held 40 percent of the market? 

Mr. MONTGOMERY. That would probably seem a little high to me. 

Historically, over the last 20 years, it has fluctuated. But I don’t 

recall, in the last 20 years at least, it’s been higher than about 19 

percent. 

Mr. CLEAVER. So, if this legislation is approved, do you think 

that FHA would get a larger share of the market? 

Mr. MONTGOMERY. I—as a public servant, I hate using the term 

market share, because it seems like we’re a corporation, but it is 

a good descriptive term. 

If we help one more family, sir, with a safer product at a fair 

price, then we will be satisfied. If that increases the so-called market share, great. But we are doing this to position it as a product, 

to modernize it, and to make it a more viable option for lower-income families. And we think by doing that, sir, our percentage of 

the market will more than likely increase. 

Mr. CLEAVER. Well, the purpose of the question actually is designed to find out—there are some on this committee and in this 

Congress who believe that Fannie Mae and Freddie Mac’s portfolio 

has grown too large, that it’s too large. I’m not one of them, but 

there are those who believe that. 

19

And so, I’m wondering whether or not the FHA revitalization 

would relieve Fannie Mae and Freddie Mac of this—or reduce the 

size of their portfolio. I mean, if you’re going to revitalize and capture a larger share of the market—and I can see that you’re trying 

to stay away from a percentage that you think you might capture 

of the market—but I’m also interested in whether or not a not-intended consequence of this legislation might be to reduce the portfolios. 

Mr. MONTGOMERY. Well, we will certainly not change the housing 

goals for the GSE’s, affordable housing goals, sir. We have a legislative mandate to do those, and those wouldn’t change. FHA traditionally serves a lower-income/higher-risk borrower than the GSE’s 

do. And I don’t—while there could be some minimal overlaps there, 

I don’t see that being an unintended consequence. 

Mr. CLEAVER. Well, yes. I’m not making a judgement on whether 

it’s good or bad, I’m simply wondering if we can reduce the portfolios of the GSE’s. I mean, if you’re going to—you expect the market to—your market share to rise, right? 

Mr. MONTGOMERY. Yes, sir. That’s our goal, to serve more borrowers. 

Mr. CLEAVER. Okay. So if it rises, do you think that that would 

reduce the GSE’s portfolio? 

Mr. MONTGOMERY. More than likely not, sir. But I would say 

that more families, if you look at the data over the last several 

years, most of the traditional FHA borrowers—by the way, if some 

of them went conventional, great; that’s what we all want—but 

looking at the data, most of them were steered toward sub-prime 

products. And that market, as you know, has exploded, exponentially. 

Mr. CLEAVER. Well, what do you—is there—what do you consider 

to be—I mean, somewhere in your comments you made a statement 

about some home—oh, okay, I’m sorry. The primary concern with 

the risk-based pricing approach, or that ‘‘FHA will target people 

who shouldn’t be homeowners.’’ 

When you say, ‘‘shouldn’t be homeowners,’’ are you speaking to 

their income level? To their credit? What are you—who are the people who should not be home buyers? 

Mr. MONTGOMERY. Sir, one of the biggest concerns we have are 

the amount of mortgages that are going to reset later this year and 

into next year. It’s just shy of $2 trillion. And as many arms reset, 

or other variables occur, we are concerned that some families who 

got into a loan on day one at ‘‘X’’ number of dollars per month, can 

now no longer afford the home, once that interest rate resets. And 

that is something of great concern to us. 

And perhaps, if this legislation goes through, we may be able to 

be an option for many of those families to refinance into an FHA 

product. 

Mr. MILLER OF CALIFORNIA. The gentleman’s time has expired. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. MILLER OF CALIFORNIA. A good question, Mr. Cleaver. I 

think part of the problem we have is that the conventional market 

has grown dramatically, and GSE’s have not participated in that 

growth, because they have been limited on the percentage of loans 

20

they can make, especially like in high-cost areas. They’re just not 

there today. 

So, as the market grows, I think GSE participation will also grow 

at the same percentage it should have in the past. So I don’t have 

that concern. 

But on your first page of written testimony, you stated that FHA 

made significant changes, streamlining and realigning it for procedures. Could you describe those significant changes that have been 

streamlined in the process, and how it is affecting consumers? 

Mr. MONTGOMERY. We are not a retail operation. We rely on realtors and lenders, if you will, to sell and promote FHA. And if we 

are difficult to deal with, with unique and onerous requirements—

for example, if you had a cosmetic problem with a home, might 

have been a wobbly handrail or a cracked windowpane, we required 

appraisers to go back and forth, to make sure cosmetic items were 

taken care of. 

Now, certainly, we’re not, you know, cutting any corners on 

something structural in nature, or impacting the safety and health 

of the occupants. That was one concern: onerous appraisal requirements. We did away with those. We adopted what the conventional 

market does, and that’s accept the Fannie Mae appraisal form. 

We also had the unique requirements as sending the case binders back and forth. We came into the late 1990’s, so to speak, from 

a technological standpoint, and said, ‘‘Can we be doing this electronically?’’ mirroring what the Veterans Administration home buying program has been doing since 1999. Very, very successful. We 

also just are generally trying to make FHA much easier to deal 

with. 

But we all agree to meeting with our industry partners, while 

they roundly applauded—and all of them did, I might add—our 

process improvements, they also seconded what we had realized, 

that it was time to make long-overdue product improvements, as 

well. 

Mr. MILLER OF CALIFORNIA. Thank you for your testimony. 

Would you like to say anything in conclusion? 

Mr. MONTGOMERY. Just thank you very much for the opportunity 

to testify today. 

Mr. MILLER OF CALIFORNIA. Thank you, sir. I would like to welcome our second panel now. We have Stella Adams, who is a board 

member of the National Community Reinvestment Coalition. Members of the coalition seek to increase the flow of private capital into 

traditionally underserved communities. 

Jerry Howard is executive vice president and chief executive officer of the National Association of Home Builders. Welcome, Jerry. 

The Association is a Washington, D.C.-based trade association, 

where the mission is to enhance the climate for housing in the 

building industry. 

Regina Lowrie is the president of Gateway Funding Diversified 

Mortgage Service, located in Horsham, Pennsylvania. She is testifying today as a board member of the Mortgage Bankers Association. 

And A.W. Pickel is president and CEO of Lender One Financial 

Corporation, located in Lenexa, Kansas. Lender One is a full service mortgage banking operation approved to underwrite convenVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
21

tional and government loans. Mr. Pickel is testifying today on behalf of the National Association of Mortgage Brokers. Welcome. Ms. 

Adams, we would recognize you first, for 5 minutes. 

STATEMENT OF STELLA ADAMS, BOARD MEMBER, NATIONAL 

COMMUNITY REINVESTMENT COALITION 

Ms. ADAMS. Thank you, Mr. Chairman, and Ranking Member 

Waters. It is an honor to be here today, as the voice for over 600 

community organizations from across the country that comprise the 

National Community Reinvestment Coalition. 

Mr. Chairman and other distinguished members of the committee, we applaud your efforts to modernize FHA and update programs that have become antiquated. It is important that these programs remain relevant in today’s lending market. 

Nonetheless, we are concerned with some of the proposed reforms 

that will move FHA more towards private sector pricing patterns. 

The mission of FHA is to serve low- and moderate-income families 

with affordable home loans. In general, we believe that FHA should 

be modernized, but these proposals would move FHA away from its 

original purpose. 

NCRC believes that FHA must provide an alternative to subprime lending, in order to provide a competitive impetus for pricing 

to be reduced for borrowers with impaired credit. The proposal to 

adopt a risk-based pricing mechanism for mortgage insurance 

would move FHA closer to the risk-based pricing in the sub-prime 

market. 

In other words, FHA pricing would more closely resemble subprime pricing. This move would be the opposite of what is needed. 

We need to retain and expand upon alternatives to sub-prime pricing, in order to maintain competitive pressure on the sub-prime 

market to lower its pricing. 

An example illustrates how the proposed risk-based pricing 

mechanism would move FHA pricing toward sub-prime pricing. 

Imagine two borrowers, Josh and Monica. Josh has seriously impaired credit, and is a B-minus sub-prime borrower. Monica has a 

few nicks on her credit, and is an A-minus sub-prime borrower. 

Right now, both Josh and Monica get charged roughly the same 

FHA mortgage insurance premium. Monica cross-subsidizes Josh’s 

premium. 

On the other hand, if Josh and Monica were to go to the private 

sector market, Monica could probably get a near-prime loan, perhaps around 7 percent. Josh’s APR would be much higher, possibly 

9 to 10 percent. In contrast, the FHA program reduces the pricing 

disparity between Monica and Josh’s prices for loans. While this 

may not be the greatest deal for consumers like Monica, it protects 

consumers like Josh from onerous and high-cost loans in the private market. 

FHA’s program has lost market share to sub-prime lenders in recent years. While a number of sub-prime lenders are responsible, 

predatory lending is a subset of sub-prime lending. 

Moreover, abusive lending is particularly prevalent at the lower 

ends of the credit scoring spectrum, since the more credit-impaired 

borrowers are precisely the ones with the fewest alternatives. 

22

Currently, FHA loans are an important source of an affordable 

loan for traditionally underserved borrowers. NCRC’s data analysis 

shows that a greater percentage of lower income and minority borrowers receive FHA loans than conventional loans. Moreover, the 

level of sub-prime lending, as a percent of loans, sub-prime loans 

were 1.4 percent of government-insured loans. In contrast, subprime loans were 11.5 percent of conventional home loan purchases. 

As illustrated by the data, a move to risk-based premium pricing 

could seriously undercut the current affordability of FHA loans for 

traditionally underserved borrowers. We cannot move dramatically 

away from FHA’s vital place in the market, as an affordable alternative. 

Significant policy questions are whether a move to risk-based 

premium pricing is necessary to shore up the competitiveness of 

FHA lending, or the safety and soundness of FHA lending. 

NCRC is not convinced that a move to risk-based pricing is necessary to offer flexible and affordable mortgages. We have had discussions with a number of large lenders offering conventional mortgage loans with very minimal downpayments, without private 

mortgage insurance, and to borrowers with low credit scores—

below 600 FICO. 

We ask HUD to more fully explore these types of products, and 

additional credit counseling that may be needed as a component to 

some of these products. Enhanced home buyer counseling and careful underwriting appear to be a more promising path than moving 

toward a sub-prime pricing structure. 

By making FHA loans more costly for credit-impaired borrowers, 

the chances increase that these borrowers will default, making the 

FHA program less safe and sound. 

Mr. MILLER OF CALIFORNIA. The gentlelady’s time has expired. 

Would you like to wrap up? 

Ms. ADAMS. We thank Mr. Chairman for holding this hearing of 

great importance for the ability of minority and low-income borrowers to buy affordable homes. We urge the committee not to 

move FHA towards a risk-based pricing system, and not to raise 

maximum loan amounts. 

As demonstrated above, NCRC believes it is critically important 

to preserve FHA as an affordable alternative to the sub-prime market. On the other hand, if FHA remains an affordable alternative, 

it serves as an important check and balance on the private market, 

keeping pressure on sub-prime lenders to lower their prices. Thank 

you, on behalf of NCRC and our members. 

[The prepared statement of Ms. Adams can be found on page 47 

of the appendix.] 

Mr. MILLER OF CALIFORNIA. Thank you. Mr. Howard, you are 

recognized for 5 minutes. 

STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND CEO, NATIONAL ASSOCIATION OF HOME BUILDERS 

Mr. HOWARD. Good morning, Chairman Miller. Good morning, 

Mr. Cleaver. It’s great to be before this subcommittee again. I am 

23

Jerry Howard, the CEO of the National Association of Home Builders. 

Over the past 2 decades, the popularity and relevance of the 

FHA’s single family programs has waned, as they have failed to 

keep pace with the market. This is due partially to statutory and 

regulatory constraints that have limited the FHA’s ability to respond to the needs of the borrowers. The differences between 

FHA’s requirements and those for conventional mortgages are a 

disincentive to the use of the FHA programs. 

Further, the FHA’s lack of responsiveness to market needs has 

created opportunities for predatory lenders. Nevertheless, important strides have been made to revitalize FHA under the leadership of Commissioner Montgomery, and with the support of Secretary Jackson. 

The benefits of these efforts are already being seen. The FHA 

has aligned its appraisal requirements with market practices. Additionally, FHA’s new policies increase the allowable loan to value 

ration for cash-out refinancing transactions. And revisions to the 

203(k) rehabilitation program have made this program more user 

friendly. 

Despite these steps, several requirements still seriously constrain 

FHA’s ability to deliver a range of mortgage products needed for 

FHA to fulfill its mission. 

Accordingly, NAHB believes that Congress should grant the FHA 

the broader authority outlined in the Administration’s budget request, and detailed in the draft authorizing legislation. NAHB is 

pleased that several reform proposals are included in the Administration’s position. I will outline them here. 

First, the current limit for FHA mortgages is too low to enable 

deserving potential home buyers to buy homes in many high-cost 

areas. The artificially low limit restricts choices for home buyers 

who use FHA-insured mortgage loans. They are pushed to the lowest echelon of available homes throughout much of the country. 

And in many areas, there are no homes available. 

NAHB supports the Administration’s proposal to recalibrate local 

loan limits to 100 percent of the area median, up to the conforming 

loan limit, and to increase the minimum FHA mortgage amount to 

a more meaningful level. 

Second, one of the most common factors keeping potential home 

buyers from achieving their dream of home ownership is the lack 

of financial resources to pay downpayment and closing costs. FHA’s 

current statutory requirement of a cash contribution of 3 percent 

by a home buyer was considered innovative years ago, when 

downpayments of 10 percent or more were the norm for conventional loans. 

However, recent strides in underwriting make it possible to predict with reasonable certainty, the likelihood that a borrower will 

or will not default on a loan, rendering the downpayment a far less 

critical variable in the underwriting process. 

NAHB has long supported efforts by this committee to implement 

the new zero downpayment program, and we support the Administration’s request to provide FHA the flexibility to establish a range 

of downpayment program requirements for its single family proVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
24

grams, as long as the programs operate on an actuarially sound 

basis. 

Third, NAHB is pleased that the budget request includes an initiative for a risk-based mortgage insurance premium. Such a premium would temper the current structure for better performing 

loans, or cross-subsidizing weaker loans in the FHA insurance 

fund, allowing the FHA to support a broader menu of mortgage 

markets. 

Fourth, by extending the maximum loan maturity to 40 years, 

FHA will enable borrowers’ monthly loan payments to be reduced. 

Unlike current popular interest-only loans, an FHA-insured mortgage loan with a 40-year maturity will ensure that some part of the 

borrower’s monthly payment is used to reduce the outstanding loan 

balance, and to build up equity in the home. 

Finally, in many communities, condominiums represent the most 

affordable path to home ownership. Unfortunately, FHA’s requirements for condominium loans are burdensome, differing significantly from the requirements for mortgage loans that are secured 

by detached single family housing. The net result is a severe limitation on the availability of FHA-insured mortgages for those attempting to purchase a condo unit. 

NAHB is pleased that the Administration has requested to consolidate all of the single-family mortgage insurance programs 

under one section of the National Housing Act. This would be a 

major step in reopening FHA-insured financing in this critically 

important market segment. 

Mr. Chairman, we thank you for the opportunity, and we look 

forward to working with you, and with the ranking member and 

the other members of the committee in this important issue. 

[The prepared statement of Mr. Howard can be found on page 52 

of the appendix.] 

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

Fitzpatrick, you are recognized for the purpose of an introduction. 

Mr. FITZPATRICK. Mr. Chairman, I am very proud indeed to welcome to the House of Representatives, and this committee, an outstanding Pennsylvanian, Regina Lowrie, who is the chairman of 

the Mortgage Bankers Association. 

Ms. Lowrie is a woman entrepreneur who, in 1994, founded 

Gateway Financial Diversified Mortgage Services in Horsham, 

Pennsylvania, which is part of the greater Philadelphia area, with 

just 8 employees, which she has helped to grow today to a company 

of over 800 employees with 58 offices, and is greater Philadelphia’s 

largest independent mortgage company. I am very proud to have 

her testify to the committee today. Thank you, Regina. 

Mr. MILLER OF CALIFORNIA. Ms. Lowrie, you are recognized for 

5 minutes. 

STATEMENT OF REGINA M. LOWRIE, CHAIRWOMAN, 

MORTGAGE BANKERS ASSOCIATION 

Ms. LOWRIE. Thank you, Congressman Fitzpatrick. And good 

morning, and thank you for holding this hearing, and inviting me 

to share MBA’s views on reforming the FHA. 

As Congressman Fitzpatrick said, in 1994, I founded Gateway Funding Mortgage with 7 employees and $1.5 million in capital. 

25

We now have over 800 employees working in more than 58 offices, 

and originating over $3 billion in loans. I am proud of our work at 

Gateway, and of my entire industry, in providing home ownership 

opportunities for American families. 

When I started Gateway, FHA programs helped to serve many 

borrowers who would otherwise not get a loan. Ten years ago, FHA 

comprised 40 percent of our volume. We worked hard to be a good 

partner with FHA. And together, FHA and Gateway served tens of 

thousands of people. 

Today, however, this story is very different. While Gateway has 

grown significantly, our use of the FHA program has dropped precipitously. While Gateway has been able to adapt to changes in the 

market, FHA has not. While the needs of low- and moderate-income home buyers, of first-time home buyers, and of senior home 

owners have changed, FHA has not followed its historic path of 

adapting to meet borrowers’ changing needs. 

We support FHA, and we believe that it plays a critical role in 

today’s marketplace. Most of FHA’s business is directed towards 

low- and moderate-income and minority borrowers, the very strata 

that is most challenged to be part of our ownership society. 

At the same time, we have watched, with growing concern, as 

FHA has steadily lost market share over the last decade, potentially threatening its long-term ability to help underserved borrowers. FHA was founded in 1934, and many of the laws, regulations, and traditions that govern its operations have not kept pace 

with the rapidly changing and dynamic marketplace. As the market continues to innovate around FHA, the great fear is that many 

aspiring home buyers will either be left behind, or forced into higher cost alternatives. 

We believe that Congress should empower FHA to incorporate 

private sector efficiencies that will allow it to meet today’s needs 

and anticipate tomorrow’s. MBA believes that changes should be 

made in three areas: FHA needs more flexibility to innovate new 

products, and introduce them; invest in new technology; and manage their human resources. 

MBA supports the Administration’s proposals to help FHA 

achieve these goals. MBA supports changes to the FHA downpayment requirements, including the elimination of the complicated 

downpayment formula, and the rigid cash investment requirements. 

The downpayment is one of the primary obstacles for first-time, 

minority, and low-income home buyers. FHA may be able to serve 

more borrowers, and do so with lower risk to their funds, if they 

are able to adjust their premiums, based on the risk of each mortgage insured. 

MBA would caution, however, that creating a risk-based premium structure will only be beneficial to borrowers if there is a 

lowering of current premiums. 

Finally, MBA supports all of the proposed changes to the current 

home equity conversion mortgage program. MBA’s surveys show 

that FHA’s HECM product comprises 95 percent of all reverse 

mortgages, and is thus tremendously important to our senior homeowners. 

26

In conclusion, FHA has an important role to play in the market 

in expanding affordable home ownership opportunities for the underserved, and addressing the home ownership gap. But the loss of 

market presence means we are losing FHA’s impact. The result is 

that some families are either turning to more expensive financing, 

or giving up. 

MBA applauds the leadership and commitment of HUD Secretary Jackson and FHA Commissioner Montgomery in calling for 

FHA reform. And I urge Congress to enact legislation to reform 

FHA to increase its availability to home buyers, promote consumer 

choice, and ensure its ability to continue serving American families. 

Thank you. 

[The prepared statement of Ms. Lowrie can be found on page 61 

of the appendix.] 

Mr. MILLER OF CALIFORNIA. Thank you, Ms. Lowrie. Mr. Pickel, 

you are recognized for 5 minutes. 

STATEMENT OF A.W. PICKEL, III, PAST PRESIDENT, NATIONAL 

ASSOCIATION OF MORTGAGE BROKERS 

Mr. PICKEL. Good morning, Chairman Miller, Ranking Member 

Waters, members of the subcommittee, and Mr. Cleaver. It’s always 

good to see a fellow Kansas Citian. 

My name is A.W. Pickel, III, and I am the past president of the 

National Association of Mortgage Brokers. Thank you for inviting 

NAMB to testify today on transforming the Federal Housing Administration for the 21st Century. As the voice of the mortgage brokers, NAMB speaks on behalf of more than 25,000 members in all 

50 States and the District of Columbia. 

I want to commend this subcommittee for its leadership when 

addressing the much-needed reforms to the FHA program. America 

enjoys an all-time record rate of home ownership today, an achievement to which mortgage brokers have directly contributed. 

NAMB appreciates the opportunity to address the need to: one, 

increase FHA loan amounts for high-cost areas; two, develop riskbased pricing for mortgage insurance on FHA loans; and three, reform the FHA program to reduce the barriers to mortgage broker 

participation. 

NAMB supports many of the proposed reforms to the FHA program, but believes the Administration should also first make certain that the FHA loan program is a real choice for prospective borrowers. Regardless of how beneficial a loan product may be, it requires an effective distribution channel to deliver it to the marketplace. 

Unfortunately, many prospective borrowers are denied the benefits offered by FHA loans, because mortgage brokers, the most 

widely used distribution channel in the mortgage industry today, 

are limited in their ability to offer such products. 

Current FHA requirements impose cost-prohibitive, time consuming, and unnecessary annual audit and net worth requirements 

on mortgage brokers that want to originate FHA loans. These requirements seriously impeded mortgage brokers’ ability to bring 

FHA loans to the marketplace. A stated objective of HUD and FHA 

is to increase origination of FHA loan products, and expand home 

27

ownership opportunities for first-time, minority, and low- to moderate-income families. 

NAMB supports increased access to FHA loans, so the prospective borrowers who have blemished or almost non-existent credit 

histories, or who can only afford minimal downpayments, have increased choice of affordable loan products, and are not forced by default into a sub-prime loan. 

The solution to increasing FHA loan production is simple. Allow 

more mortgage brokers to offer FHA loan products directly to consumers. This can be accomplished by eliminating the audit and net 

worth requirements for mortgage brokers. At a minimum, bonding 

requirements offer a better way to ensure the safety and soundness 

of the FHA program, rather than requiring originators to submit 

audited financial statements. 

Congress and this Administration have made home ownership a 

priority in this country. Unfortunately, today, the demand for 

homes continues to outpace new housing development and sales of 

existing homes, causing escalation of home prices. In an environment of rising interest rates, many first-time, minority, and low- to 

moderate-income home buyers need the safer and less expensive financing option that the FHA program can provide. 

For this reason, NAMB uniformly and unequivocally supports increasing FHA loan limits in high-cost areas. Congress should also 

create the ability for FHA loan limits to be adjusted up to 100 percent of the local area median home price in all communities, thereby providing a logical loan limit that will benefit both the housing 

industry and the consumer. This approach allows the FHA loan 

limits to respond to changes in home prices, and reflect a true 

home market economy. 

The benefits of the FHA program should belong equally to all 

taxpayers, especially those residing in high-cost areas that often 

are most in need of affordable mortgage financing options. NAMB 

also believes that FHA risk-based premiums are needed in the current mortgage finance system to drive competition and lower cost 

for borrowers. 

Private mortgage insurers have already demonstrated the ability 

to balance risk with the premiums charged. FHA should be afforded the same opportunity. The proposed reforms simply bring 

FHA into parity with what has already proven to be a reasonable 

assumption of risk for the marketplace. With risk-based premiums, 

FHA will have the ability to enter the sub-prime market safely, 

and still offer significant savings to prospective borrowers. 

Because FHA’s share of the market is approaching marginal levels, any risks to the program are likely to be greater under the status quo than with the proposal. Making FHA more competitive will 

improve the services and products provided by other lenders and 

insurers in the industry, and help to restore FHA loan product 

origination to levels of previous years. 

NAMB also supports eliminating the downpayment requirement, 

and granting FHA the flexibility to offer 100 percent financing to 

aid in the effort to increase home ownership for first-time, minority, and low- to moderate-income families. 

Therefore, under the leadership of Mr. Montgomery, I would like 

to say that FHA has made great strides, most recently with the 

28

adoption of the 95 percent cash-out refinances, and the appraisal 

changes. We would encourage Congress to seize this opportunity to 

revitalize the FHA program with this proposal, so that we can increase minority home ownership by 5.5 million by 2010. 

Borrowers underneath this will see better loan programs at lower 

interest rates. We strongly urge the subcommittee to accept this 

proposal. NAMB appreciates the opportunity to offer our views on 

transforming the FHA program for the 21st century. We want to 

thank you for your consideration. We look forward to working with 

you, and I am happy to answer any questions. 

[The prepared statement of Mr. Pickel can be found on page 80 

of the appendix.] 

Mr. MILLER OF CALIFORNIA. Thanks, Mr. Pickel. Ms. Waters, you 

are recognized to make an opening statement. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank Mr. Ney, who is not here this morning, for his interest 

in this subject matter, and for agreeing to hold this hearing on this 

issue. And I would like to thank you for sitting in for him. 

Historically, the Federal Housing Administration and its mortgage insurance programs were available to insure lenders against 

loss from loan defaults by borrowers. However, this hearing is really long overdue, because of the decline of the use of FHA-insured 

mortgages making an otherwise valuable source of mortgage insurance unavailable for an important segment of the mortgage market. 

Some might even say that the FHA had lost touch with reality, 

because its programs were no longer reaching their intended targets: low- and moderate-income persons and first-time home buyers. Today we have an opportunity to explore FHA mortgage insurance programs to determine what is best for first-time home buyers 

and low- and moderate-income persons, as well as the many borrowers who feel that the sub-prime lending market is their only option. 

The relationship between affordable housing and the availability 

of mortgage insurance is an important issue for me. Without the 

availability of mortgage insurance choices, those pursuing the 

American dream of wanting a home find it next to impossible to 

overcome the many obstacles to home ownership. Governmentbacked mortgage insurance should not be seen as one of those obstacles. 

The growth in risk-based mortgage activities has been accompanied by a rise in predatory lending activities, predatory lending 

activities that inflate the cost of owning a home, and increasingly, 

erode the equity in the very home that the individual purchases. 

Predatory mortgages are estimated to cost $9.1 billion each year. 

The FHA proposal is, in part, an alternative to help buck this 

trend. It is welcomed. 

According to the FHA, between 2003 and 2005, non-prime loans 

grew from 118 billion to 650 billion in mortgages, while FHA went 

from insuring 9.2 percent to 4.1 percent of the Nation’s mortgages. 

According to a Mortgage Banker’s Association survey, non-prime 

loans are far riskier, with foreclosure rates twice that of prime 

loans. And non-prime foreclosures will only grow with pre-payment 

penalties, balloon mortgages, and rising interest rates. 

29

For minorities, the situation is even more frightening. Non-prime 

targets minorities with 40 percent of African Americans and 23 

percent of Hispanic home buyers paying interest rates that are 3 

percent over market rates. Between 2001 and 2003, the shared 

non-prime mortgages for African Americans almost doubles. And 

with Hispanic, the rate went up two-and-a-half times. 

I am just happy that the FHA has decided to finally address the 

shortcomings of the current FHA mortgage insurance programs. 

Some of the problems are being driven by changes in technology, 

while other problems represent the reluctance of some to take on 

this issue, because of criticism about FHA entering the predatory 

lending market. 

It would be premature and unfair for any of us to conclude anything about the FHA mortgage insurance proposal until we have 

heard from the Commissioner and the other witnesses. I understand that they have been here this morning; they have had their 

say. 

Many of you know that I have worked with Mr. Ney and some 

others, not only to make sure that those of us who live in States 

like California could raise the loan limits to include more people, 

but increasingly we have been watching as the mortgage brokers 

and others come up with more and more products to be able to accommodate the low-income home buyers, and the minority home 

buyers. Unfortunately, FHA has just sat there, watching this market without being able to impact it in any appreciable way. 

Now, I think with this hearing, all of our members can learn a 

lot more about what is possible with FHA. I am excited about no 

downpayments; I am excited about a product that can finally reach 

the market that so desperately needs some attention. 

So, with that, Mr. Chairman, I thank you and I yield back the 

balance of my time. 

Mr. MILLER OF CALIFORNIA. Thank you, Ms. Waters. I appreciate 

the testimony today, Mr. Pickel, Ms. Lowrie, Mr. Howard. You 

have all expressed support for raising these limits. 

But Ms. Adams, I noticed your opposition to that. And how is 

this increase harmful to low-income and minority families who live 

in places such as New York, California—where Maxine and I are 

from—and Washington, D.C.? How does that impact them in a negative fashion? 

Ms. ADAMS. Thank you, Mr. Chairman. The concern that we 

have at NCRC is that while, in those high-priced markets, it certainly would make it affordable, unlike the GSE’s affordable housing goals, the FHA does not have an affirmative public obligation, 

outside of its intended mission, to serve low- and moderate-income 

persons. 

And so, if we expand it to high—to the high-cost markets where 

it would meet the needs of low- and moderate-income persons, it 

would also expand their ability to reach out in other markets, in 

markets like mine, where it’s very affordable to go into upper middle-income— 

Mr. MILLER OF CALIFORNIA. No, it doesn’t do that. It only impacts high-cost areas. And what are the alternatives if these loan 

limits are not increased in high-cost areas? It deals with it up to 

a percentage to median. If your median is down to $150,000, it 

30

doesn’t increase it there. But you can’t buy a $300,000 home in 

Maxine’s district, nor in my district. And we’re trying to create 

more opportunity in the marketplace. 

But what you’re expressing does the opposite. It eliminates people from having the opportunity to have an FHA loan. So what are 

the alternatives to these loan increases, in your opinion? 

Ms. ADAMS. We believe that there are a number of factors that 

are playing into those markets that may need to be addressed outside of the FHA. Forty percent of those markets are really investors, and not really first-time home buyers, and their second home 

markets that are driving up the costs in those areas. 

Mr. MILLER OF CALIFORNIA. What do you consider underserved 

populations, then? 

Ms. ADAMS. I clearly consider minority and low-wealth populations to be underserved. 

Mr. MILLER OF CALIFORNIA. That would be predominantly San 

Francisco, Oakland, Los Angeles— 

Ms. ADAMS. But I will tell you that housing prices at $300,000 and $400,000, the populations that I consider low-wealth and underserved, won’t even be able to afford an FHA loan at $300,000. 

Ms. WATERS. Would the gentleman yield? 

Mr. MILLER OF CALIFORNIA. Yes, I am just about through, and 

then I would be happy to yield. 

Ms. WATERS. Yes. 

Mr. MILLER OF CALIFORNIA. We have to look at areas other than 

just less expensive areas. FHA needs to be relevant in low- and 

moderate-income families throughout this country. 

Ms. WATERS. I think that’s correct, sir. 

Mr. MILLER OF CALIFORNIA. And low- and moderate-income families in many areas are having to pay $400,000, $450,000 for a 

home. And FHA is not there to serve them. And then that puts 

them in a situation where, like Maxine Waters was concerned 

about, where are we forcing these people to go to? And in many 

cases, they are forced to go to lenders that we consider predatory, 

in some cases. 

Sub-prime, I’m not talking about, because I think there is an absolute market for that. But to take FHA and take it out of these 

marketplaces, puts people in a very difficult situation when we’re 

trying to provide an opportunity for low- and moderate-income 

home buyers in high-cost areas. Would you like to respond to that? 

Ms. ADAMS. I agree with you, sir. I think it’s a complex issue. I 

don’t know how people who make $40,000, $50,000, or $60,000 are 

going to be able to afford a $300,000 loan, even with FHA— 

Mr. MILLER OF CALIFORNIA. Different issue. Different issue. Maxine, I yield to you. 

Ms. WATERS. Yes. I’m sorry, Mr. Chairman, I have to run over 

to the Judiciary Committee for an amendment that I have. But I 

wanted to say to our witness here that I appreciate her concern, 

and certainly that is a legitimate question to raise. 

When you look at our market in California, and you look into 

what is supposed to be the poorest areas where these homes have 

just shot up to unimaginable prices, what you find in many cases 

are two and three families going in together to buy homes. And it 

works very well. 

31

What happens is if you get, you know, two or three families who 

are working that can share the space, and then what they do is 

they build up equity. And when they build up the equity in the 

home, and then they are able to refinance, often times they can 

bring down the price of the interest rates, etc. 

And in addition to that, with the appreciation and the equity 

that they have in the home, it gives them even more money, and 

they buy up even more. So I know it’s kind of tricky, but believe 

me, they need the opportunity to have access, even with these spiraling costs that we have in places like California. 

Ms. ADAMS. Ms. Waters? 

Ms. WATERS. Yes? 

Ms. ADAMS. It is the desire of the National Community Reinvestment Coalition that every American have the opportunity and access to affordable housing, and to home ownership, and to safe and 

sound products, such as the FHA mortgage, as opposed to the—

some of the products that are in the sub-prime market. 

Ms. WATERS. Well, I know your mission, and what your goals 

are. But I also have to tell you that I find that you are getting 

some of your support from predatory lenders. And if you can work 

with them, you can work with FHA. 

Ms. ADAMS. We strongly—I only had 5 minutes, and I only wanted to highlight the risk-based— 

Ms. WATERS. No, but I want to let you know I know a lot. 

Ms. ADAMS. Yes, ma’am. But— 

Ms. WATERS. And so when you start to tell me about what your 

mission is, I probably know it as well as anybody. 

Ms. ADAMS. Yes, ma’am. We support FHA— 

Ms. WATERS. I know where much of your money comes from. So 

they need the same opportunity that the predatory lenders that 

you work with have, okay? 

Ms. ADAMS. We’re trying to reform those predatory lenders— 

Ms. WATERS. I know what you’re trying to do, but I also know 

who is at your banquets, and what they do, all right? You’re talking to me, now. 

Ms. ADAMS. We support FHA. We believe that FHA should be 

available to as many—and as a real safe alternative to all subprime lenders. And if that puts some of our partners in a bad situation, that won’t hurt us at all. We absolutely believe that FHA is 

the right product to meet the needs of low- and moderate-income 

borrowers, minority borrowers, and is a real alternative. 

Mr. MILLER OF CALIFORNIA. I want to reclaim my 2 minutes. Ms. 

Lowrie, in your testimony you noted that 15 years ago, a number 

of FHA-insured mortgages had dropped from 13 percent to—of total 

originations to 3.5 percent. Could you discuss the decrease in FHA 

originations in high-cost areas? 

Ms. LOWRIE. Thank you for the question. And you’re right. I 

mean, back almost a decade ago, FHA’s market share was over 13 

percent, and today, less than 3.5 percent. But I think a lot of that 

has to do with the fact that it has not been able to keep pace with 

the private sector market. 

And when we talk about risk-based pricing, that’s a component 

in mortgage lending that the investment community, that Wall 

32

Street—not just sub-prime, but even the prime market—has moved 

toward risk-based pricing. 

There are limitations in technology. As the Commissioner mentioned, the inability to be able to transmit loans electronically—I 

mean, we are moving towards, probably within the next several 

years, being able to do an electronic e-note mortgage, electronic signatures. And yet, we couldn’t even electronically transmit a file to 

FHA. So, FHA could use improvements in the area of technology, 

innovation, and new products. 

And just one other point, Congressman. It took almost 7 years 

to put in place a hybrid ARM, a 5/1 and a 3/1 ARM, that the private market had already introduced in years prior, because it has 

to go through Congress for approval. 

Mr. MILLER OF CALIFORNIA. So they lost market shares because 

of that. 

Ms. LOWRIE. Yes. 

Mr. MILLER OF CALIFORNIA. Okay. Mr. Fitzpatrick, 5 minutes. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. Ms. Lowrie, in your 

testimony you talked about the need for improvements in the reverse mortgage program. There is a bill pending in Congress, H.R. 

2892, that I introduced, that would remove these statutory limit—

the cap of 250,000—mortgages. It has passed the House already, 

and there is a very similar bill pending in the Senate. 

The idea being that when there is a cap on the number of mortgages that can be issued in this country, that it actually has a limitation on the number of mortgage bankers that can actually invest 

and get into the market. Perhaps that lack of competition then increases the ultimate cost of the mortgage program to senior citizens 

who really need it, might increase the cost of the fees associated 

with the mortgage. 

I was wondering if you believe whether removing what you refer 

to as the HECM cap, the home equity conversion mortgage program cap, won’t in fact lower the cost of getting one of these mortgages for senior citizens in this country. 

Ms. LOWRIE. Well, it’s hard to answer how the market would 

react to that, how it would affect liquidity in that product. But I 

do think that it has a—it offers a great opportunity to reduce the 

cost for seniors. And I also think that, in addition to eliminating 

the cap, opening it up to purchases for seniors under the HECM 

program is also a great opportunity to offer that product to more 

seniors. So, yes, I do, Congressman. 

Mr. FITZPATRICK. And that actually came up during the course 

of discussion in this committee about what we could do to help 

homeowners impacted by Hurricanes Rita and Katrina, who actually don’t even have a home at that point in time, might have to 

build a home, which is almost akin to a purchase. 

In the event that the cap was not eliminated, what do you think 

the threat to seniors would be? 

Ms. LOWRIE. Well, I think when you look at the issue between 

high-cost and low-cost areas, it almost seems unfair that a senior 

in a low-cost area, who has the same amount of equity in their 

home, could maximize taking that equity out, whether it’s to pay 

bills or to sustain living for the rest of their life, and someone livVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
33

ing in a high-cost area couldn’t do that because they—their property is over the cap. 

So, I think there is an inequity there, and I think we see more 

and more—we just have to look at the demographics in our country, and look at the increasing aging population, that this program 

not only is becoming more popular, but I think it’s a critical component for a lot of seniors in this country, to be able to sustain their 

lifestyle. 

And as Congresswoman Waters said, you know, there are people 

who can’t get a prescription, or you know, purchase groceries. I 

mean, I think this is—it’s an important issue, and I think we have 

a fiduciary responsibility to address that and keep equity within 

the program. 

Mr. FITZPATRICK. And so, as the program becomes more widely 

used, is it your experience that seniors are satisfied? Are they 

happy with the program? 

Ms. LOWRIE. Congressman, not only are they more satisfied, I 

think the industry has done an excellent job in trying to educate. 

You know, we talk about financial literacy and consumer education 

being so critical to low-income minority borrowers, but it’s also important for the seniors. And I think it took a number of years for 

seniors to understand the HECM product, and the industry has 

done a fabulous job in really getting the message out, and educating them, and having them feel more comfortable with the product. 

So, I think that’s why we’re seeing continued growing interest, 

and a need for these changes and revitalization of the program. 

Mr. FITZPATRICK. Thank you for your testimony here today. 

Ms. LOWRIE. Thank you. 

Mr. MILLER OF CALIFORNIA. Thank you. Mr. Scott, you’re recognized for 5 minutes. Mr. Scott? Mr. Cleaver? 

Mr. CLEAVER. Thank you, Mr. Chairman. I almost had a chance 

to be the acting ranking member, but I guess I have forfeited now. 

This was going to be the highlight of my career, but— 

Mr. MILLER OF CALIFORNIA. So much for your career. 

Mr. CLEAVER. Mr. Scott has just ruined it. 

[Laughter] 

Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Pickel, the FHA 

Modernization Act, which I think is something that this committee 

ought to approve, and hopefully the House will approve it, but is—

how active are your members in the Gulf region, in the aftermath 

of the three hurricanes: Katrina, Rita, and Wilma? 

Mr. PICKEL. Actually, our members are very active in the aftermath of all that. One of the things our association did was set 

aside $350,000 to help out people who had been actually hurt by 

the hurricanes. 

The other thing that I guess we’re doing at this point—and if we 

had the opportunity, we could do more—would be getting actively 

involved in helping people do reconstruction, or put their homes 

back together. A number of mortgage brokers can’t do that, simply 

because they’re not allowed to do FHA products, due to the annual 

audit. 

The audit simply says that they have to have $75,000 in net worth. Most audits cost about $10,000 by a CPA. So, for a one-perVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
34

son, or a two-person, or a three-person mortgage broker shop, it’s 

fairly cost prohibitive, and they just choose not to do it. 

So, if mortgage brokers were allowed to do FHA products without 

the audit, it would greatly increase our ability to help more homeowners, especially in those areas. But we are doing quite a bit. Several people have gone down there, actually, from around the country to help out. 

Mr. CLEAVER. Thank you. I wanted to ask Mr. Montgomery this 

question earlier, and maybe any of you can address it. 

But wouldn’t this, wouldn’t the Gulf Coast region be the perfect 

laboratory for the revitalization, or the expansion, of FHA? I mean, 

don’t you think that this has created perhaps the best opportunity 

for FHA since the beginning of its—not decline—but its reduction 

in providing housing for low-income Americans? 

I mean, you look at New Orleans, for example. You know, it 

seems to me that the door is wide open, and if it isn’t, then we perhaps ought to make some adjustments in the bill to open the door 

for FHA. So if any of you would address that, I would appreciate 

it. 

Ms. LOWRIE. Congressman, yes. First of all, the Mortgage Bankers Association totally agrees with you that, you know, FHA can 

play a vital role. They have already played a vital role in helping 

to stabilize that market. 

I think the issue—and I had the opportunity to visit down in 

New Orleans, and visit the various parishes and see the devastation. And this would be one piece of it, revitalizing FHA and having 

FHA be in the forefront of the market, creating opportunities down 

there. But there are a lot of other issues. 

I mean, all of our members, and private capital, need to be supportive, not because—as we mentioned, and the commissioner mentioned, it is private lenders that fund FHA loans that are insured 

by the Federal Government. So it’s a partnership that, you know—

we will continue to work very closely with FHA and the other housing authorities, Habitat for Humanity, to try and bring capital and 

funding into that area, to revitalize the market. 

Mr. CLEAVER. Thank you. But if the—I mean, we are—the Federal Government is guaranteeing the loans, and I mean, you are 

not suggesting at all—and this is an honest question—that lenders 

are going to be hesitant? 

Ms. LOWRIE. No. And when I said it’s a complicated issue, without taking up a lot of time or too much time, remapping the flood 

maps for that area, and having the ability to insure those loans 

with flood insurance is one of the issues. 

Mr. CLEAVER. Okay. 

Ms. LOWRIE. So lenders and servicers are grappling with a lot of 

issues relating to Hurricane Katrina. And I think that FHA and 

what HUD has done in that market has been phenomenal. And we 

will continue to work with them over the coming years. 

Mr. CLEAVER. Thank you. 

Mr. MILLER OF CALIFORNIA. The gentleman’s time is up. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. MILLER OF CALIFORNIA. Mr. Howard, your testimony alludes 

to FHA’s sliding market share. And should Congress be concerned 

about FHA’s market share, and could the fact that there is a deVerDate 0ct 09 2002 12:41 Nov 13, 2006 Jkt 030534 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 F:\DOCS\HBA095.040 HFIN PsN: TERRIE
35

clining market share point to the private sector meeting those 

needs? 

Mr. HOWARD. Yes, sir. I think that Congress should be concerned 

about FHA’s relevance in the marketplace. FHA is designed to help 

low- and moderate-income people reach home ownership. When 

FHA’s relevance diminishes, it opens the door for more predatory 

lending, sub-prime lending that is not of the stature of FHA. 

So, I think it’s a really important component to get the people 

who are trying to make the first step on the ladder to home ownership. And so FHA’s efforts to revitalize, I think, are crucial in that 

regard. 

Mr. MILLER OF CALIFORNIA. And what’s your opinion on the 40-

year mortgage product, and whether it provides affordability and 

increases costs and risks to low- and moderate borrowers? 

Mr. HOWARD. I think it’s a really innovative idea. I mean, our 

country was the first country to come up with the 30-year conventional mortgage, and increasing it to 40 years just—at the same 

time as possibly the risk-based cost factor would potentially increase the payments by a moderate-income home buyer, putting 

the 40-year mortgage in place will bring them back down, and at 

the same time, ensure that they are building equity. 

We think it’s a novel idea, a good idea, and given the changing 

dynamics in our society, one that would fit right in right now. 

Mr. MILLER OF CALIFORNIA. Good. Mr. Neugebauer, you are recognized for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Howard, as 

you know, I have been in the housing business for a number of 

years. And one of the things that—when Secretary Jackson was 

here last week, we talked about the fact that when I first got in 

the housing business, that FHA had a bigger presence in the housing industry. 

And now, at this particular time in the history of our country, 

we have one of the highest homeowner rates in the history of our 

country. More people own a home today than at any other time. 

And particularly minority home ownership is increasing. 

And yet, we have been able to accomplish that with a diminished 

role of FHA in that market. And so I guess the question I have—

and maybe to the other panel members—is how relevant is the continuation of FHA, and has the private sector moved in and taken 

over an area where, in the past, when I first got in this business, 

that was an area they would not tread? 

Mr. HOWARD. I think the market conditions in the past several 

years have been very conducive to private sector involvement, and 

I think that’s great. 

But in your State, in Texas, during the credit crunch, the private 

sector totally disappeared from the market in many cases. Also, out 

in California at various times, members of the private sector have 

closed down their housing offices and walked away. And FHA, 

along with the GSE’s, were the only elements of the housing finance system that remained and kept things going. 

So, as a back-stop, FHA is vitally important. Moreover, as a conduit to low- and moderate-income home ownership, FHA remains 

vitally important, particularly if these proposals are enacted, and 

36

the FHA is streamlined, and is able to get its message out to the 

consumers. 

Mr. NEUGEBAUER. Yes, Ms. Lowrie? 

Ms. LOWRIE. Congressman, I would like to just add to what Mr. 

Howard said, and speak to your point about addressing home ownership to minorities. And you’re absolutely correct, our home ownership rate is close to 69 percent in this country, the highest it’s 

been in the history of the United States. 

However, for minorities, and for immigrants, and for low-income 

borrowers, there is a gap. And it’s a substantial gap. And the statistics have shown that FHA has consistently been able to serve 

that underserved borrower. 

The statistics today show it. If you look, African-American and 

Hispanic borrowers constitute over 29 percent of the book of FHA 

business, whereas in the conventional market, it’s only a little over 

14 percent. So, there is still a definite need for FHA in the marketplace. 

Mr. NEUGEBAUER. Mr. Pickel? 

Mr. PICKEL. In regards to your question as to its viability, I 

guess my comment would be that, yes, there are other products 

that have developed to meet the need. And one of the things that—

and by the way, I am a small mortgage guy, I just run a small 

shop—we consistently hear is the zero down, or you know, no 

money to get into the house. 

And to keep FHA out of that market only disadvantages the very 

people who really need it. So, quite frankly, even though there are 

other products out there, if we can get FHA back in there, I mean, 

we have an opportunity to do something really good. And this 

would be great, because they could get a fixed rate with—and the 

MMI premiums, I looked at what they’re proposing, I mean, it’s 

really a good thing, and it would really help FHA. And it would 

help people. 

Mr. NEUGEBAUER. Well, I was sorry I was not able to be here 

when Mr. Montgomery was speaking earlier, but I did talk to Secretary Jackson last week. And one of the things I think we had 

talked a little bit about, the fact that some of the people that are 

originating a good number of loans are kind of shut out of that 

process because of the audit procedure. 

And one of the things that certainly we want to pursue is being 

able to allow the folks that are really originating a good portion of 

the loans to be actively, you know, originating the FHA loans. 

What—as we look at the minority home ownership and the gap, 

and trying to close that gap, we have had the no downpayments, 

and HUD has had some different programs, and some of the States 

have had different programs through housing finance organizations. Where do you see the most critical piece of—if we reshape 

FHA, what’s the critical piece that we need to be thinking about? 

I will start with Ms. Adams, and then we will just kind of go 

down the panel, and I suspect my time will be just about gone. 

Ms. ADAMS. Thank you. I think one of the critical pieces of this 

is the flexibility to offer the no downpayment option. It is critical 

that we keep FHA as a flexible but affordable product suitable to 

low-income and minority borrowers. 

37

FHA has really effectively served minority communities by providing conventional products, providing a safe product for borrowers that—many of whom have been trapped in this—or steered, 

or somehow end up in the sub-prime market because they are not 

aware of FHA and its options. And we need to keep it in the—

make sure it has the flexibility to serve the communities it was intended to serve, and to reach into there. 

Mr. HOWARD. Mr. Neugebauer, I think that the flexibility issue 

is an overarching issue, but I think it also needs to apply to the 

price limits on FHA borrowing. In some of America’s urban and 

suburban areas, no matter how flexible FHA is, with the current 

price limits they’re not going to be able to reach down to the moderate and low-income people, be they minority or majority in this 

country. 

And so, in addition to the programmatic flexibility, I think they 

have to also be able to respond to the markets and the increasing 

prices in housing. 

Ms. LOWRIE. Congressman, I would agree with my fellow panelists here that the flexibility and downpayment is critical. And one 

of the biggest barriers to home ownership is the downpayment. So, 

the private market—the private sector—has seen the zero down 

work very well, and when it’s underwritten based on certain credit 

risk parameters. 

But I would go even further to say that when we are looking at 

revitalizing and FHA reform, we need to be looking at not just this 

one component, but giving FHA the ability to innovate new products without having to go—I mean, the market is so dynamic, you 

know, my sales people will say to me, you know, ‘‘So and So down 

the street is offering the My-Community 100 percent mortgage.’’ 

They want it yesterday. It takes years to get something approved 

for FHA to be able to offer it within the marketplace. So that’s one. 

And being able to invest in technology, and manage their human 

resources, giving FHA the flexibility to operate more in line with 

the private sector, you know. It does put money in the Treasury, 

it’s never cost the taxpayer one cent. And that money going into 

the Treasury helps reduce the deficit. I think we need to look at 

what can be done to put some of it back into FHA. 

Mr. MILLER OF CALIFORNIA. The gentleman’s time has expired. 

Mr. Pickel, maybe you can answer the question why the financial 

audit was put in place that keeps you out of the marketplace with 

FHA. 

Mr. PICKEL. Why it was put in place? I think—I wasn’t there 

when it was put in place, but I think— 

Mr. MILLER OF CALIFORNIA. You’re a great one to answer it, 

then. 

[Laughter] 

Mr. PICKEL. I think it was most likely put in place so that they 

had some type of idea that this broker, or this individual, had some 

financial soundness to them, or stability. But quite frankly, 

$75,000 is not much, in terms of financial stability. 

Mr. MILLER OF CALIFORNIA. No, not with the cost of the audit. 

Mr. PICKEL. No. And then, you know, really, FHA holds the direct endorsement lender accountable for those loans. What we’re 

38

looking to prevent with the broker, quite simply, is just the issue 

of fraud. The broker doesn’t underwrite, the broker originates. 

I think, you know, in answer to your question with that audit, 

you know, eliminate the audit so that FHA can have a brand new 

sales force on fixed rate mortgages, and we will increase home ownership another— 

Mr. MILLER OF CALIFORNIA. I agree with you on that. Well, I look 

forward to this bill moving forward. I would like to thank Mr. 

Montgomery, Ms. Adams, Mr. Howard, Ms. Lowrie, and Mr. Pickel, 

for their testimony. It was very well received. 

The Chair notes that some members may have additional questions for the 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 the response in the record. 

The hearing is adjourned. Thank you. 

[Whereupon, at 11:07 a.m. the subcommittee was adjourned.] 

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