U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

72–628 PDF 2012

PERSPECTIVES ON THE HEALTH OF THE 

FHA SINGLE-FAMILY INSURANCE FUND 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

DECEMBER 1, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–87 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

December 1, 2011 ............................................................................................. 1 

Appendix: 

December 1, 2011 ............................................................................................. 71 

WITNESSES 

THURSDAY, DECEMBER 1, 2011 

Caplin, Andrew, Silver Professor and Professor of Economics, Department 

of Economics, New York University ................................................................... 54 

Cunningham, Henry V., Jr., CMB, President and CEO, Cunningham and 

Company, on behalf of the Mortgage Bankers Association (MBA) .................. 56 

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

Development, accompanied by Carol Galante, Acting Commissioner, Federal 

Housing Administration ...................................................................................... 13 

Scire, Matthew J., Director of Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 52 

Sinks, Patrick, President and Chief Operating Officer, Mortgage Guaranty 

Insurance Corporation, on behalf of the Mortgage Insurance Companies 

of America (MICA) ............................................................................................... 57 

Veissi, Maurice ‘‘Moe’’, 2012 President, National Association of REALTORS® 

(NAR) .................................................................................................................... 59 

Wartell, Sarah Rosen, Executive Vice President, Center for American 

Progress Action Fund ........................................................................................... 60 

APPENDIX 

Prepared statements: 

Caplin, Andrew ................................................................................................. 72 

Cunningham, Henry V., Jr. ............................................................................. 75 

Donovan, Hon. Shaun ...................................................................................... 89 

Scire, Matthew J. .............................................................................................. 105 

Sinks, Patrick ................................................................................................... 125 

Veissi, Maurice ‘‘Moe’’ ...................................................................................... 138 

Wartell, Sarah Rosen ....................................................................................... 147 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of Brian Chappelle, Partner, Potomac Partners LLC ... 164 

Written response to a question submitted to Sarah Rosen Wartell ............. 173 

Written response to a question submitted to Matthew J. Scire ................... 174 

(1) 

PERSPECTIVES ON THE HEALTH OF THE 

FHA SINGLE-FAMILY INSURANCE FUND 

Thursday, December 1, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Manzullo, Biggert, Miller of California, Capito, Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hayworth, Renacci, Dold, Schweikert, 

Canseco, Stivers; Waters, Maloney, Gutierrez, Velazquez, Ackerman, Sherman, Capuano, McCarthy of New York, Baca, Lynch, 

Miller of North Carolina, Scott, Green, Cleaver, Ellison, Donnelly, 

Carson, and Carney. 

Chairman BACHUS. The committee will come to order. 

Today, the committee meets to review the recently released Fiscal Year 2011 actuarial study of the FHA Mutual Mortgage Insurance Fund. I welcome Secretary Donovan, Acting FHA Commissioner Galante, and our other witnesses today. 

And I would like to take this opportunity to express to you, Secretary Donovan, on behalf of the people of Alabama, their regards 

and appreciation for your efforts during the tornadoes that struck 

Alabama. The response was excellent, and we appreciate your professionalism. 

Two years ago, this committee met to hear disturbing news that 

the FHA capital reserve ratio, which is the primary barometer for 

measuring the FHA financial solvency, had deteriorated to a level 

of .53 percent, which is well below the statutory requirement of 2 

percent. Since then, things have gotten worse. The capital reserve 

experienced a further decline to .5 percent in 2010, and then on 

November 15th of this year, the independent actuarial study revealed the capital reserve ratio had fallen more than half and now 

stands at .24 percent. 

Having said that, we should also acknowledge that we have witnessed a historic housing market correction with the largest drop 

in home prices in history and the worst economic downturn since 

the Great Depression. With this background, it is not surprising 

that the FHA capital reserves have suffered. We also need to recognize that a substantial part of the problem results from legacy 

loans originated during the housing bubble prior to the economic 

2 

downturn. Current loans have much higher credit scores and a 

markedly better performance. 

I am encouraged that the FHA has implemented some incremental reforms to shore up the insurance fund reserves and reduce 

risk, including the hiring of a Chief Risk Officer. However, I think 

our witnesses have acknowledged, these reforms are not enough. 

I share the concerns expressed in a November 7th GAO report 

that FHA has yet to implement a comprehensive risk assessment 

strategy. A separate GAO study released last week on Ginnie Mae, 

which guarantees the payment of principal and interest to investors and securities backed by FHA-insured mortgages, found that 

Ginnie Mae faces a risk of financial loss due to inadequate or failed 

internal processes because of limited staff, substantial reliance on 

outside contractors instead of Ginnie Mae employees, and the need 

for modernized information services. 

Both of these GAO reports, coupled with an independent actuarial study, all released within the last month, do not paint a picture of a government agency prepared for the 21st Century, let 

alone the immediate housing financial crisis. 

Finally, Mr. Secretary, let me reiterate that I share your and the 

Administration’s opposition to any increase in FHA loan limits. The 

new levels of $729,500 at 100 percent government guarantee 

passed recently by Congress was not the right course of action for 

creating an environment where the private sector can compete on 

a level playing field with government-subsidized entities in our 

housing markets. 

I look forward to your testimony, as well as that of the other witnesses. 

At this time, I recognize Mr. Gutierrez for 4 minutes. 

Mr. GUTIERREZ. Thank you, Chairman Bachus, for holding this 

hearing, and I welcome Secretary Donovan and our other witnesses. I look forward to our discussion today on the Federal Housing Administration, the health of its single-family insurance fund, 

and the role that it continues to play in the housing market. 

We are going to get into the details today talking about actuarial 

studies and capital reserves. These are important issues that we 

must understand. What we know is that the FHA’s capital reserve 

ratios have fallen and continue to be below the level required by 

statute. That is a fact we have to deal with. But the real questions 

that we have to ask today are why is this the case, and what can 

we do to ensure that the fund stays in the black going forward? 

I think we can dismiss some theories pretty quickly; for example, 

the idea that the FHA has acted irresponsibly under this Administration, or that it is actively trying to grow its way out of the problem. Those ideas are simply absurd, despite the talking points of 

some of my colleagues. 

Most of the loans that are hurting the FHA were made during 

the Bush Administration. The FHA, with the help of Democrats in 

Congress, has tightened its underwriting standards, raised annual 

insurance premiums, and increased downpayment requirements for 

borrowers with lower credit scores. If anything, these are all policies that have reduced the FHA’s potential footprint in the market. 

Those are just facts. 

3 

The fundamental problem is that we are still in the grips of a 

foreclosure crisis that is hurting American homeowners, the FHA’s 

balance sheet and, indeed, our entire economy. I think that we 

have to focus on this fundamental issue in order to have a useful 

conversation about maintaining the health of FHA into the future. 

We also have to talk about where this Congress is putting resources. Are we spending the money to ensure that Americans have 

access to housing counseling to avoid foreclosure? I think not. Are 

we adequately requiring lenders to provide loan modifications for 

borrowers who are delinquent on their mortgages? I think we need 

to ask that question even more. Are we doing more to ensure that 

principal reduction is on the table of modification process? 

All of these things would improve the health of our housing market, improve the health of the FHA, and, most importantly, improve our economy, but I can’t say that I think we have done 

enough to help American homeowners who are threatened by foreclosure or are underwater on their mortgages. 

The more loans we modify, the healthier the FHA funds will be. 

I hope that we spend time today talking about what the FHA and 

other agencies can do to hold servicers—and I want to ask the Secretary specifically about this—accountable, encourage more successful loan modification to keep families in their homes, and get 

our housing stock back on a steady growth. I look forward to the 

testimony today discussing how we can fix the problem. I thank 

you, Chairman Bachus, and I yield back the balance of my time. 

Chairman BACHUS. Thank you, Mr. Gutierrez. 

And at this time, I recognize the vice chairman of the full committee, Mr. Hensarling, for 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

FHA is likely a disaster in the making. If we are not careful, it 

may become Fannie Mae and Freddie Mac, the sequel. 

At 400-to-1 leverage, 10 times the leverage that was employed by 

Lehman Brothers when they filed their bankruptcy, something is 

amiss. The capital reserve ratio is almost 90 percent less than the 

statutorily required minimum—working in the third year in a row 

where the Mutual Mortgage Insurance Fund has been undercapitalized. If FHA was a private financial institution, likely somebody would be fired or fined, and the institution would find itself 

in receivership. Instead, what we have seen is an agency that has 

undertaken an expansionary strategy whose aggregate insurance in 

force has more than tripled since 2008. We have an agency that 

now guarantees mortgages up to roughly twice what they did just 

a few years ago, certainly an example of extraordinary mission 

creep. 

It is estimated that more than half of FHA’s current insurance 

in force is on mortgages taken out by owners who have negative 

equity in their homes. FHA’s seriously delinquent rate for September was 8.7 percent, up from 8.2 percent in June, at a time 

when many believe that we will see further erosion in home values. 

In February 2011, in the Administration’s report to Congress, 

they said, ‘‘FHA should return to its pre-crisis role as a targeted 

provider of mortgage credit access for low- and moderate-income 

Americans and first-time homebuyers.’’ Before the taxpayers get 

4 

soaked yet again, I hope that the Administration’s actions will 

match their rhetoric. 

I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

Mr. Scott is recognized for 31⁄2 minutes. 

Mr. SCOTT. Thank you very much, and, Secretary Donovan, it is 

good to see you. 

First of all, I want to start off by thanking you and HUD for the 

very valuable assistance you gave me in dealing with our home 

foreclosure situation in Georgia. Georgia is the epicenter of home 

foreclosure, and my district, which represents the suburban areas 

of the Atlanta metropolitan area where so many of the huge home 

subdivisions are particularly hit, that comes almost 2 years after 

we had the great flood. So our housing situation in that area is 

very serious, and in that regard, we put together a home foreclosure event with the assistance of HUD. 

And I really want to say thank you to a couple of people on your 

staff: Audrey Crutchfield—I think you may know her—and also Ed 

Jennings, who is a regional person. And when you thank them, I 

want you to encourage them to do it again with me, because this 

problem is still there. 

We were able to help save over 2,500 homes, but that is just a 

drop in the bucket. We need to get help down there very seriously, 

and if we start early enough, if we want to start this year, we could 

save 10,000 homes. We are particularly serious with the areas of 

that combined impact of high unemployment, people without jobs. 

We have a severe problem with a lot of elderly. There is no reason 

for us to have to put 90- and 100-year-old elderly people out. Where 

are they going to go? How are they going to get help? We were able 

to save one of those fellow Georgians just this week, as you know. 

And we have kept them in their homes thanks to the good graces 

of one of our sheriffs there. 

This FHA was put together as a result of the Depression, in 

1934, and it was put together for these very pressing reasons. We 

need to do that despite the efforts last April, where I think the 

Congress cut $88 million. That is devastating to your Department. 

So there is a role that we are playing in these cavalier budget 

cuts that goes straight to the heart of where the greatest need is 

for the problem; if there ever was a need for us to look very gingerly and avoid these massive budget cuts that helped to exacerbate the very problems that I am talking about. And so, we want 

to get into that today, and I hope we can get a message across loud 

and clear that we need to reverse this rather disturbing trend to 

try to balance the budget on the backs of those areas of our service 

to the American people where they need the help the most and call 

upon those who can afford it, those multibillionaires and millionaires who are not paying their fair share, to help. 

This is a primary example of where we are. America is a great 

country, and just as we rose out of the ashes of the Depression and 

formed the FHA at that time, surely this is a time in which we can 

serve its great sterling purpose and strengthen the funding for 

HUD. 

So I appreciate your being here. Thanks again for your work, and 

let your folks know we look forward to working with them again 

5 

next year. We are putting that home foreclosure event together as 

we speak, and hopefully we can contact your office. Thank you. 

Secretary DONOVAN. Thank you. 

Chairman BACHUS. Mr. Royce, did you want a minute, or a 

minute-and-a-half? 

Mr. ROYCE. Thank you very much. 

Chairman BACHUS. One-and-a-half minutes then. 

Mr. ROYCE. Very good. Thank you, Mr. Chairman. 

In 2008 and 2009, some of us were warning about the potential 

risk of this government agency heading toward their statutorily 

mandated 2 percent capital reserve ratio, and we had hearings like 

this one, and we were told at the time not to worry. The testimony 

was that the FHA was fine, and the reforms being made were 

going to prevent a taxpayer bailout. I remember we had, in October 

of 2009—then-FHA Director Stevens was here. He came before the 

committee, and his words were these: ‘‘We will not need a bailout.’’ 

Secretary Donovan, in reviewing your prepared remarks, it is 

clear that you are laying out a very different scenario here. And 

given the actuarial report from 2011, I can see why. In that report, 

the capital reserve ratio is now one-quarter of 1 percent, which is 

a fraction of the statutorily mandated 2 percent. And this leverage 

ratio is really—it is about 244 to 1. That would give pause, I think, 

to any regulator at this point. 

And so the obvious question that I think we hope to get answered as you lay out your plan is, what is next, Mr. Secretary? 

What is your solution for preventing a taxpayer bailout of FHA? 

I think it is clear that banking on a quick turnaround in the 

housing market, I think that rebound is not the safe way to bet. 

I think you need to lay out a scenario where we have a plan that 

moves us back from the brink that could lead to a bailout. I very 

much appreciate your being here, and I am looking forward to 

hearing your testimony here today. And I yield back the balance 

of my time. 

Chairman BACHUS. Thank you. 

Mr. Green for 2 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank you and the 

ranking member for having the hearing. 

Thank you, Mr. Secretary, for appearing today, and I am hopeful 

that what you will present to us will help us to understand how 

the housing market can bounce back with the help of FHA. 

Your credit scores have gone up to 700, average credit score. You 

have been assisting in areas where the market, in general, does not 

receive a lot of help from other institutions. I think that we have 

to concern ourselves with the housing market in terms of the recovery, and I see FHA as a part of that recovery effort. So I thank you 

for appearing and trust that when you have completed your testimony, we will have greater insight into how FHA will play a meaningful role. 

And I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

Mr. Miller for 11⁄2 minutes. 

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

Secretary Donovan, thank you for meeting with me this morning. 

We had a nice conversation beforehand, and we do need to look for 

6 

ways to shore up the FHA insurance fund. Falling home prices are 

really the major reason you are in the situation you are in today, 

and until we reform the housing system, home values will continue 

to falter, people will lose money, and this economy will not turn 

around. 

But the housing market is a very, very complex marketplace. 

There is no doubt we need to look to try to bring the private sector 

back to fill the void that has been created out there, but until we 

do that, somebody has to step forward to make sure there is liquidity in the marketplace. 

That was the reason we formed the FHA and the GSEs, to do 

that, but many times what we do is very local. I told you about the 

situation we are facing in a part of my district, Chino Hills, about 

the people who are suffering from the Edison towers that were put 

in the right-of-way behind their homes. That was nothing to do 

with them, nothing to do with Edison. The State of California mandated ‘‘X’’ amount of renewable energy must be provided in the 

State of California, so they installed these 200-foot towers behind 

homes. 

The problem is that FHA does not lend in certain areas. Now, 

there are many FHA loans within that area right now because the 

homes are out of the right-of-way, but the towers have doubled in 

size, and now they are within a fall zone. And I know it is a gray 

area for you, but it is a very serious area for the people who have 

been impacted. 

I want to thank your staff for working with us on this issue, but 

it is something that we need to look at and ask, what is right? The 

people bought in good faith. They are not in a right-of-way, but 

what the State of California has mandated has put them in a very 

difficult situation, and it has impacted them in the pocketbook. Not 

only has the marketplace had a negative impact on them as falling 

prices have, but now what has been done to them for the betterment of the State, so-called, has had a really dire impact on their 

finances, and they are angry. They have a right to be. 

When we have an opportunity to do good, we need to look at 

that. And I would just encourage you to look at what you can do 

in that area. Whatever help you can provide these people, they 

would really appreciate it. It is through no fault of their own. They 

bought in good faith, they have lived there for years in good faith, 

and now they are being impacted by this. But I want to thank you, 

and it is a huge issue, and whatever you can do, I would appreciate 

it. 

I yield back. 

Chairman BACHUS. Mr. Lynch for 1 minute. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the witnesses for appearing before this committee, and helping us with our work. I want to hearken to the remarks of Mr. Royce of California. I was in on these meetings as 

well when we raised concerns about the capital ratio back in 2008, 

and we received direct assurances from FHA ‘‘not to worry, we 

have our arms around this, we are going to handle this, we are not 

going to go below the statutory minimum.’’ Then, they did. We 

called you back. I had meetings in my office. We had reassurances 

again that you were going to handle this. And here we are. 

7 

Now, you have dug yourself in such a deep hole that you are 

going to need some funding, you are going to need a bailout, or you 

are going to need some drastic measures to dig yourself out of that 

hole, and that is a problem. There seems to be a pattern of denial 

that things were going to get better, and we are going to turn this 

thing around, and we didn’t hear a peep to reverse this decline. 

And that is a problem because now the problem is significant, and 

it is going to be more difficult dealing with it now because we have 

allowed this shortage to accumulate. 

So I am just disappointed that we didn’t have the acknowledgment that we had raised up here that we saw happening that 

wasn’t reflected at the agency. And there were things that we could 

have done that would have been less destructive several years ago 

than the hand that we have to play now, and there are a lot of people in this country, a lot of homeowners, who are relying on— 

Chairman BACHUS. Mr. Lynch is recognized for an additional 15 

seconds. 

Mr. LYNCH. Thank you. 

We have to work together here. We can’t have us raising concerns and the agency blowing us off and saying there is no problem, and then it is a mess, and then we have to do something drastic to correct it. We need to work better together, I guess. And I 

will be interested in hearing how you are going to come up with 

this money, all these resources, to fill in the shortfall. 

Thank you. I yield back. 

Chairman BACHUS. Thank you. 

Mrs. Capito for 11⁄2 minutes. 

Mrs. CAPITO. Thank you. 

I would like to welcome Secretary Donovan back to the committee as well, and I want to thank the chairman and the ranking 

member for the hearing today. Having sat through many of these 

hearings over the last several years, I think, as the speaker before 

me says, when a red flag is in front of us, we need to pay attention. 

I think we see a major red flag here with the decline in the capital 

ratio. 

In the Secretary’s defense, I would say he has begun, or attempted anyway, improvements to the program like raising the annual premiums and other things that could be done, but we need 

to work hand in hand both legislatively and through regulation to 

try to improve what is a seriously declining and, I think, potentially dangerous situation. 

With the actuarial report saying that the mandated reserve ratio 

is down to .24 percent, it is time to more than just pay attention; 

it is time to take action. And so, I pledge to work with you as we 

have in the past. We did an FHA reform bill last year. I believe 

it didn’t make it all the way through, and I think some of the ideas 

in that bill would be very useful in helping to alleviate this situation. 

Changes that are currently in practice, like tightening the underwriting standards, increasing premiums, and enhancing enforcement, I think are helping, but the statistics are showing that we 

are still in a seriously declining situation, and as we have heard 

repeatedly, and I would echo my voice in this, a bailout to the FHA 

8 

is something that would be intolerable to the American people and 

certainly to this Congress. 

So I would like to thank the chairman for holding the hearing 

and welcome the Secretary today. Thank you. 

Chairman BACHUS. Thank you. 

Mrs. Maloney for 2 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman, and Mr. Ranking 

Member, and I am really honored to welcome all of the panelists 

today, particularly Secretary Donovan, and to say that New York 

is so proud of you. Thank you so much for your public service to 

our State and City, and thank you also for your public service for 

our Nation. 

This is a very important hearing because the FHA really represents a critical leg of the stool of housing finance. And I think 

it is safe to say that in the wake of the most recent financial crisis, 

we are all concerned about the FHA’s ability to continue to insure 

mortgages. 

Over the last year, the FHA has insured $218 billion in singlefamily mortgages, helped more than 362,000 families avoid foreclosure through loss mitigation, and helped 440,000 families refinance their mortgages to a lower rate. Some of these families who 

have benefited live in the district I am honored to represent, and 

they are very grateful. 

So the importance of FHA’s role in the housing system really 

must be underscored. And FHA is really the only game in town 

right now because the private sector has largely disappeared from 

the market. 

However, I am concerned, and I join my colleagues who have expressed their concerns, that the actuarial report indicated that the 

FHA’s Mutual Mortgage Insurance Fund capital ratio fell from .50 

percent in 2010 to 24 percent in 2011. And I do know that there 

are a variety of reasons that led to that decline, including a decline 

in home prices, but I hope that we will see an uptick in that rate 

as the market stabilizes. And I believe the actuarial report, with 

a lot of hard work and help from the economy, that we can move 

toward the level of 2 percent by 2014. 

In the meantime, I understand that FHA has undertaken a number of important steps to ensure the health of the fund by strengthening risk controls, underwriting controls, and enforcement; increasing premiums; and expanding loss-mitigation assistance to 

avoid unnecessary claims. 

So I look forward to your testimony. I particularly would like to 

hear your take on the legislation on FHA reform that has been presented by the Republican Majority, and again, I thank you for your 

efforts to help Americans stay in their homes and finance their 

homes. Thank you very much. 

I yield back. 

Chairman BACHUS. Thank you. 

Mr. Garrett for 1 minute. 

Mr. GARRETT. I thank the chairman for holding this very important hearing on FHA and its future viability, in light of the new 

actuarial report that just came out which raises real concerns. Unfortunately, as you know, Congress just decided to expand the role 

9 

of the FHA even before they had the opportunity to study that report in depth. 

Mr. Secretary, you have been in your position for about 3 years. 

Each year the actuarial report comes out, and each year it shows 

deterioration, gets worse and worse and worse with regard to the 

capital position. And as Mr. Lynch has already indicated, prior to 

that, each year you come here and basically you or your subordinates say things are fine, that we are in good financial condition, 

and that your projections show that things will get better year 

after year. 

However, as I say, if you look at those reports that come after 

you speak to us, things continue to deteriorate, they get worse and 

not improve. They erode. So when you come here now and tell us, 

don’t worry, be happy, things are okay and improving, I have heard 

that record before, and I really wonder why we should believe that 

and why we should not anticipate that in a few months from now, 

this spring, you will be coming to Mr. Lynch and me and the rest 

of us saying you need to be bailed out. 

I add to that just one other comment. I have heard some comments at least out there from Mrs. Galante that even with this 

alarming situation, the FHA is not really going to make any other 

additional significant policy changes to better its fiscal position; 

rather, the answer is simply to grow its way out of it. And I really 

wonder, then, whether or not growing your way out of this problem 

is not only doing more damage to yourself, but also doing more 

damage to the private sector in freezing out private mortgage guarantors and the rest of the private sector by doing so. 

So I have a lot of concerns as to this track record to date, and 

also where we are going with this. 

I yield back. 

Chairman BACHUS. Thank you, Mr. Garrett. 

Mr. Ackerman for 2 minutes. 

Mr. ACKERMAN. Thank you, Mr. Chairman, and I thank the 

ranking member for the hearing. 

Mr. Secretary, indeed we are all proud of you. Thank you for the 

great job you are doing under very difficult circumstances. 

I don’t think the sky is falling. Unlike some of my colleagues, I 

think you are to be congratulated, not criticized, for the fact that 

your market share is expanding, or, as some people have said, exploding. Your agency has been designed for that purpose, to be 

countercyclical, to pick up the slack when there are no other lenders. That is your job, and that is your role, and you are doing it, 

and you are doing it quite well despite the fact—or I point out the 

highlight of the fact is that the quality of your borrowers has increased, as the audit indeed shows for the first time, being over 

700 on the FICO scores. That is a very good sign and a very positive sign in very troubling times. 

There are some reasons to be concerned, and I think your testimony that we have seen so far is very, very realistic, and we have 

to figure out what to do if indeed the housing market continues to 

decline and prices decline anyway. 

My second point is basically during the years of the Bush Administration, they kind of branded themselves as the ownership society. Everybody had to own something, especially their house, and 

10 

people found ways to market houses to people who were basically 

subprime borrowers. There were really no subprime loans, they 

were pretty tricky and some devious, but the borrowers were 

subprime. 

Now that we have highlighted that, I thought we had gotten 

away from some of the causation of the problem, but I find that an 

ad—and I have seen many like it—this is from one of the major 

newspapers in my region in New York—Cambria Heights: ‘‘Foreclosure. One-family brick plus private driveway, full basement. 

Asking $163,000. No credit, bad credit okay. Won’t last. Call 

quick.’’ 

Why are we still selling and marketing to people who have no 

credit and bad credit? This is not advertised as being out of your 

shop in any way, I don’t want to advertise it, but this is still going 

on. People are being induced by lenders—not your agency, but by 

lenders to buy houses when clearly they are marketing it to people 

who can’t afford it. No credit, bad credit. Who are they asking to 

buy houses? What do we do about that? 

And I will yield back the balance of my time because I do have 

some specific questions for you when that moment comes. 

Chairman BACHUS. Thank you, Mr. Ackerman. 

And let me at this time acknowledge that Ms. Carol Galante, 

who is the Acting Federal Housing Administration Commissioner, 

is seated at the witness table with Secretary Donovan and is accompanying him today. We appreciate your presence and understand you are going to assist, if needed, the Secretary. And I have 

enjoyed our conversations over the past few months. So we welcome you to the hearing. 

Thank you. 

Mr. Neugebauer for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Chairman BACHUS. We are having a little longer opening statements, but these are important matters, and I think it is important 

that those Members who wish to make an opening statement can 

do so. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Secretary, it is good to have you here. The Mortgage Insurance Premium Fund report was issued, and it was a little ironic 

because it didn’t paint a very pretty picture, but the summary said 

that it was actuarially sound. And I was pretty sure if I went to 

Webster’s, that an entity that had less than one penny of equity— 

and, in fact, it is not less than one penny, it is less than a quarter 

of a penny in equity—with such a huge book of business would not 

be an entity that was probably actuarially sound. 

And I think the other thing that was troubling about that, and 

I think my good friend Mr. Garrett made the point, is when we go 

back, if you look at previous reports, and you look at the projections of where you thought you were going to be in the outyears, 

we have missed those every year. 

And the other piece of information there is that when you look 

deeper into the numbers here, and I am looking, that when you 

look at the single-family book of business, actually that reserve is 

even less than that. It is .12 percent. I was trying to decide how 

much of a penny that you could show to represent that. That is like 

11 

846-to-1 leverage, and obviously that is leverage that any other entity in this country that was regulated would be in some kind of 

either bankruptcy or conservatorship. So, one of the things, the 

challenges, here is how do we fix this? And I think that is an important piece of that. 

One of the problems, though, I think, even beyond being out of 

money at this particular point in time, is the fact that because we 

have crowded the private market out of the system here, you are 

getting a majority piece of the business, and so it is almost a selffulfilling prophecy that if we were to take actions to reduce the 

amount of business that FHA is doing, reduce your market share 

back to traditional levels, you wouldn’t have the new income levels 

to support the activities that you are in right now. 

So it is going to be interesting to hear from you how we bring 

FHA back to more traditional levels as far as market share and at 

the same time keep you from having to dip into the taxpayers’ 

fund. 

And so, I look forward to the question-and-answer period where 

you and I can discuss that further. And thank you, Mr. Secretary. 

Chairman BACHUS. Thank you. 

Ms. Hayworth for 1 minute. 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

And, Mr. Secretary, as you may know, I am a co-chair of the nonpartisan Hurricane Irene Coalition here in the House, and my priority, as is theirs, is to ensure that we, and in our case the Hudson 

Valley, has the fullest possible access to the Federal funds that we 

need to recover from Hurricane Irene and Tropical Storm Lee. Over $400 million in disaster aid has been made available 

through the Community Development Block Grant (CDBG) program, but, as you know, my home county of Westchester is being 

denied this help as well as their normal CDBG funding due to an 

ongoing dispute with HUD over what can reasonably be described 

as minor, but punitive terms of a recent settlement that was made 

before the current county executive took office. And that is despite 

the fact that Westchester has assured funding in good faith for 

over 700 units of affordable housing in a county that has a limited 

amount of land, and we have a lot of open space, which is good for 

the environment. 

So, Mr. Secretary, I am asking as a member of the Hurricane 

Irene Coalition and as the Representative for a good part of Westchester County that you please work with Westchester County to 

provide the critical recovery funding that the county needs and deserves. And I thank you, sir, and look forward to your testimony. 

Mr. Chairman, I yield back. 

Chairman BACHUS. I would like unanimous consent for the 

record to reflect that there is a nonpartisan caucus on Capitol Hill. 

So thank you. 

At this time, Mr. Dold for 11⁄2 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. Certainly, I want to thank 

you for holding this hearing, and, Secretary Donovan, thank you 

for being here. 

I think we all share a common objective, which is a more sustainable and more effective mortgage finance system, and regardless of 

political party, most of us would agree that such an improved sysVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
12 

tem should have three primary components: first, to promote the 

private sector as our primary mortgage financing source; second, to 

restore long-term stability to the housing sector, and third, to protect taxpayers from future bailouts. After already paying for over $100 billion in Fannie and Freddie 

losses, and with potentially hundreds of billions more in coming 

years, taxpayers also remain exposed to potentially large FHA 

losses because the FHA guarantees over $1 trillion of mortgages 

while maintaining only a tiny fraction of that number in insurance 

reserves and other resources. 

Solving this problem, I think, is absolutely critical for taxpayers, 

for current and future homeowners, and for our economy as a 

whole. And so I am concerned when I see additional solicitations 

coming out—and there is one over here that I just saw that is talking about trying to get additional loans with a FICO score of only 

580—these are a concern for me. And I think what we have to do 

is come together to try to make sure we are shoring this up for the 

American taxpayer and for future homeowners. 

I look forward to your testimony here today. Thank you so much 

for being here, and I yield back. 

Chairman BACHUS. Thank you. 

Are there any other Members on the Minority side or any other 

maybe ranking members-in-waiting who would like to make an 

opening statement? No? Okay. 

At this time, Mr. Schweikert is recognized for 1 minute. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Secretary, I look forward to hearing the testimony. I am operating under two premises: one, that a shock in the FHA loan system would be horrible to the real estate market, particularly when 

you are from Arizona, but the second part of that premise is you 

are in violation of the law. Looking here at the statute that you 

shall maintain 2 percent, I look forward to learning why I am 

wrong in the way I am reading this statute. 

The second thing is also going to the actuarial report, and please 

forgive me if I missed it. I am trying to get a good definition and 

breakdown of properties and mortgages on your assets side. What 

is the breakdown? How much is actually held in REO properties, 

and how much is actually held in paper? And as my good friend 

Mr. Dold here just mentioned, this probably isn’t you, this is maybe 

a correspondent lender, but when you get an email soliciting an 

FHA loan with a 580 FICO score, it makes you a little nervous. Of 

if you are going to grow your way out, do you grow your way out 

with higher-risk loans? 

Thank you, Mr. Chairman. I yield back my time. 

Chairman BACHUS. Mr. Canseco is recognized for 11⁄2 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for being here today. 

Yogi Berra once said, ‘‘It is deja vu all over again.’’ The latest actuarial report on the state of the FHA’s insurance fund is reminiscent of warning signs we saw from Fannie Mae and Freddie Mac 

last decade. Even though FHA has been below its statutorily required capital ratio for 3 years, it now has exposed taxpayers to 

over $1 trillion in liabilities, and the agency now guaranties almost 

one-third of new mortgages in the United States. 

13 

Even a cursory look over the latest report brings into question 

many of FHA’s projections about the health of the housing market 

and its ability to cope with future losses. Putting taxpayers in such 

a risky position is unacceptable, and it is a stark example of the 

consequences of the decades-long foray of government meddling in 

the housing market. 

Today’s hearing is of extreme importance, and I look forward to 

hearing from our witnesses on this matter. And I yield back the 

balance of my time. 

Chairman BACHUS. Thank you. 

Without objection, if any Members want to submit written statements, they will be made a part of the record. 

If there are no further opening statements, at this time I would 

like to welcome Secretary Donovan and Mrs. Galante. The Secretary has a hard stop of 12:30, but I understand that the Commissioner can stay longer if Members have questions. 

And so at this time, Mr. Secretary, you are recognized for 8 minutes. 

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

COMMISSIONER, FEDERAL HOUSING ADMINISTRATION 

Secretary DONOVAN. Thank you, Chairman Bachus, and members of the committee for this opportunity to testify on the status 

of the FHA MMI Fund and the Fiscal Year 2011 actuarial report. 

But before I begin, I want to say a quick word about Ranking 

Member Frank, who announced his retirement this week. Given 

that he has never been exactly the retiring type, I am sure that the 

Congressman will continue to be the passionate and effective advocate for families on Main Street that he has always been. 

Mr. Chairman, this report arrives in a significantly different environment from the one that we faced upon taking office. Then, our 

economy was shedding over 800,000 jobs a month, housing prices 

had fallen for 30 straight months, and foreclosures were surging to 

record levels month after month. Today, nearly 13 million homeowners have refinanced their mortgages since April 2009, putting 

nearly $22 billion a year into the hands of families and our economy. And with recent changes from FHFA, more refinances are on 

the way. 

Today, because we provided responsible families opportunities to 

stay in their homes, the number of families falling into foreclosure 

is down 45 percent since early 2009. More than 5.3 million mortgage modifications have been started since that time. Central to 

this progress has been the FHA, which has undertaken the mission 

that Congress set for it after the Great Depression by taking over 

1 million loss-mitigation actions to help families keep their homes, 

and helping 2.25 million first-time homebuyers realize the dream 

of homeownership, 56 percent of all first-time homebuyers in the 

last 2 years and 60 percent of African-American and Hispanic 

homebuyers last year alone. And as the actuarial report we discuss 

today finds, while we have been through the second worst housing 

downturn in the history of the country, FHA, unlike many other inVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
14 

stitutions, retains a positive fund balance, and the current book of 

business is strong. 

Specifically, the actuarial reports insurance on loans booked since January 2009 posts an estimated net economic value of $18 

billion, with the new 2012 book of business expected to add $9 billion alone. It reports that although the capital reserve account is 

$4.7 billion, FHA’s total reserves stand at $33.7 billion, $400 million more than in 2010. 

That the FHA has been able to weather this storm thus far to 

date is no accident. Indeed, with the partnership of Congress and 

this committee, we have been able to put in place the most sweeping reforms to credit policy, risk management, lender enforcement, 

and consumer protections in FHA history, reforms, as this actuarial report makes clear, that have produced real results. With 

your help, we have been able to increase premium rates 3 times 

under this Administration, yielding significant added revenue to 

the fund. We have also put in place a two-step FICO floor, which 

required those with low credit scores to contribute a minimum 

downpayment of 10 percent. Only those with stronger credit scores 

have remained eligible for FHA-insured mortgages with the minimum downpayment. This approach is based on FHA data that 

clearly shows that the success of a borrower depends on a combination of factors that include the loan to value, but not that alone. 

The changes we have made have significantly improved the quality and performance of FHA loans. Where nearly half of FHA borrowers had credit scores below 620 in 2007, today the average FHA 

credit score across all borrowers is over 700 for the first time in 

FHA history. For home purchase loans originated in early 2011, 

early payment default rates are less than one-sixth what they were 

in early 2018, and for streamline refinance loans they are onetwelfth of what they were at the peak before President Obama took 

office. 

We have taken other steps to protect the fund as well, including 

critical enhancements to lender enforcement, withdrawing the approval of over 1,600 lenders to participate in FHA programs, more 

than 4 times the number during the entire tenure of the previous 

Administration. With these actions, we are sending lenders a very 

clear message that if you don’t operate ethically or transparently, 

we won’t do business with you, and we will not hesitate to act. 

Mr. Chairman, the collective impact of these efforts cannot be 

overstated. Indeed, were it not for these reforms, many of which 

this committee has helped make possible, FHA would be seriously 

in the red today. And on the strength of these new books of business, not only does the actuarial report find the fund retains positive capital today, it projects that FHA should be able to rebuild 

reserves to the congressionally mandated 2 percent threshold 

quickly once markets across the country exhibit sustained growth. 

Indeed, using base case projections based on Moody’s Analytics 

forecast, the actuary expects capital reserves to reach 2 percent 

again in 2014, sooner than was projected just last year. 

Of course, for all this progress, very serious challenges remain. 

Like any other organization in the housing-finance sector, the actuary finds that FHA’s finances are very closely tied to home prices, 

which have been broadly stable since we took office, but weaker 

15 

than expected in 2011. In particular, it found that FHA’s older 

books of business underwritten during the bubble years of 2000 to 

2008 will continue to produce substantial losses of more than $26 

billion. It reports as many as half of the highest-risk loans insured 

at the peak of the housing bubble will ultimately result in a loss 

for the FHA, with more than one out of every four loans insured 

in 2007 resulting in insurance claim and losses of close to $10 billion for the 2008 book of business alone. 

That is why we continue to pursue additional reforms that protect the taxpayer, support the housing market, and meet the FHA’s 

historic mission of helping underserved borrowers. In the very near 

future, we expect to publish an indemnification rule to hold lenders 

in FHA’s lender insurance program responsible for loans that were 

improperly originated or in which fraud or misrepresentation were 

involved. In addition, we will soon publish a rule that reduces allowable seller concessions to protect the MMI Fund from risks associated with inflated appraisal values. 

Now that we have these actuarial results, we are carefully examining a range of additional steps to further strengthen the fund, including enhancements to our loss-mitigation protocols and whether 

additional premium increases are necessary. We expect to announce these next steps in our proposed Fiscal Year 2013 budget, 

and we will work with Congress as we have throughout. 

We must also continue to shrink government’s footprint, a key 

goal of the Administration’s White Paper on the future of housing 

finance, and a process that I am pleased to report has already 

begun at FHA through our premium increases and underwriting 

changes. Indeed, while FHA’s volume grew dramatically during 

this crisis, in 2011, FHA loan volume was down 34 percent from 

its peak in 2009. 

FHA’s current market share of mortgages is 14 percent and declining for the first time since 2006. During these uncertain times, 

as we carefully manage the balance between helping the market recover and working to bring private capital back, this represents important progress. 

And so, Mr. Chairman, while none of us can predict what the future will hold, what we do know is that these new loans we are 

making are the strongest in FHA history. But given the continuing 

fragility of the market, we must continue to be vigilant and prepare to take additional steps to protect the taxpayer. As it has been 

since the outset of this Administration, that remains our goal 

today. 

Thank you. 

Chairman BACHUS. Thank you, Mr. Secretary. 

[The prepared statement of Secretary Donovan can be found on 

page 89 of the appendix.] 

Chairman BACHUS. Mr. Secretary, the Obama Administration’s 

White Paper entitled—and you referred, I think, to that without 

naming it—‘‘Reforming America’s Housing Finance Market’’ that 

was released in February indicated that the goal was to encourage 

the return of private capital and to reduce the risk to American 

taxpayers, but looking at the Fiscal Year 2011 actuarial report 

from FHA, it assumes that the FHA market share—it assumes a 

16 

market share of no less than 20 percent all the way to Fiscal Year 

2018. 

Do you know why this is? And won’t that elevated level of FHA 

participation in the housing finance market discourage the return 

of private capital to the housing financial sector? 

Secretary DONOVAN. Mr. Chairman, you are exactly right. The 

report laid out a series of steps, not just for FHA, but for Fannie 

Mae and Freddie Mac as well, to shrink their market share. The 

most critical steps there were to increase the cost of FHA insurance 

and the guarantees that Fannie Mae and Freddie Mac provide to 

encourage more private capital to come in, and we have started 

down that path. As you know, with authority granted by this committee, we have raised premiums 3 times. They now stand at the 

highest level in FHA history. And, in fact, it has begun to have results. As I just mentioned, we have seen our market share shrink 

from about 17 percent last year to 14 percent this year, and the 

latest quarter shows it continuing to shrink. 

In addition, we proposed in the President’s proposal for the budget compromise that was reached this summer to increase premiums 

for Fannie Mae and Freddie Mac. I know that you have supported 

that as well, and that is a step that we are working on with FHA. 

In addition, we proposed, and we continue to believe, that loan 

limits not just for the GSEs, which have come down, but for FHA 

need to come down and return to their more historic levels so that 

we can ensure that private capital does return. So we have started 

on those steps, but we will continue to take steps going forward to 

make sure that we do everything we can to bring private capital 

back to the market. 

Chairman BACHUS. Thank you. 

The Fiscal Year 2012 funding bill that the President just signed 

and, of course, the Congress passed, reinstated the high loan limits 

for FHA. And, of course, I did not support that, and I don’t think 

the President or the Administration supported that. First, I would 

like your comments on that. And second, it didn’t include Fannie 

and Freddie. So my real concern, or another concern I have, is 

what effect will that have on business flowing to FHA from Fannie 

and Freddie? 

Secretary DONOVAN. We stated publicly in the White Paper that 

you have referenced that we believed that the loan limits should 

have been allowed to expire, and I think if you look at my public 

statements, consistently, as I have said today, we continue to believe that the loan limits must come down. 

I do think you point out something important, which is that the 

effect of having for the first time in history higher loan limits on 

FHA compared to Fannie Mae and Freddie Mac could produce the 

results that would have more business come to FHA than we have 

expected, particularly on the purchase side. We will need to see 

what happens there. And part of what we are looking at in terms 

of future steps is how we should price premiums and other policies. 

And I mentioned in my testimony that we expect in our budget proposal for 2013 to have specific proposals about how we move forward with these loans. 

Chairman BACHUS. Thank you. I do think that could cause problems, and I think you agree. 

17 

Secretary DONOVAN. Mr. Chairman, if I could, one important 

point I want to make here is that those high-balance loans, the 

loans above our old loan limits, represent about 2 to 3 percent of 

our loan volume in terms of dollars—I am sorry, in terms of number of loans and about 6 to 7 percent in terms of dollar volume. 

And the evidence we have, albeit early evidence, is that those loans 

are lower risk than other loans that we are making. And so, therefore, I don’t think the issue is that those loans pose a significant 

risk to the taxpayer or the fund. The real issue is about how we 

encourage private capital to come back while making sure that we 

continue to support the market through this crisis. 

Chairman BACHUS. Thank you. I agree. 

Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you. 

Secretary Donovan, we have seen in the press—The American 

Banker: ‘‘Banks Likely to Gain FHA Relief Under Foreclosure Servicing Settlement’’—that the FHA is potentially playing a role in the 

robosigning settlement between the servicers and the State attorneys general. It sounds like the FHA might be letting servicers off 

the hook for breaking FHA rules and failing to work with borrowers to keep them in their homes by waiving the FHA’s right to 

deny a servicer’s claim and enforce a penalty for an improperly conducted foreclosure. 

Can you comment on this? And do you think this kind of settlement would be appropriate? 

Secretary DONOVAN. Congressman, I want to make sure this is 

absolutely clear: It is exactly the opposite. We began an in-depth 

investigation of the servicing practices of our larger servicers. We 

found significant problems with the way that they were handling 

servicing, specifically their loss mitigation as well as other steps, 

the robosigning and other problems that you all have heard so 

much about, and began discussions with fellow agencies as well as 

State attorneys general, who also found similar problems with the 

way loans were being handled. And so the discussions that we have 

been having are about holding those servicers accountable for those 

practices, and, first of all, making sure that the taxpayer is compensated. 

And, in fact, one of the things that can help the FHA fund to recover to a higher capital level is to recover where—not only on 

servicing, but on origination and other places where mistakes were 

made, where loans were originated or serviced against FHA requirements, as well as to get help to borrowers. 

So any release that we would provide would be in exchange for 

significant penalties as well as to help homeowners who were 

wronged by those practices. That is what we are pursuing. 

Mr. GUTIERREZ. And that is why I raised the question, and 

maybe American Banker just got it wrong. It is not like they always get it right. 

I want to ask you this question because that is our responsibility. 

If a mortgage servicer, a bank, an originator of the loan didn’t help 

the American family stay in the home, and did not go through all 

of the mitigation, and didn’t or did robo, or didn’t do anything, just 

let it sit out there, then you could simply say, yes, you can make 

an insurance claim; am I right? They can make an insurance claim, 

18 

but if you find they didn’t follow the rules, you can simply deny the 

claim and then penalize them 3 times the total cost— 

Secretary DONOVAN. That is correct. 

Mr. GUTIERREZ. Are you still committed to carrying that and 

having that as a powerful tool when we deal with the mortgage 

servicers? 

Secretary DONOVAN. Absolutely. 

Mr. GUTIERREZ. Because I think it is important that we all understand that the insurance is insurance, but you have to follow 

the rules of the insurance. And we know that they didn’t follow the 

rules in many cases, and that is why we have the pending litigation across the country. 

I believe that kind of settlement is important because it sends a 

message that just because you have an FHA-insured loan, it 

doesn’t mean you are going to get the money. Because what we 

have found—and I don’t know if you have any evidence of this and 

I would like to hear your comments—in just the normal practice of 

reviewing is that homes stay out on the street and the banks do 

nothing to keep people in the homes. They don’t mitigate. They 

simply send you a letter and then you send them money and then 

they want on and then they are going to foreclose. They don’t help 

anybody. And secondly, they simply leave the homes. 

In Chicago, for example, the city council had to pass legislation 

against the banks saying, well, if you are just going to have all 

these abandoned properties out there, we are going to charge you 

for boarding them up and for keeping them clean and we are going 

to have to fine you. We found that. Do you find the same situation 

to be true across the country? 

Secretary DONOVAN. As I said earlier, Congressman, we have 

found significant problems with servicers not following our requirements on loss mitigation. And I am proud to say that FHA has 

been a leader in correcting those and ensuring that we help families stay in their homes. 

Mr. GUTIERREZ. And I am with you. I support you. I think you 

are at the helm and are doing a good job. I just want to raise this 

issue because I know what you have done on loss mitigation. I congratulate you and I thank your staff for keeping American families 

in their homes. But I also want to say to all of those mortgage 

servicers out there that you are going to continue to penalize them, 

as they try to submit a claim and they didn’t follow the loss mitigation and they didn’t follow the procedures, you are going to deny 

that claim and you are going to try to go after them for 3 times 

the amount. 

Thank you so much. 

Mr. HUIZENGA [presiding]. The gentleman’s time has expired. 

With that, Mr. Miller of California is recognized for 5 minutes. 

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

Donovan, I am glad to hear that you are holding lenders accountable. When they don’t use reasonable underwriting standards and 

do their job, they should bear the loss. I am also, I guess, relieved 

to hear that my argument that the loan limits in high-cost areas 

are safer loans. But you have justified that they are. But there is 

no doubt we want to get the private sector money back into the 

marketplace. That has been the goal all along. And the drop in reVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
19 

cent conforming loan limits identified by many economists is a test 

for the private sector to see if they are willing to step forward and 

fill the void. Do you have any evidence the private market is filling 

this void created by this at this point? 

Secretary DONOVAN. I think there is some evidence that that is 

beginning to happen. Certainly there have been, in the jumbo loan 

space, some securitizations, some steps forward. Mortgage insurers 

are, some of them at least, coming back into the market more. And 

I do think that we need to continue to take steps that I talked 

about before to ensure that we encourage it. I think it is clear that 

we certainly haven’t returned to a fully healthy market at this 

point and that we need to continue to take steps to encourage private investments to come back. 

Mr. MILLER OF CALIFORNIA. Some have made the argument to 

get everybody out of it on the government side. If the private sector 

was the only game in town in 2007 without a government-backed 

entity, what would have happened? 

Secretary DONOVAN. I think it is important to recognize that 

Congress established FHA to be a countercyclical force. So the fact 

that our market share grew in the wake of the crisis was not, as 

some may have suggested today, a plan on behalf of this Administration or something that we took affirmative steps to take. 

Mr. MILLER OF CALIFORNIA. But if you hadn’t been there, what 

would have happened? 

Secretary DONOVAN. I think it is clear that had we not been able 

to step in and provide liquidity in the market, the housing crisis 

would have been deeper, there would have been more significant 

declines in home prices, more foreclosures, and frankly more losses 

for the taxpayer. 

Mr. MILLER OF CALIFORNIA. And the taxpayers own homes, last 

time I checked. 

Secretary DONOVAN. To be clear—and this is a critical point in 

this hearing today—the actuary predicts the loans we made from 

2000 to 2008 will lose $26 billion for the taxpayers. Loans we have 

made since 2009 will make $18 billion for the taxpayers. So it is 

very important to recognize that the threat to the fund is from 

those legacy books of business and what we need to do is ensure 

that we minimize the losses from those. It is not a problem of the 

new loans that we are making, which are predicted to be profitable, 

even under the most dire economic circumstances predicted in the 

various models that the actuary looked at. 

Mr. MILLER OF CALIFORNIA. If we, as some would like to do, end 

all government guarantees today, how would that affect the overall 

U.S. economy, in your opinion? 

Secretary DONOVAN. I think we have been clear in our White 

Paper which does advocate shrinking the government footprint, but 

we have to do that in a careful, measured way. 

Mr. MILLER OF CALIFORNIA. As the private sector backfills. 

Secretary DONOVAN. So that the private sector can come in, and 

not to expect that is going to happen overnight. And I think consistently in a range of proposals that we have seen, that is something that Congress understands and that is generally understood, 

is that this will be a process that will take place over time and not 

20 

something that we can expect, given the depth of the crisis to happen immediately. 

Mr. MILLER OF CALIFORNIA. What are the barriers you see as it 

applies to the private capital we are entering into the market, in 

the secondary market for home loans today? 

Secretary DONOVAN. Clearly, confidence and a stronger economic 

recovery overall is a critical step. That is why the President has 

been so focused on getting the American Jobs Act passed. That is 

why as part of the American Jobs Act, he proposed a project rebuild that would specifically deal with the overhang of foreclosed 

properties, put 200,000 construction workers back to work fixing up 

those properties, but also ensure that they actually—rather than 

depressing home values in their communities, they help to raise 

home prices by getting fixed up and being resold. That is a critical 

step that we can take. 

A second one I would say is to remove some of the uncertainty 

that is holding back lending today. And that is another reason why 

we have been pursuing these discussions around robosigning and 

other problems. We have to resolve those and get clear, fair, strong 

rules of the road in place that require servicing and other steps to 

be taken that really make sure that it is clear what the responsibilities of the lender and a servicer are going forward, rather than the 

lack of clarity that we had that led us into the crisis. 

Mr. MILLER OF CALIFORNIA. Thank you very much. I yield back. 

Mr. HUIZENGA. At this point, Mrs. Maloney of New York is recognized for 5 minutes. 

Mrs. MALONEY. Thank you. Obviously, saving more loans from 

going into foreclosure is key to reducing losses to the FHA insurance fund. And a New York Times editorial—I believe it was this 

weekend—that I read stated that there are 14.7 million American 

homeowners underwater on their mortgages. Unfortunately, 1.6 

million will likely lose their homes to foreclosure. But the editorial 

states that there are at least 1.6 million who have had a temporary 

setback in their lives, whether it is a health condition or a loss of 

a job, and that their homes can be saved if a loan modification is 

done. 

The key to making this happen is the servicers reaching the borrowers to advise them of their options, particularly loan modifications. And I know from a recent OGR hearing from another committee on which I serve that the GSEs are doing a lousy job of borrower contacts. Fortunately, HUD has a regulation on its books 

since 1992 requiring servicers to make face-to-face contact with the 

borrowers after the 90th day of delinquency. 

And I must say, in New York what has been the most helpful 

is when we have these conferences with the borrowers, with the 

people in need, with government services and try to put people face 

to face to help them stay in their home and to help the borrowers 

keep the houses and really to save the American taxpayers money. 

What more can we do to really enforce that regulation of forced 

face-to-face contact, of working to help the people stay in their 

homes? Are you enforcing that regulation? And could you give us 

some insights into why the servicers are not responding, why they 

don’t work to help them stay in their homes? We get reports all the 

time when people do lose their homes that the servicers never even 

21 

contacted them. They just came in and foreclosed on them. So 

should we try to give them an economic incentive so that they 

would work harder, have face-to-face contact, try to work it out? 

What can we do? Why are they not doing it? And are you enforcing 

that regulation? 

Secretary DONOVAN. Congresswoman, I think partly this goes 

back to the discussion we began with Congressman Gutierrez, 

which is we did find substantial problems in lenders not meeting 

our requirements for reaching out to borrowers, for offering them 

the right tool to be able to stay in their homes. So we have both 

through enforcement measures and technical assistance, working 

closely with those lenders, we are enforcing those regulations and 

have seen improved results. At this point, not only have we 

reached about 1.2 million homeowners to help them stay in their 

homes through loss mitigation activities, but we have improved the 

success of it to the point where 2 years, later 95 percent of those 

homeowners are still in their homes. So we are making progress. 

I think we can go further. We continue to push. 

We are also, through servicing settlement discussions that we 

are having, looking at requiring write-downs that you talked about 

and improved modifications that would help more families stay in 

their homes. 

The last thing I would say though is housing counseling is a critical piece of the puzzle here. What we see is that recent evidence 

shows a homeowner is twice as likely to be able to stay in their 

home if they get housing counseling assistance, if they get that 

face-to-face help from a housing counselor. We were very disturbed when $88 million was cut from HUD’s 

budget last year. We were able to work with the Appropriations 

Committee this year to get, not all of that funding, but a significant 

portion of that funding restored. And we have been working closely—and I give Carol real compliments here—to improve our housing counseling operation. We have cut the amount of time to get 

funding on the streets by 83 percent through our competitive processes. We already have our housing counseling notice out and 

available for the 2012 funds we just got. So we are really trying— 

we are doing a lot to improve that process, and that funding will 

be critical as well. 

Mrs. MALONEY. I totally support your funding request, and it has 

been part of our recovery. 

Also, could you comment either in writing or in the brief time I 

have left on the economic development programs that HUD has? I 

know the focus is housing. But particularly when I was on the city 

council, your 220 program would help build sort of economic models. I know at that time, it even made money. Can you talk about 

that program? Is it still around? Is it working? Is it helping with 

economic development? 

Mr. HUIZENGA. The time has expired, but go ahead and answer 

that question. 

Secretary DONOVAN. I would be happy to follow up afterwards 

with more specifics on the program. We do continue to have that 

program available. I would also say, in the project rebuild portion 

of the Jobs Act that the President proposed, we propose to expand 

our neighborhood stabilization activities that have been so successVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
22 

ful in the residential area to include up to 30 percent that could 

be used for commercial and nonresidential buildings or properties 

to support economic development as well, particularly in neighborhoods that have been hardest hit by the housing crisis. And that 

is an important tool as well. 

Mr. HUIZENGA. With that, Mr. Garrett from New Jersey has 5 

minutes. 

Mr. GARRETT. I thank the Chair, and again, I thank the panel 

for being here. And I want to thank the panel also and Mrs. 

Galante, who testified before the Senate Banking Committee, if I 

am not mistaken, speaking for the Administration, opposed the recent increase or maintaining the level of FHA loan limits. I agree 

with you on that. And if I understood your testimony correctly, I 

appreciate that. My only regret, as I said before, was that the Congress went ahead with their decision on this prior to totally digesting the entire report that you all had there, as far as the condition 

of the fund right now. 

First of all, just a basic question. So you might want to say, look 

at the FHA, you are saying in two books, the old book and the 

newer book. And the old book is the one where you are losing 

money on it; it is bad. And the newer book is a good book and you 

are making money on it. So things will be good as that book goes 

forward. Is that basically a summary? 

Secretary DONOVAN. Congressman, I want to be clear about this, 

because I think it has come up in other comments as well. We have 

significant concerns about the level of the reserves at this point. 

Mr. GARRETT. I understand that. 

Secretary DONOVAN. The actuary does predict that the fund will 

stay positive. But there is a serious risk and we need to take steps 

to protect against it. 

Mr. GARRETT. I guess my question is, if things are getting better 

based upon the new book—in other words, you are saying you are 

going to be able to make money on the new book, why don’t you 

just significantly increase the size of your new book or why isn’t 

the private sector entering into that market sphere? If you are able 

to make money on it, why isn’t the private sector able to make 

money on it? And why are they leaving it all to you if it is such 

a good book? 

Secretary DONOVAN. Specifically, I believe—and it goes back to 

the comments I made earlier—that there are a series of barriers 

to the private sector reentering that include a lack of clarity 

around enforcement, servicing, potential buy-backs, and a range of 

steps that need to be clarified and established so that more private 

capital does come in. I would be clear— 

Mr. GARRETT. I only have 2 minutes. 

Secretary DONOVAN. Our market share is declining and that is 

important evidence, I think, that the steps that we are taking to 

shrink our footprint are beginning to have a real effect. 

Mr. GARRETT. Let me get into another issue and get into the 

weeds on an accounting issue that I talked about. I am a member 

of the Budget Committee and one of the areas we are looking at 

is how the FHA is scored. Currently, even though the GSEs and 

FHA are both part of the government and you both are taking on 

risk, they are scored differently. The scoring on the GSE book is 

23 

scored by including the market risk of holding loans, while the 

FHA book, on the other hand, is scored under the Federal Credit 

Reform Act, which does not include the market risk. What this 

means from a practical point of view is that the GSE book looks 

better than it does with less volume, and the FHA book looks better than it does with more volume. Some have insinuated this has 

been done on purpose by the Administration and have opposed a 

change of the rule because it basically makes the GSEs look better 

as they shrink down and makes the FHA look better as they increase. 

On this accounting rule, do you support rectifying this difference 

and assuring the taxpayers are provided some transparency as to 

the actual risk tat you incur and are taking through these programs? 

Secretary DONOVAN. First of all, Congressman, we obviously follow the law in terms of Federal credit reform and it is up to Congress to determine how we— 

Mr. GARRETT. And what is your recommendation to Congress? I 

only have a little bit of time. 

Secretary DONOVAN. I think you are talking about the fair value 

accounting that CBO has recommended. 

Mr. GARRETT. Right. 

Secretary DONOVAN. We believe there are a number of steps in 

CBO’s way of looking at this that are important. We have in fact 

begun to incorporate different changes to our modeling in a number 

of those. There are portions of it, however, that we really don’t 

think apply to FHA. 

Mr. GARRETT. Why is that? 

Secretary DONOVAN. Simply because our cost of credit and a 

range of other things are different from the way—essentially what 

they are recommending is that we look at it as if we sold off FHA 

to the private sector and how would it be modeled and valued. 

Mr. GARRETT. And is that the fair way of— 

Secretary DONOVAN. The fact is that there are many things that 

are different about the way the business operates, both in terms of 

the need for return on capital. We don’t have a need for a return 

on equity. That would overstate the costs. There are a number of 

other things that are just different about the way we operate. We 

are not a profit-oriented institution. We don’t have shareholders 

that need a return, and those portions of it simply don’t make 

sense for the way you look at FHA. And frankly, they are not required by the law. 

Mr. GARRETT. Right. I understand that it is not required. That 

is why we need to change the law and that is why we are looking 

for you to give encouragement to Congress in order to make those 

changes. I see my time is up. 

Mr. HUIZENGA. With that, Ms. Velazquez for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

Secretary DONOVAN. Thank you. 

Ms. VELAZQUEZ. Let me take a moment to thank you for your 

leadership and your foresight in dealing with this massive housing 

disaster that you were confronted with. And I want to thank you 

on behalf of the 13 million families who have been able to keep a 

24 

roof over their heads and everything that you are doing to assist 

those who are at risk of foreclosure, representing the 99 percent of 

this country. 

So my question is, Mr. Secretary, during the housing bubble, the 

FHA insured less than 500,000 mortgages. After less than 5 years, 

FHA’s obligation has expanded to cover over 1.7 million mortgages, 

more than a threefold increase. Did the FHA take any steps to prevent private lenders from shifting the risk of underperforming 

loans to the FHA and therefore taxpayers? 

Secretary DONOVAN. It is a very important question. And we 

were very concerned when we came into office that risk management was not strong enough at FHA, that we had not taken sufficient steps to make sure that we weren’t going to get those very 

same subprime lenders that had caused such damage to shift over 

to FHA. And so we appointed the very first chief risk officer in the 

history of FHA. We have created a whole organization, risk management organization under that chief risk officer that has taken 

important steps. We instituted a whole set of underwriting changes 

which have improved the quality of our book. We have also taken 

substantial steps to increase our enforcement. I mentioned more 

than 1,600 lenders we have excluded from doing business with 

FHA, more than 4 times the number of lenders that the prior Administration had penalized in its entire 8 years. And so, we have 

taken a whole series of steps and others that are critical along 

those lines. And I really do think that is a big reason why the performance of our loans has been so much better over the last 2 

years. 

Ms. VELAZQUEZ. Thank you. According to the HUD report, the 

MMI fund is expected to become solvent and will return to the congressionally mandated 2 percent capital ratio by 2014. Mr. Secretary, is this projection based on home values increasing over the 

next few years? And if that is the case, how would the FHA protect 

taxpayers if home values do not rise as expected, causing the MMI 

fund to seek help from Treasury? 

Secretary DONOVAN. Very, very important. And just to be specific, the actuarial report predicted that home prices would decline 

in 2011 by 5.6 percent, and then would begin to rise about 1 percent, 1.3 percent next year. And that is sort of the base case that 

it projected on. And based on that, it projected that we would recover to the 2 percent capital ratio by 2014. Obviously, none of us 

has a crystal ball, and there is a real risk that home prices could 

perform worse than that, and the actuary looks at a whole range 

of scenarios there. 

To ensure that we have protection against that, we are looking 

at a series of steps. I laid out five different steps in my written testimony, including premium increases, and further steps on lender 

enforcement. But I think it is very important for the committee to 

understand the balance here. Given that the actuary predicts that 

under any economic scenario that they look at, the new loans that 

we are making are profitable, given that our premiums are already 

at the highest level that they have been in the history of the FHA 

and given that the losses are really coming from old books of business, we have to balance any premium increases or other steps that 

we might take on new loans against both the fairness of that, given 

25 

that they are already profitable, and the fact that it has some risk 

to the housing market more broadly by limiting the number of people who might purchase homes and pushing home prices down further. 

So what we need to look at as well is how do we recover what 

we should be recovering from the older loans? And that means increased lender enforcement and other steps that we are looking at 

as well. 

Mr. HUIZENGA. The gentleman’s time has expired. With that, Mr. 

Neugebauer from Texas for 5 minutes. 

Mr. NEUGEBAUER. Thank you. Secretary Donovan, it is good to 

see you again. 

Secretary DONOVAN. You, too. 

Mr. NEUGEBAUER. I want to go back to something I said in my 

opening statement. And maybe in the conversation you and Mr. 

Garrett were having, I think you all were talking about market 

share. But what I want to talk about is something you were just 

alluding to, which is that your new business is priced differently 

than your old business was because it turns out your old business 

probably wasn’t priced appropriately because you didn’t have 

enough money to cover that. And so now, the fund levels would be 

much worse than they are today if you hadn’t had the fairly substantial increase in market share. Would you say that is true? 

Secretary DONOVAN. I think there is no question that the quality 

of the new loans that we are making has helped balance losses on 

the old loans. As I said earlier, the Congress set us up to be countercyclical, and so this is not something that we intended. In fact, 

we are working to shrink our market share, and that is beginning 

to have an effect. But certainly, those new loans are balancing 

losses from those older books. 

Mr. NEUGEBAUER. Providing the profit and the cash flow to sustain the losses on those. And so one of the questions that I wanted 

to ask you about you—putting these new risk management tools in 

place, it raised your guarantee fees. Are you doing locational risk 

analysis? Because obviously, there are pockets where if you are 

looking at—as you said, the studies showed maybe a 5 percent additional decline in prices. But there are other areas of the country 

that, as I am sure you looked at—that probably could actually have 

more than a 5 percent decrease, further decrease in prices. So 

when you are looking at making loans in those areas, are you saying—are you increasing the G fee or are you saying, you know 

what, we may not want to be making 97 percent loans in that area 

because of a downside. Is that a part of your risk management? 

Secretary DONOVAN. Yes. Congressman, I would love to be able 

to have a way of knowing what is going to happen in the individual 

housing markets and the national housing market. If you know 

someone who could help us do that with precision, that would be 

a wonderful tool. The truth is that there are not great ways of 

knowing what is going to happen a year out or 2 years out at the 

national level, much less at the local level. 

We work with appraisers. We have very clear appraisal techniques. We have been trying to improve those to try to get to real 

market value and to look at the kind of things that you are talking 

about. Certainly, we have gone to a disaggregated, more geographiVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
26 

cally specific set of home price indicators in the modeling. That is 

one of the improvements that we have made. But the truth is—and 

nobody is able to do this, to get to very precise, geographically specific pricing. The most important thing we can do—and this is what 

we did do—is to look at the risk factors for a particular borrower 

and to raise to 10 percent the downpayment requirement for riskier 

borrowers. And frankly, what we have seen since we did that is 

that our early payment defaults have declined by two-thirds in 

those riskiest loans. So the evidence is that the policy is really having a good effect. 

Mr. NEUGEBAUER. Let’s just go to the fact that your assumption—and I think it is kind of one of your best-case scenarios in the 

study was that you thought there would be an additional 5 percent 

decline in housing prices, right? 

Secretary DONOVAN. Actually, it predicted that it would be 5.6 

percent this year. Since that was done in June, we have another 

quarter of data and it is actually better than was predicted by the 

actuary. So it is likely at this point that 5.6 percent isn’t quite as 

bad. But that was a prediction for this year. 

Mr. NEUGEBAUER. Yes. So if you predicted that you are going to 

have a 5 percent decline in housing prices and you are making 97 

percent loans, aren’t we setting people up to being underwater? 

And when you talk about predicting the future of some of these locational issues, there are historical data that can show you what 

the inventory levels are in many of these locations, how long it 

takes to foreclose on properties in different jurisdictions. And to 

me, that is an important part of the risk analysis. But what you 

are saying is, we don’t do that? Yes or no? We don’t do that? 

Secretary DONOVAN. What we are clearly looking at is what are 

the risks of different factors in underwriting. Downpayment is a 

critical piece, but it is one of a number of factors, and what we see 

on the performance of our high LTV loans—because we have excluded the highest-risk borrowers from doing that—is very, very 

strong performance. Early payment defaults are far lower for the 

highest credit score borrowers with high LTV than 10 percent 

downpayments with lower credit score borrowers. 

So I would be happy to share with you more of the data. But 

what we are basing this on is real experience in realtime. And the 

performance there is strong enough. The other thing I would just 

say is— 

Mr. HUIZENGA. The gentleman’s time has expired. I will let you 

very quickly finish. 

Secretary DONOVAN. I will just finish. We looked back at last 

year. If we had even gotten rid of the highest LTV loans on purchases, our estimate is that 10 percent of the borrowers in the entire country would not have been able to buy a home. So what we 

are balancing here, to be clear, is making as safe loans as possible 

but also not trying to do anything that would threaten the housing 

recovery. And frankly, anything that would hurt the housing recovery would do much more damage to the taxpayer not only at FHA 

but at the GSEs and elsewhere. And that is really the balance that 

we are trying to maintain. 

Mr. HUIZENGA. Thank you. The gentleman’s time has expired. 

Mr. Ackerman from New York for 5 minutes. 

27 

Mr. ACKERMAN. Thank you. I want to probe, if I can, for a moment and reflect on the philosophical differences within the committee as far as the role of the public sector and the private sector 

which I think is indicative of the same discussion in the country. 

There are those who would believe that the government or the public sector should play very little or no role in many aspects of public 

life, housing in particular in this case. It should be left up to the 

private market. And I think that is very reflective of our votes and 

our attitudes and our approach to things. 

That being said, how much money do you make? 

Secretary DONOVAN. Me personally? You mean FHA? Or do you 

mean me personally? 

Mr. ACKERMAN. On your day job. 

Secretary DONOVAN. I would say I make a fair salary. It is under 

$200,000. 

Mr. ACKERMAN. It is about what we make, right? 

Secretary DONOVAN. Yes. 

Mr. ACKERMAN. And if you took a bonus from somebody, you 

would go to jail? 

Secretary DONOVAN. We do have certain very, very small awards 

we can make to employees. I am not one of those who can get one 

of those bonuses. Yes. 

Mr. ACKERMAN. So there is no incentive for you to gobble up 

business from other sources, is there? Other than getting an 

‘‘attaboy.’’ 

Secretary DONOVAN. Based on the discussions of the committee 

today, I would say there are lots of incentives for me not to do more 

business. 

Mr. ACKERMAN. But there are no financial remunerations? 

Secretary DONOVAN. Absolutely not. 

Mr. ACKERMAN. So you have no motivation for stealing clients or 

customers from the private sector and gobbling up their book of 

business, right? You have no reason to crowd them out of the market? You have no reason to see that their market share is less and 

your market share is larger, do you? 

Secretary DONOVAN. None that I know of, Congressman. 

Mr. ACKERMAN. And it is quite conceivable that in the private 

sector, people could get bonuses in exponential amounts, thousands 

of percentages if they wanted, larger than your salary? 

Secretary DONOVAN. In fact, one of the problems I believe that 

led us into this crisis is that there was lots of compensation to 

mortgage originators to make bad loans. 

Mr. ACKERMAN. And even in Fannie and Freddie before they 

were in conservatorship, they could get bonuses also? 

Secretary DONOVAN. They could. 

Mr. ACKERMAN. And yet, your business remained stable and you 

didn’t get into any financial trouble and you didn’t need a bailout 

while they did and had to be taken under the public wing and 

given taxpayer dollars to be steady? 

Secretary DONOVAN. Thus far, although we continue to be vigilant, given the risks. 

Mr. ACKERMAN. How come you did so well when they did so poorly in the private sector and those who are now under conservatorship? 

28 

Secretary DONOVAN. I think the main factor is that FHA continued to make plain vanilla 30-year fixed-rate fully-documented 

loans. It is why our market share shrunk to about 2 percent. 

Mr. ACKERMAN. And you have no problem with your market 

share shrinking? You don’t take it personally? 

Secretary DONOVAN. That is what Congress intended us to do, 

from my understanding. 

Mr. ACKERMAN. That is part of your mandate? 

Secretary DONOVAN. When the private market is operating correctly, that we would need to do very limited business. That is correct. 

Mr. ACKERMAN. So when you were established back after the Depression for the purpose of expanding into the brink, into the 

breach when there was a crisis within the system and you expanded to fill that role, those who said, Oh, my God; look what 

they are doing; they are stepping into the breach; and that is a 

dangerous place for them to be, how terrible, you were really fulfilling your role and your mission and your obligation, were you 

not? 

Secretary DONOVAN. We believe so, yes. 

Mr. ACKERMAN. And you would be very, very happy to have a 

smaller market share and remain stable and ready to fill that 

breach again once the problem has been resolved within the housing market? 

Secretary DONOVAN. More than that, I believe we are taking affirmative steps to reduce our market share. 

Mr. ACKERMAN. I want to thank you and your agency for doing 

the great job that you are doing and for standing ready to be the 

professional firemen that you are and withstanding the criticism of 

the people who say that you are preventing the good Samaritans 

from coming in and fighting the fire. 

Secretary DONOVAN. Thank you. 

Mr. ACKERMAN. Thank you very much. I yield back the balance 

of my time. 

Mr. HUIZENGA. Thank you. With that, Mr. Posey from Florida for 

5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. Thank you for coming, 

Secretary Donovan. First of all, I would probably be remiss if I 

didn’t compliment Buzz Osley in your Orlando office. 

Secretary DONOVAN. Thank you. 

Mr. POSEY. He has been a great asset to our office. He has been 

a great asset to educating the public in my district on how to stay 

out of trouble and, if you are in trouble with your mortgage, how 

best to handle it. Great, great job down there helping educate the 

public and mitigate losses. 

Secretary DONOVAN. Thank you. I will let him know. 

Mr. POSEY. A couple of questions. What are you doing to prosecute the fraud that you have discovered that helped put us in this 

undesirable position we are in now? 

Secretary DONOVAN. We are working very closely with the Department of Justice. We obviously don’t do the prosecuting ourselves. The Department of Justice represents us. We have active 

cases against a range of lenders. A good example of that is TBW, 

which was not only one of the larger FHA lenders but also a large 

29 

Fannie Mae and Freddie Mac lender. We discovered working closely with our Inspector General serious problems, including fraud, in 

the work that they were doing with FHA lending. 

Mr. POSEY. Just because time is limited, I am going to ask if you 

would send me a memo and brief me on the number of cases and 

scope of it. 

Secretary DONOVAN. Absolutely. 

Mr. POSEY. And then, I will follow up with you on that. 

Do you see any needed improvement in the REO process? 

Secretary DONOVAN. One thing I would just mention related to 

the enforcement is we have legislative changes that we would like 

to pursue with the committee that we would love to work with you 

on to improve our ability to go after lenders and kick them out of 

the program when they are not doing their job. So that is an important next step. 

Mr. POSEY. You will get 100 percent from both sides of the aisle 

on that, I promise you. 

Secretary DONOVAN. And we have worked well with the committee on that. 

Mr. POSEY. Back to REO. I only have 3 minutes. 

Secretary DONOVAN. On REO, we are working closely with 

Fannie Mae and Freddie Mac. We asked for ideas from the public 

for new things that we could do to improve our REO processes. We 

expect by the first quarter of next year to be able to implement 

some new pilots around our work on REO to improve those processes. 

Mr. POSEY. If you issue any bulletins on that, I would like to be 

kept in the loop. On paper, it is a pretty attractive process. On the 

ground, in reality, it is devastating. It is very inefficient. It causes 

you greater losses than you would sustain otherwise, and harms 

neighborhoods to a much greater degree than would otherwise happen if that process were streamlined, more effective, and allowed 

more people to participate in this. As I say, on paper it really looks 

good, but I think on the ground level, from my observation at least, 

it needs to be vastly improved and can’t even wait a year for that. 

What effect do you think it would have to make FHA loans, full 

recourse loans? 

Secretary DONOVAN. I think you could argue about the amount 

but there is no question they would be substantially more expensive. And in exchange for that, I think there would be some potential improvement in performance. Various people have modeled it 

in different ways. It is hard to predict how significant that would 

be. 

Mr. POSEY. If you have any data on that in your office, I would 

appreciate it if you would send that to me, if anyone has prognosticated what would happen there. 

And I wonder if there is some way you might even make the 

awareness. I heard it said by many people, the point made by 

many people and most recently by former Senator Gramm that we 

hear a lot of people are upside down in their mortgages. And he 

compares that to somebody driving a new car off the car lot. The 

second they drive off, if they financed their car, they are upside 

down in their car, too. That doesn’t mean it makes good sense to 

abandon the car and go buy another one. 

30 

I just wonder if there is some way you might initiate that in your 

education program. I know there are so-called financial advisors 

telling people, ‘‘Hey, if you are underwater, walk away.’’ And that 

really doesn’t help anybody at the end of the day. If people would 

hang in there a little bit better probably, like they do their with 

automobile, just view it a little bit differently. I just think there is 

a negative propaganda being perpetrated to a large part of the population and no positive information coming from the other way to 

put it into proper perspective, more reality. 

I am sure you have read the book, ‘‘Reckless Endangerment’’— 

that would have been a good title for a former Congress. But the 

authors of that book believe that the worst of this market is still 

ahead of us. We have been unable to get anybody from the Department of the Treasury to tell us whether or not they think we have 

bottomed out, to give us any real information. The people that we 

think are the most knowledgeable cannot give us that information. 

I would appreciate any insight that you have. 

I see my time is up. Thank you, Mr. Chairman. 

Secretary DONOVAN. I would be happy to follow up. 

Mr. HUIZENGA. With that, Mr. Capuano from Massachusetts for 

5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Secretary Donovan, do you have any idea approximately how 

many loans FHA currently has up there right now? 

Secretary DONOVAN. The total value of our portfolio— 

Mr. CAPUANO. The number of loans. 

Secretary DONOVAN. —is over $1 trillion. The exact number— 

Mr. CAPUANO. The number of loans. 

Secretary DONOVAN. It is right about 7 million. 

Mr. CAPUANO. About 7 million. I am just curious. Of these 7 million people, these are all first-time home buyers, is that correct? 

Secretary DONOVAN. Not all of them are first-time home buyers. 

There is refinancing also available. That is a much smaller share 

of our business. 

Mr. CAPUANO. So 90 percent of them are first-time home buyers? 

Secretary DONOVAN. Our estimates are that of all the first-time 

home buyers who bought homes last year, about 56 percent used 

an FHA mortgage. So it is not only a huge share within our program; it is a huge share of the overall. 

Mr. CAPUANO. So vast bulk of all FHA mortgages are first-time 

home buyers, people getting into the market, mostly young people 

for obvious reasons. I am just curious. I know that you don’t know 

the answer. But I would like at some point for some of your people 

to take a look to see how many of them, if it wasn’t for FHA, could 

afford a 50 percent downpayment and then afford to carry a mortgage over a 5-year period? And I ask that question because, and 

correct me if I am wrong—I know you have the staff back there 

who probably have great history in their minds—before FHA, 

wasn’t that the typical mortgage in America: 50 percent down and 

a 5-year repayment period? 

Secretary DONOVAN. That was very typical before FHA. And still 

in many countries around the world, those are the types of terms. 

Mr. CAPUANO. And the creation of FHA instituted the 30-year 

mortgage which we now come to take as a given, and they instiVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
31 

tuted the practice of limited downpayments, 20 percent, 10 percent, 

now down to 3.5 percent, whatever the number might be. Is that 

a fair historical memory? 

Secretary DONOVAN. That is right. 

Mr. CAPUANO. I ask that because I am not against the private 

market but that was what the private market did when there was 

no government involvement. The private market basically disallowed most people in this country—my guess is of the 7 million 

mortgages you have now, very few of them would ever have been 

able to put 50 percent down and pay a mortgage back at the rates 

that would have been required over a 5-year period. Very, very few 

of them, which is why homeownership has gone up in this country. 

I think it is a fair debate that we are currently having as a society 

where the level of homeownership should be. But I don’t think anyone has the audacity to suggest that you go back to the 30 or 40 

percent that it was before the FHA. 

And I say that because all this discussion about somehow you 

have done something wrong is ridiculous if you believe that homeownership and middle class go together. I guess I do. And those 

who don’t should turn to their own constituents and tell them to 

sell their house and rent. 

The other thing I am concerned about—and I think you are as 

well—are some of the issues relative to the capital requirements, 

the reserve account. And I actually think that it is long overdue 

and well done to tie downpayment requirements and other requirements to FICO scores—not that I think FICO scores are the holy 

grail but you have to have something, and they are as good as anything. So I actually think it is a good thing. Just out of curiosity— 

I think you have already said it but I want to be clear—have the 

repayment levels improved now that you have increased the FICO 

score requirements? 

Secretary DONOVAN. Our early payment defaults have dropped 

by two-thirds. 

Mr. CAPUANO. So they have improved? Defaults have gone down 

as you have increased the FICO requirements? 

Secretary DONOVAN. The other thing—and I have to thank the 

committee for this—the most serious problems we had, the worst 

loans were seller-funded downpayment loans. And those alone are 

estimated to be responsible for about $14 billion in losses and that 

was stopped by this committee just in the beginning of 2009. 

Mr. CAPUANO. Is it also a fair conclusion that in the average 

home, the more valuable homes that you are allowed to do, the 

ones that are closer to your cap are the ones that have a lower rate 

of default? Is that a fair conclusion? 

Secretary DONOVAN. Given that we haven’t been doing those 

larger loans for very long, it was raised as we went into the crisis 

by Congress, we don’t have definitive data but the early default 

performance suggests that those larger loans actually perform 

somewhat better. 

Mr. CAPUANO. So that it would be fair as we are—because again 

I haven’t heard any disagreement from you that the idea is to get 

the capital reserve up back where it is supposed to be so that everybody could feel better about this and the fact that you have 

raised these standards and narrowed down some of the scopes of 

32 

who could get in, and you are raising that number, it would be fair 

I would think to do this statutorily to say—not just for you but for 

the next HUD Secretary, the next Congress to say, if those capital 

levels go down, then we will automatically trigger some of the 

things that you have already instituted. And if we do that and you 

continue on the course that you are on, kind of tightening it up 

when the reserves go low—not to get you out of the market but because no one wants a bailout, no one wants you to default, no one 

wants problems with FHA, we want you to be stable. Why 

shouldn’t we just do this statutorily in some general way, exactly 

the types of things you have done and maybe a few more things 

as well? 

Mr. HUIZENGA. The gentleman’s time has expired. I will allow a 

very brief response. 

Secretary DONOVAN. I would be happy to follow up. I think the 

only thing we need to be careful of is the balance between recovering on old loans that were the problem versus putting increased 

costs on new borrowers. And given that our premium levels are already at the highest level, I think making sure that we maintain 

that balance not just focusing on the underwriting of new borrowers but also what we are doing on old loans around enforcement 

is critical as well. 

Mr. HUIZENGA. All right. The Chair will make a historical note 

that the FHA was created in 1934, according to the memo in front 

of me. And we will now go to Congressman Schweikert from Arizona. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. I am glad someone 

had the memo. Forgive me for doing this, but there are just so 

many questions I would love to run through, Mr. Secretary. So we 

will try to pretend to do the lightning round. First off—and I think 

there may be an informational correction from the last bit of exchange of testimony. FHA is not restricted to first-time home buyers, correct? 

Secretary DONOVAN. That is correct. 

Mr. SCHWEIKERT. The way the last dialogue went, if someone 

was listening, they would think they would have to be a first-time 

home buyer and I want to make sure it is on the record that it is 

not that way. Also, you are talking about performance particularly 

on the higher end of your LTV, your loan limit performing pretty 

darn well. If we are walking into this environment where some of 

our regulators are actually doing the Qualifying Residential Mortgage (QRM) and the qualifying mortgage definitions, isn’t that 

going to ultimately continue to inhibit or drive more business to 

FHA and stymie the creation of a private label in the S market? 

Secretary DONOVAN. Just to be clear, first of all, I think we were 

talking about large balance loans rather than in terms of the performance, rather than LTV. 

Mr. SCHWEIKERT. I was just using that as an example of loans 

that are performing well. So that would actually be—if you and I 

were going to go out and start our own private label mortgage, you 

and I are going to start a securitization business, that is probably 

where we would go first because we know it is performing well. But 

if I have a Qualifying Residential Mortgage and I have risk retenVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
33 

tion and all these other things over here, how am I ever going to 

compete with FHA? 

Secretary DONOVAN. There is no question that there is an important balance that needs to be struck in the QRM between making 

sure that we don’t repeat the mistakes of the past but at the same 

time creating a robust private market. So I think you raised an important tension. But for FHA, we have a range of mechanisms, including our premium levels and other underwriting, that have allowed us—and loan limits of course, which have allowed us to ensure that the private market can function very well. 

Mr. SCHWEIKERT. Actually, that is really not true. You have your 

G fee, your fees and you do have loan limits. But because of the 

current loan limits, which my understanding is you weren’t particularly thrilled with, there is no private market out there. Now 

a lot of that is there are uncertainties within Dodd-Frank and 

those mechanics. Please understand, I have had an FHA loan. I 

have sold—my brokerage firms over the years have probably sold 

hundreds, if not thousands of them. So it is not my opposition 

there. It is just it is sort of the mission creep in many ways, you 

are a huge portion of the market today. 

Mr. Secretary, has your legal staff thrown out any warnings or 

concerns about the fact that you are well beyond this statutory 2 

percent and any sort of recourse that either you, in your capacity, 

or as an agency, hold by violating the law right now? 

Secretary DONOVAN. We have had a lot of discussions with the 

legal staff. My concern is not just on the legal side. It is on the 

business side that we need to take significant steps to make sure 

that capital reserve gets rebuilt. Just in terms of the specifics of 

the law, my understanding is that it requires that if FHA goes 

below the 2 percent, there be a plan put in place to ensure that 

the fund recovers as quickly as possible. Those are the steps that 

we have described. Those are the additional steps that I talked 

about that will be in our 2013 budget. All are parts of what is required by the law to put in place steps that will help the fund recover. 

Mr. SCHWEIKERT. Mr. Secretary, why I am a little disturbed is 

because as I go back to previous years’ testimony, it sounds very 

similar. We are going to build the plan. Please understand, I don’t 

want there to be a shock to FHA where all of a sudden some legal 

opinion comes and you could have to stop writing loans or do this 

or that because I don’t think the real estate market can handle 

that. 

I want to bounce to something Mr. Posey said just because I 

think there might have been an exchange error there. And I think 

he touched on, what do you think would happen if FHA loans were 

full recourse, would that help your credit quality, would that also 

help us in some way where for many of us that have a concern, if 

someone gets an FHA loan—so I have what, 3.5, maybe 5 percent 

down and I somehow am able to get either a credit line or stacking 

a second instrument behind that, there is absolutely no equity—in 

many ways, you are incentivized to walk away from the loan. 

Should that trigger recourse on my first mortgage or deed of trust? 

Mr. HUIZENGA. The gentleman’s time has expired. I will allow 

the Secretary to answer. 

34 

Secretary DONOVAN. I would actually need some clarification on 

the question. I am not sure I am clear. I would be happy to follow 

up afterwards. 

Mr. SCHWEIKERT. Mr. Chairman, may I have unanimous consent 

for 30 seconds? 

Mr. HUIZENGA. Without objection, it is so ordered. 

Mr. SCHWEIKERT. Right now, an FHA loan is nonrecourse, correct? 

Secretary DONOVAN. Yes. 

Mr. SCHWEIKERT. If I go and put a second loan behind that in 

most places, other than Texas—it is still nonrecourse. But I have 

chewed up what little equity was built in there and actually made 

it even more likely that I am going to default or there is going to 

be a higher loss ratio on it. Has there ever been discussion of policy 

on, if I stack up, if I use what little equity I have in the property 

that the first should become recourse? 

Secretary DONOVAN. I have not heard extensive discussion of 

that. There has certainly been a significant amount of discussion 

about whether to allow second liens, how to ensure we don’t get the 

same kinds of problems that we have had in terms of the stacking 

of debt in first, seconds, thirds in many cases. That has clearly 

been a significant problem and I think it is important that we have 

policies that ensure that doesn’t happen going forward. 

Mr. HUIZENGA. The gentleman’s time has expired. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman, and thank you to 

the committee for your tolerance. 

Mr. HUIZENGA. On behalf of the committee, you are welcome. 

With that, Mrs. McCarthy from New York for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Thank you for having this hearing. And thank you for spending so 

much time with us, Secretary Donovan. This is a great concern for 

all of us on both sides of the aisle because we are dealing with an 

awful lot of constituents at home who are trying to get modified 

mortgages. I think there is only one—I am not going to mention 

the name—bank that has been working with us and they are the 

only ones that have actually modified a number of mortgages that 

we have been asked to help. 

But something that I wanted to ask you about, especially what 

has been in the paper, with our veterans coming home from Afghanistan and Iraq and coming home to find that their house is in 

foreclosure when we have passed legislation to make sure that 

wouldn’t happen. What can you be doing to protect these veterans 

coming home? Even though we have laws, but obviously—to me, 

whatever is the highest fine that you can give to these particular 

banks, it should be. And it should be. 

Secretary DONOVAN. Yes. These examples are shameful. And we 

have worked closely where we have found examples of that in FHA. 

We have worked closely with the Department of Justice. They have 

brought a series of cases. I would be happy to follow up to get you 

background information on not only cases they brought but where 

they have won judgments against companies for that. 

The other thing I would add, though too, is in addition to examples on the foreclosure, we have many, many servicemembers who 

are being hurt by being underwater and the inability—particularly 

35 

when they are asked by the country to relocate to another base and 

they are stuck in a house that is underwater, they can’t sell it, it 

hurts their credit rating, there is work that the Department of Defense has done, a set of programs that Congress has established 

that are very helpful in terms of making sure servicemembers 

aren’t hurt by being underwater where they need to move as well. 

So that is another step that we could take that is very important. 

Mrs. MCCARTHY OF NEW YORK. If there is anything that you 

think that we need to be doing even more so, please let us know 

because those who are defending this country and coming home— 

those who are lucky enough to come home uninjured, we can’t let 

this one go. 

Secretary DONOVAN. I couldn’t agree more. 

Mrs. MCCARTHY OF NEW YORK. Certainly, an awful lot of our 

constituents, through no fault of their own—they had a good credit 

rating, they bought a home. I live on Long Island. A starter home 

used to be around $500,000. Now, it is about $430,000 but that is 

still an awful lot of money for a young couple to get together to be 

able to do that. 

So, I thank you again for the FHA loans. But also, I agree with 

Mr. Gary Miller from California. Unless we somehow come up with 

getting this housing market going again through the real estate 

and building, our economy is not going to come back to the way 

that we want it. And I hope that you are looking at—I know a 

number of legislators here have given you different ideas, pieces of 

legislation that we have written to jump-start that, and I hope that 

we—I was hoping that we could actually do it sooner than later, 

but this session is almost over. 

But the question I want to ask you is, your testimony states that 

the default rate on FHA loans has been relatively stable throughout this year due to a number of factors, and I know you touched 

upon it. But can you discuss the overall state of the housing market relative to the stable default rates and anticipated rebuilding 

of FHA’s Mutual Mortgage Insurance Fund for 2012? 

Secretary DONOVAN. I think what is critical there is we have 

seen a substantial decline over about a year, year-and-a-half, leading into this year. We have seen stabilization and even a small increase in delinquency rates in FHA, but also across-the-board. I 

think that the kind of slowdown that the economy had in the late 

summer really impacted that to some degree and saw it come up 

somewhat, but they remained stable and substantially lower than 

we had seen historically. 

And I think most importantly there, the decline of about 45 percent in the number of people falling into foreclosure has been a 

combination of both lower overall serious delinquency rates as well 

as the more than 5 million modifications, loan modifications, that 

I had talked about earlier in my testimony. Those have been key 

pieces. 

Mrs. MCCARTHY OF NEW YORK. My time is short. I know the 

President had mentioned, and it is something that I had mentioned 

years ago, that people who go into foreclosures from unemployment 

or whatever, to try to rent the homes to them until things got better. My time is going to be up, but I hope that you are working on 

that. 

36 

Secretary DONOVAN. We did institute increased forbearance for 

unemployed homeowners in FHA. We required—we went from a 

minimum of 4 months to a minimum of 12 months forbearance. We 

did the same thing with Treasury programs, and we hope that the 

rest of the market will follow us on that. It is very, very important. 

Mrs. MCCARTHY OF NEW YORK. Thank you for your service. 

Mr. HUIZENGA. With that, Mr. Canseco from Texas for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for being here today. In your testimony, your written 

testimony, you mentioned that over the past 3 years, FHA has 

made homeownership possible for 2.27 million first-time buyers. 

How many of these first-time homebuyers used the $8,000 

homebuying tax credit included as part of the 2009 stimulus bill for 

their downpayment? 

Secretary DONOVAN. Given that the tax credit is claimed after 

closing, we don’t have precise estimates of how many families used 

the tax credit, so I can’t give you a specific answer on that. 

Mr. CANSECO. But you mentioned earlier in your testimony that 

downpayment is a critical piece in the risk analysis; is that correct? 

Secretary DONOVAN. Correct. 

Mr. CANSECO. Does the FHA categorize using this $8,000 tax 

credit as a self-funded downpayment loan, which data shows are 3 

times as likely to default as other loans? 

Secretary DONOVAN. In fact, we were very aware of that history 

when we established our policy. What we said was we banned any 

use of the tax credit as a loan or something else that would be go 

directly towards reducing the downpayment. We allowed the tax 

credit to be used to increase the amount of downpayment, but we 

did not allow any homebuyer to monetize that tax credit, to go out 

and borrow against it or do anything else. The downpayment had 

to come from their own funds or from family in a way that any 

other loan would be required. So we made sure to specifically avoid 

the experience that you are talking about with the tax credit. 

Mr. CANSECO. So given that the $8,000 tax credit could have 

come after the finalization of all of the documents, you can’t really 

follow that $8,000, whether it went to make up for that $8,000 that 

went into the downpayment? 

Secretary DONOVAN. Let us be clear about this. When a family closes, they are required to have a $10,000 downpayment for an 

FHA loan. We check to make sure that is coming from allowable 

funds, a bank account they may have, a family member—so we 

would check. If they go and then get a refund from their taxes at 

the end of the year of $8,000, all that does is replenish funds, savings that they may have. So it actually puts the homeowner in a 

better position relative to repaying their loan, not worse. 

Our job was to make sure at closing that those funds were coming only from allowable funds, not, for example, by going out to a 

scam artist or some local lender and saying, well, I am going to get 

this tax credit; lend me the money to do that. So that was our requirement. 

Mr. CANSECO. So your answer is that this tax credit did not go 

into the seller-funded downpayment assistance? 

Secretary DONOVAN. It is a completely different phenomenon. 

Just to be clear, the risk with the seller-funded downpayment was 

37 

that you basically had the seller of the home raise the price—we 

often saw bogus appraisals—and effectively get to zero downpayment or worse. Here the requirement was that they have that 

downpayment in their own cash, in different family—anything that 

would be traditionally allowable. So we were very specific about the 

way that tax credit could be used. 

Mr. CANSECO. So FHA estimates that the capital reserve fund 

could withstand an additional decline in housing prices up to 4 percent and remain positive. Does this mean that the housing price 

declines in excess of 4 percent will trigger a taxpayer bailout of 

FHA? 

Secretary DONOVAN. To be clear about that, the expectation in 

the actuary was a 5.6 percent decline this year, and our estimate— 

and this is only an estimate, there are many other factors—is that 

everything else staying equal, an additional 4 percent decline next 

year could trigger the need for additional assistance. 

But that is before any changes or other steps we might take. For 

example, and I lay out five different things we could do in my written testimony, premium increases or a series of other steps that 

would add capital to the fund and help to avoid that. 

Mr. CANSECO. Does the recent increase in loan limits for FHA 

encourage private capital to get back into the markets? 

Secretary DONOVAN. It does not. And that is why we laid out in 

our White Paper our position, the Administration’s position, that 

the loan limits ought to step down. On the other hand, I do think 

it is important to point out that they do not, based on early data, 

put the fund at greater risk. 

Mr. HUIZENGA. The gentleman’s time has expired. 

Mr. CANSECO. Thank you very much. 

Mr. HUIZENGA. Mr. Sherman from California for 5 minutes. 

Mr. SHERMAN. Thank you. 

I do want to reemphasize your last comment, and I know you 

gave a similar response to Gary Ackerman, and that is this increase does not put the FHA fund at greater risk. If anything, as 

I understand your data, it should help the FHA absorb some of the 

risk that it absorbs on loans of less than $625,000. 

One concern that people have is, are the FHA reserves adequate? 

We obviously prefer that they be higher, but it is my understanding that those reserves would not be exhausted if we ended 

up this year with a 5.6 percent decline in national home prices, and 

then there was a 4 percent decline next year. Is this right? And do 

you predict a 4 percent or greater decline in home prices next year? 

Please tell me no. 

Secretary DONOVAN. I will tell you that what our independent 

data that was used for the actuarial predicted was a 5.6 percent 

decline. It appears we got third quarter data yesterday from FHFA 

and Case-Shiller it appears likely that the decline this year will be 

smaller than that 5.6 percent. It is now year under year just under 

4 percent, and their prediction—again, Moody’s Analytics prediction—is for a 1.3 percent increase next year in home prices. So 

I will tell you that is the base case that the actuarial is run off of. 

Mr. SHERMAN. So the predictions have been more gloomy than 

actuality over the last several months, and if the predictions hold, 

the FHA will not need an infusion of Federal funds? 

38 

Secretary DONOVAN. Under the base case, that is correct. I will 

note, however, that obviously we can’t predict the future; that the 

predictions last year, the performance this year has actually been 

somewhat worse than was predicted by Moody’s last year, and that 

is why we are evaluating a series of steps that we could take and 

that we expect to be included in our 2013 budget. 

Mr. SHERMAN. You ought to be planning for everything, but the 

best estimate is home prices will go up infinitesimally next year, 

and if they even go down by 4 percent, FHA will not need money 

from this Congress. 

One thing I think we tend to agree on here is we want to give 

consumers as much choice as possible. Another thing I think we all 

agree on is we want the Federal Government to take as little risk 

as possible and the private sector to take as much of that risk as 

possible. And I would like to see Fannie and Freddie’s conforming 

loan limit in high-cost areas raised to $729,000 because then you 

may, in many of those cases, have private mortgage insurance. 

As I understand the current situation, if somebody gets an FHA 

loan, the Federal Government is on the hook for the first dollars 

lost. If, instead, that loan was privately mortgage insured and 

Fannie and Freddie, then the private sector is on the hook for the 

first losses. Do I have that right? 

Secretary DONOVAN. That is correct. 

Mr. SHERMAN. And so, if we can give consumers in high-cost 

areas like Los Angeles a chance to use Fannie and Freddie, that 

opens additional doors to them, and those doors would involve less 

of the risk being absorbed by the Federal Government than an 

FHA-insured loan. 

Secretary DONOVAN. I am not sure if you were here earlier. I did 

talk about the fact that we have never had a situation where FHA 

loan limits were actually higher. 

Mr. SHERMAN. I remember when they were lower. 

Secretary DONOVAN. And overall, I would just restate our position that we do think we need over the long term to bring those 

loan limits down to more historical levels for FHA. 

Mr. SHERMAN. While increasing them for Fannie and Freddie, I 

would hope, because the one way you can get a double-dip recession is to see a decline in values, a precipitous decline in values, 

of homes in the 10 high-cost areas of the country. 

With that, I yield back. 

Mr. HUIZENGA. Thank you. 

And at this time, the Chair recognizes himself for 5 minutes. 

I want to say thank you to a couple of my colleagues who are allowing me to jump ahead here before I have to take off. My background is real estate, as well as a few of the others who are here, 

and when I was in real estate back in the early 1990s and into the 

late 1990s, FHA loans were extremely difficult to get, they were 

very unusual, and were sort of the last resort, because they did go 

to those who were underserved. And I am glad to hear your position. I hope that it is a clear position you have shared with the 

Senate, who has pushed this increase on the FHA loan limits, and 

I encourage you to continue to do that and talk with them as we 

are trying to readjust this. 

39 

I do have one quick question on page 3 of the report that you had 

given us talking about the underserved borrowers part of that. 

There is a note that 56 percent of all first-time homebuyers in 

2010, according to the National Association of REALTORS®, were 

FHA buyers. Am I reading and understanding that correctly? 

Secretary DONOVAN. That is their estimate, that is correct. 

Mr. HUIZENGA. So do you believe that 56 percent of all first-time 

homebuyers are underserved buyers? 

Secretary DONOVAN. What I would say is that we have a dual 

mission, as far as I understand Congress’ creation of FHA, in normal times to serve underserved borrowers, but that in times of crisis, where there is a lack of private capital, for FHA to act as a 

countercyclical force and to be able to serve a broader group. And 

I think that is, in fact, what has happened during this crisis, and 

I think the fact that it is 56 percent of first-time buyers is to some 

degree a result of that lack of private capital. 

So I would certainly expect and, in fact, would hope that number 

would go down and return to a more normal level, but that certainly is not a level that I believe is the right level over a longer 

term and in normal times. 

Mr. HUIZENGA. I would hope so as well. And the countercyclical 

element rule for FHA, I think, leads logically to the next question: 

should all of these first-time homebuyers, these sub-700 credit 

score buyers—I think that it was noted that 580 was a score that 

was out there—be in a position to be buying homes? 

Secretary DONOVAN. We would be happy to spend some time 

with you showing the performance data. I think the fundamental 

question is if they are buying a home they can afford with a product that is going to be safe and sustainable, and they demonstrate 

that they can be successful homeowners, that is what we are looking at. And certainly, the performance we have seen, the improved 

performance, tells us that by and large, they can be successful 

homeowners. 

Mr. HUIZENGA. I think that is the fear that a lot of us have in 

this current economy with the job situation as it is that that may 

be more risky, which goes back to a number of questions about requirements for reserves and those kinds of things. 

And you had—I believe it was Mr. Ackerman who had asked you 

a question and talked a little bit about bailout for FHA. Your exact 

quote was, ‘‘We don’t need one thus far.’’ On page 13, you are making the claim that the current underwriting and premium structures have created an actuarially sound basis for growing capital 

at a rapid rate in the economy. 

I, for one, am pleased that it sounds like it is going to be an easy 

pledge from all of us on this committee to say there won’t be an 

FHA bailout. I don’t know how sure you are of that, but I guess 

I am looking for some reassurance that the FHA is not going to 

need that government assistance, because that is what a lot of the 

concern is that a number of us have on this committee. 

Secretary DONOVAN. It is my concern as well, and we have been 

working very hard to do everything we can to make sure that we 

protect the taxpayer. 

To be clear, the new loans that we are making, even under the 

most severe economic scenarios that the actuary looked at, would 

40 

remain profitable. So fundamentally, what we are talking about 

here is a risk; if the economy and the housing market performed 

worse than expected in the actuarial, that is the risk that could 

push FHA’s capital reserves into the negative. I can’t tell you here 

today that is a zero risk, because it is not. 

Mr. HUIZENGA. But doesn’t that sort of go counter to your argument that the FHA is needed for countercyclical, and if you guys 

are that rock solid, why isn’t the private sector stepping in? Some 

of us suspect it might be some of the regulators that have been 

clamping down on amounts of loans that banks are holding and 

those types of things. But I think you are seeing sort of that ‘‘push 

me/pull you’’ aspect to some of my concern at least. 

My time has expired. 

Secretary DONOVAN. Briefly, I would say I think we agree that 

we need to encourage private capital to come back, and the fact 

that our market share is now shrinking is evidence, I believe, that 

the steps that we are talking on premiums and on underwriting 

are, in fact, moving in that direction. 

Mr. HUIZENGA. Thank you. 

And with that, Ms. Waters of California for 5 minutes. 

I believe the chairman had also made a commitment to you because you had missed your opening statement that there would be 

some additional time, and I will let the next person in the Chair 

take care of that. So at this point, let us go with 5 minutes, and 

then ask for additional time. 

Ms. WATERS. Thank you very, very much. 

I am appreciative for Secretary Donovan and the time that he is 

putting in on this very, very important issue today. 

I would like to remind the committee that we saw this coming 

last year when the capital reserve level fell to .53 percent. In response, I worked across the aisle with then-Ranking Members Capito and Bachus on the FHA Reform Act, which passed the House 

on a bipartisan vote of 406–4. Although that bill wasn’t signed into 

law, parts of it, most notably the provisions that allowed FHA to 

raise the annual and upfront premiums, were enacted separately. 

These provisions were the most important pieces from my bill because they were designed to give FHA the resources they would 

need to raise their capital reserve levels. However, the provisions 

on FHA being able to police fraud were likewise important, and I 

am disappointed that the Senate didn’t take up my bill. 

However, Secretary Donovan has taken advantage of the flexibility we were able to get signed into law last year, and FHA has 

tightened its lending standards. The average FICO score of FHA 

borrowers has risen from 620 to 700. In addition to more creditworthy borrowers, the recently extended higher loan limits will 

help FHA to strengthen its reserves. 

There has been a lot of speculation in the press about whether 

or not FHA needs a bailout, and I am certain that you, Secretary 

Donovan, may have gotten questions to that effect from Members 

on both sides of the aisle. But I just want to be clear that FHA remains the only source of mortgage credit for most Americans today. 

Investors are still reluctant to enter the mortgage market after 

being burned by originator misrepresentations and fraud during 

the run-up to the financial crisis, conflict of interest problems conVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
41 

tinue to plague mortgage servicers, and just last month, one private mortgage insurer filed for bankruptcy. 

In the wake of these problems and uncertainty, FHA has taken 

on a larger market role. That role has helped the middle class. 

There are millions of working, creditworthy, middle-class borrowers 

who would not be able to buy a home or to refinance an existing 

mortgage if not for the availability of FHA mortgage insurance. 

FHA is singlehandedly holding up our mortgage market. And I 

must reiterate time and time again that we must support it. 

To be clear, I do oppose any attempt to use the current challenges facing FHA as an excuse to dismantle, defund or otherwise 

destabilize this critical housing program. Now is the time to 

strengthen FHA, not to weaken it. And I am more than willing to 

work with my friends on both sides of the aisle to find ways to 

make FHA stronger, better, and more effective in providing homeownership opportunities to all Americans. 

If I may continue, I would like to ask a few questions of the Secretary. 

The FHA has made changes to the downpayment requirements 

for borrowers with FICO scores of 579 and lower, 10 percent downpayment, and prohibits loans for borrowers with FICO scores below 

500. Has this change helped contribute to the strong economic 

value of the current book of business? Is the new premium structure better aligned with market conditions? 

Secretary DONOVAN. First of all, Congresswoman, thank you for 

all your work with us on the FHA bill that you talked about. We 

do continue to believe that many of those provisions that weren’t 

passed that were part of the bill are critical to allowing us to continue to increase enforcement and other steps. So thank you for 

your work on that. We look forward to continuing to partner with 

you on it. 

Specifically on your question, the answer is yes, we have seen a 

roughly two-thirds reduction in early payment defaults in that 

class of loans, and that really, I think, is a result of the underwriting changes that we talked about. 

Ms. WATERS. HUD set underwriting minimums that combine 

credit score and downpayment requirements to balance risk management, with broad access to housing credit for borrowers who 

have historically met FHA credit quality standards. 

Could you comment on the impact this has had on FHA’s current 

book of business? 

Secretary DONOVAN. What we see is between the last 2 years, the 

actuary predicts about an $18 billion positive net worth for those 

two books of business, so $18 billion of benefit to the taxpayer from 

those two books. 

I would also say the work that we have done to look at what 

would happen if we removed the option for lower-risk borrowers to 

get higher LTV loans, we think we could lose as much as about 10 

percent of all the buyers last year. And that is the concern that we 

have in terms of risk to the housing recovery: If we were to restrict 

credit too much, it might actually perversely hurt the taxpayer by 

increasing the losses that we would see on loans that were made 

in 2008 and before that. 

42 

Dr. HAYWORTH [presiding]. May I have unanimous consent for 

another minute-and-a-half for the ranking member? Without objection, it is so ordered. 

Ms. WATERS. Thank you very much. 

Mr. Secretary, could you comment on the steps HUD has taken 

to increase enforcement of FHA lender policies, eliminate approval 

for loan correspondence, and increase net worth requirements for 

lenders wanting to underwrite FHA loans? 

Secretary DONOVAN. Absolutely. I think one of the first steps 

that we took was to really create a strong risk management team 

and culture at FHA, created the first-ever Chief Risk Officer position in the history of FHA. We also increased net worth requirements for lenders that hadn’t been increased in quite some time. 

We stepped up dramatically both the investigations that we were 

doing, the share of loans that we were reviewing, and consequently 

we have seen 4 times more lenders removed from the FHA rolls 

during the period of this Administration than in the entire 8 years 

of the prior Administration. And we have worked actively with our 

partners at the Department of Justice to bring cases against the 

worst offenders and have been successful in a number of those as 

well. 

Ms. WATERS. Thank you very much. I think you have done a 

great job, and, again, I appreciate all of the attention that we paid 

to FHA and the way that you perceive it even without all of the 

legislation that we would have liked to have had passed. 

I yield back the balance of my time. 

Secretary DONOVAN. Thank you. 

Dr. HAYWORTH. The Chair recognizes Mr. Hensarling for 5 minutes. 

Mr. HENSARLING. Thank you, Madam Chairwoman. 

Mr. Secretary, in the 2011 actuarial study that I guess was released last month, if I read it correctly, we have approximately $1.2 

billion in value supporting insurance in force of about $1.9 trillion 

on the single-family MMIF; is that correct? 

Secretary DONOVAN. It is actually not correct, Congressman. There is a total of $33.7 billion in reserves that are held against 

the book. That is actually the highest level of reserves in the history of FHA. And contrary to what was predicted last year, those 

total reserves actually— 

Mr. HENSARLING. I was talking about just the single-family. 

Secretary DONOVAN. This is single-family that I am focused on. 

I think you are focused on—there are two reserve accounts: the 

capital reserve account; and the financing account. The financing 

account is the piece that I believe that you are focused on, and that 

is only excess reserves that are—I am sorry, the capital reserve account is only excess reserves that are held above and beyond expected losses. So I think, and this is very important, the total cash 

reserves that we are holding against that book is a total of $33.7 

billion. 

Mr. HENSARLING. But the insurance in force, $1 trillion; is that 

correct? 

Secretary DONOVAN. It is over $1 trillion, that is correct. 

Mr. HENSARLING. Now, in that report I think, if I quote you correctly, ‘‘With economic net worth being very close to zero under the 

43 

base case forecast, the chance that future net losses on the current 

outstanding portfolio could exceed capital resources is close to 50 

percent.’’ I am under the impression that study was based upon 

June and July data; is that correct? 

Secretary DONOVAN. It was based on both predictions for house 

prices and the latest data as of June, that is correct. 

Mr. HENSARLING. And the serious delinquency rate has increased 

from June to September; is that correct? My data shows that we 

now have 50,000 more serious delinquent FHA loans in September 

as compared to June. 

Secretary DONOVAN. As the portfolio grows, obviously the number typically increases. As with, I think, all types of loans, there 

was a slight increase in the serious delinquency rate at the end of 

the summer. 

I would also say, though, home prices have performed better 

than expected since the June 30th predictions, given that home 

prices are the single most important factor in predicting the value 

of the fund; that it is likely that, in fact, the actuarial understates 

the capital reserves relative to what has happened since June 30th 

as a result. 

Mr. HENSARLING. So, Mr. Secretary, am I to assume you are 

more optimistic than the statement that was included? 

Secretary DONOVAN. Optimism is not something that I think is 

relevant here, frankly, given the scale of the capital reserves. This 

is a serious issue. There are serious risks to the fund. We need to 

take further steps to protect the taxpayer, and we will continue to 

do that. 

Mr. HENSARLING. You obviously have discretion, and I—one, let 

me say I appreciate the comments that you have made with respect 

to the conforming loan limits with respect to FHA and what I 

would view as mission creep. I understand, again, that you have 

the discretion to increase insurance premiums. I know it has been 

done once or twice. But I think now the annual premium for a 30- 

year loan with a 95 percent LTV is 1.15. I think statutorily, if I 

am correct, you have the authority to increase that to 1.5 and have 

chosen not to do so given the precarious state of the MMIF. Why 

have you chosen not to do that? 

Secretary DONOVAN. As I said in my testimony, that is something 

that we are actively looking at. Given that we have just gotten this 

actuarial review, we are actively evaluating that, and we expect in 

our 2013 budget proposal to propose additional steps. 

But I would say, Congressman, understand that the balance here 

is we are now charging the highest premiums in the history of 

FHA, and under any economic scenario, even the most dire, the actuary predicts that new loans that we are making will be profitable. And so while increasing fees for new borrowers is an option, 

it is also critically important, and we could use the help of the committee in further enhancing our enforcement, to maximize recoveries on old loans. Those are what are really driving the losses, 

2008 and prior books of business. And we must balance changes 

that we make to new loans with focusing on enforcement and recovering on the loans that really are causing the problem. 

We can’t go back and unmake those loans. Unfortunately, they 

were made. But we can do as much we possibly can to enforce and 

44 

recover on those loans, and that is where we need the help of the 

committee as well. 

Mr. HENSARLING. Thank you. 

I see my time has expired. 

Dr. HAYWORTH. The Chair recognizes Mr. Lynch for 5 minutes. 

Mr. LYNCH. Thank you, Madam Chairwoman. 

I want to thank the Secretary and Mrs. Galante for your patience 

and your willingness to help the committee with its work. 

The question for me is not whether FHA is needed. Of course, 

it is needed, and it will be needed for the foreseeable future. The 

question is whether or not FHA is operating in a way that will be 

sustainable without a massive taxpayer bailout. That is what I 

worry about. 

I have a very, very good report here that I am going to refer to. 

It is by the GAO Director of Financial Markets and Community Investment, Matt Scire. He is going to be on the second panel sometime this evening, I expect. But he does a very good job at this. 

And according to the GAO analysis, there is $4.7 billion in the endof-year balance in the fund’s capital reserve account. You are saying there is $33 billion in that account. 

Secretary DONOVAN. Actually, the $33.7 billion is combined between the financing account and the capital reserve account. 

Mr. LYNCH. But it is the one that is historically used in this committee and, when your predecessors came up, was always the capital reserve account. It is historic here. And based on earlier testimony by your predecessors, we have always gone by this account. 

And now you are saying we are combining it with another account? 

Secretary DONOVAN. It is two different things, Congressman. 

Mr. LYNCH. Because if we could deplete a $33 billion account, 

and you are not willing to say that we will not deplete a $33.7 billion account, then we have a serious problem, because you are saying that we are not going to go negative on this account. Are you 

talking about the $33 billion account, or are you talking about the 

$4.7 billion account? 

Secretary DONOVAN. The total cash reserves is what I was talking about. In other words, we are holding against expected losses 

those reserves. And I was just correcting the—I think I didn’t want 

to leave the impression with the committee that somehow we were 

only holding $4.7 billion against potential losses. 

Mr. LYNCH. So let us talk about the ratio of reserves, the capital 

reserve ratio. Statutorily, it is supposed to be 2 percent. You are 

at .24 percent; is that correct? 

Secretary DONOVAN. That is correct. 

Mr. LYNCH. Okay. Here is the problem. Under the Fed’s analysis 

when they give us the number of homes underwater, the number 

of homes in arrears, the number of homes in default and in foreclosure, they tell us a very different story than the actuary is telling us, that we are going to remain positive next year. And the actuary told us and this committee in 2008, 2009, and 2010 not to 

worry, things are going to be okay. And we watched that account 

go from $22 billion in 2007 to $4.7 billion at the end of 2010. 

What I am saying is, I know you are working as hard as you can 

to do the right thing here, no question about that. We are trying 

to do the same thing. Congress hates surprises. We hate surprises. 

45 

So when someone tells us things are going to be okay next year, 

and then you report once a year, this actuarial review, and we get 

terrible news that things aren’t all right, as a matter of fact, year 

after year it is getting worse and worse, that creates a tension between what we are expected to do by our constituents and what is 

happening here with FHA. 

So here is my problem. You are required under the National 

Housing Act to report this actuarial review, to conduct it and publish it once a year. My problem is that in this market, that is too 

long a period of time. We are going to get surprised one way or the 

other. Now, it may be a pleasant surprise, and it may sustain what 

the actuary is saying, or it may be something that is very negative 

and we are going to be in a calamitous situation. 

What I filed back in 2009 was to ask FHA to conduct their actuarial review every 6 months, semiannual, rather than waiting a 

full year and we don’t have time to react, and we get terrible news 

and it puts us at a real disadvantage here in Congress. 

I can understand when we had $22 billion in that account, we 

didn’t need a review every year. Now we are at .24 percent on that 

capital reserve ratio. We are at a precipitous point, and it might 

be the European debt crisis, the sovereign debt crisis there that 

tips this economy the wrong way, and then we are in trouble. 

I am just asking you, would you support an enhanced—the name 

of my bill was the Enhanced FHA Oversight Act, and what we are 

looking for is we are looking for this data— 

Dr. HAYWORTH. The gentleman’s time has expired. 

Mr. LYNCH. We are looking for the data twice a year rather than 

just once a year. Would you support that? 

Secretary DONOVAN. Congressman, first of all, let me just say I 

don’t think you have heard me here say today that you don’t need 

to worry that everything is going to be fine. I have said consistently 

that we need to be vigilant because none of us can predict where 

home prices are going to go— 

Mr. LYNCH. Exactly. So what I am saying is if we get the information every 6 months instead of once a year— 

Secretary DONOVAN. Look, it is up to the committee to decide and 

the Congress to decide what the legal requirements are. What I 

will tell you is we are running these numbers far more than annually. We are running them on a regular basis— 

Mr. LYNCH. Then, there should be no problem with giving us— 

Dr. HAYWORTH. The gentleman’s time has expired. You can continue your questions in writing, sir. And I thank the Secretary for 

having remained with us past his hard stop of 12:30. 

I am calling on Mr. Stivers. The Chair recognizes Mr. Stivers of 

Ohio for 5 minutes. 

Mr. STIVERS. Thank you, Madam Chairwoman. Mr. Secretary, I 

am always worried being that my seniority is so low, that by the 

time I get to question you, we know you have been here a long 

time. So I appreciate you hanging in with us and I appreciate your 

candor today. 

We are all concerned about the actuarial report. I would like to 

ask you a couple of structural questions about FHA and then ask 

some questions about your five recommendations, if that is okay. 

46 

First, you referred to your Chief Risk Officer a little while ago, 

and that is a position that Congress allowed you to fill last year. 

And my understanding is that position was filled, and then the person has left. 

Has that position been filled? Is it filled currently? 

Secretary DONOVAN. And I apologize, Congressman, I do need to 

depart. But actually, our Chief Risk Officer has been promoted to 

a senior advisor to me directly. We have just brought on another 

senior advisor for risk. We have 15 positions that we filled in that 

office this year. So we are strongly working to fill out and complete 

that risk organization. 

Dr. HAYWORTH. And with thanks to the Secretary, Mrs. Galante 

will remain to answer further questions. 

Mr. STIVERS. Mrs. Galante, have you read the GAO report on 

risk mitigation? One of the things it says is that there is no comprehensive strategy on risk mitigation, and it calls for three specific actions to be taking place. In fact, it also says that the two 

important parts of the Agency, the single-family housing quality 

control activities and the Office of Risk Management activities, are 

still separate as of the date of this report. Has that changed since 

then? 

Mrs. GALANTE. Congressman, I have read the report, and I have 

commented on the report for the GAO. We generally think the 

GAO did a very good assessment of the progress that we have been 

making over the past couple of years integrating the risk office into 

the overall FHA operations. And so, we are working on a number 

of the recommendations that they had. Some of them were well in 

progress by the time the GAO report was done. 

Mr. STIVERS. And I would ask you to—I would say that some 

kind of comprehensive risk-mitigation strategy is really important, 

and I would ask you to relay to the Secretary who has left, that 

it is important and that you need to make it a top priority. When 

you don’t have a comprehensive risk-mitigation strategy, you are 

never—you are going to be playing Whac-A-Mole all the time, and 

it is just not smart unless you move in that direction. 

I do want to talk about some of the five solutions that the Secretary had listed in his testimony. Since last year, you have had 

the ability to raise loan limits, and you have done it a couple of 

times, but you have never tiered the rate, so you still have one 

rate. You don’t look at the risk of the customer; you don’t have a 

minimum number rate and look at the risk of a customer and go 

up further. Do you need further ability from Congress to do that? 

Because I don’t think you do. 

And one of the things the Secretary talked about that I really 

wanted to talk to him about is he talked about the conforming loan 

limits being higher than he wants them to be. He also has the ability to raise the fees on those mortgages, in particular above the old 

conforming loan limits in a tiered way, and even though he said 

those don’t raise risk, it makes a lot of sense to raise those limits 

to encourage the private market. 

Is that something that is under consideration? Because I have 

asked this question before, and it has always been under consideration, and nobody seems to do anything about tiering the fee increases. 

47 

Mrs. GALANTE. Again, just to be clear, you are talking about premium increases in our case? 

Mr. STIVERS. That is correct. 

Mrs. GALANTE. And the answer is all the options— 

Mr. STIVERS. I am talking about tiering premium increases. Are 

you seriously considering it to the point that you would actually do 

it? Because you have considered it apparently in the past. 

Mrs. GALANTE. I will just say we are—all the options are on the 

table, including some kind of tiering. I think the Secretary alluded 

to that. Particularly given the higher loan limit that we have, there 

are some opportunities there, and we are looking at them. 

Mr. STIVERS. Please tell us if you need further authority, because 

obviously you are limited to 1.5 percent. If you need more authority 

or want the ability to do more, let us know. And that is my final 

question: Do you require any congressional authority to take any 

of the five steps that you requested? It looks like you want more 

authority on lender termination, but I can’t tell if that is Congress 

that grants that to you, because, frankly, I am a freshman, and it 

is unclear to me, and I am not familiar with everything yet. I am 

still learning. 

Mrs. GALANTE. There are several provisions that were in the 

FHA reform bill that we would like that additional authority to 

seek indemnifications from certain types of lenders that we do not 

have the authority now. 

Mr. STIVERS. Can you answer in writing to me about the specific 

authorities you require from Congress, because it looks like my 

time has expired. I yield back. Thank you for the time today. 

Mrs. GALANTE. Absolutely. I am happy to do that. 

Dr. HAYWORTH. The Chair recognizes Mr. Scott of Georgia for 5 

minutes. 

Mr. SCOTT. Thank you very much. 

Just listening to the testimony, and just gathering in what we 

have heard today, it seems like HUD is—you are sort of caught in 

a catch-22. You have a situation where, as a result of your falling 

reserves in your capital fund, you probably will become more vulnerable to defaults. These defaults have to be covered because of 

the Federal guarantee that we offer to the lenders, they have to be 

covered, and that is done through the taxpayers. And then, in the 

final analysis, it means that if your funds are out, then Treasury 

has to step in. And at the same time, the Secretary has pointed out 

that the key, the real key, to turning this around and stopping the 

bleeding and the defaults is home counseling, homeowners counseling, and yet in April, this Congress slashed the money for you 

to provide the counseling; $88 million, slashed all of it. 

So when we look at this, there seems to be a mixed priority here 

in Congress. Given that, what impact has this slash of the $88 million had? Because I can tell you this from firsthand experience, I 

agree with the Secretary, the most critical weapon we have to turn 

all of this around is getting that counseling to the struggling homeowner. 

We forget how complex and complicated dealing with this whole 

issue is for your average homeowner. They refuse to answer the 1– 

800 number because a lot of them are scared, and when you don’t 

have accurate information and intelligence, you do nothing. And so, 

48 

when we had our homeowners’ event, being able to get the borrowers under one roof with the lenders under one roof, but I found 

that the key ingredient that helped us more than anything else 

was having those HUD counselors there. We found out, for example, having FHA there, and you had a HAMP program from Treasury, that if they qualified with the FHA program, then the banks 

immediately would come together with HAMP because they would 

support that. 

And so my question to you is, you, in September, in your attempt to make up for some of this, put in about $10 million in unspent 

funds from the previous year to be utilized for this home counseling 

program. But despite this move, you have expressed concerns over 

the gap in funding going forward for the 2011 period. So my question then is what level of funding would HUD actually need in 

order to operate your nonprofit housing counseling program effective for this year coming up, 2012? 

Mrs. GALANTE. Thank you for raising the issue of housing counseling. We agree it is a very important one, and we were fortunate 

with the appropriations bill that just passed that some level of 

housing counseling dollars in the conference committee was approved for, I think it is $50 million. So we didn’t get the $88 million, but we were able to—or we are able to provide for Fiscal Year 

2012 some level of counseling dollars to housing counseling agencies. And I am actually really happy you asked that because the 

notice of funding availability for Fiscal Year 2012 was posted 

today. 

Mr. SCOTT. And so, it is a done deal. We have the money for 

2012? 

Mrs. GALANTE. We have some money for 2012, yes. 

Mr. SCOTT. Is it sufficient? 

Mrs. GALANTE. We originally asked for more, and we think we 

could effectively use more. And I would also say we are doing everything in our power to make sure that the housing counseling 

program, not just for the grantees, but for the administration of it, 

is as effective as it can be, and so we certainly could use additional 

funds for that program if they were available. 

Mr. SCOTT. And some HUD-approved housing counseling agencies have been inundated with new clients with every new Federal 

program. Wouldn’t it be beneficial if HUD could contract directly 

with these housing counseling agencies in assisting delinquent 

homeowners with qualifying mortgage workout solutions? 

Mrs. GALANTE. A number of these housing counseling agencies 

are directly helping borrowers get through their processes with 

servicers. They are very effective in helping people through the 

loan modification process. 

Dr. HAYWORTH. The gentleman’s time has expired. 

Oh, Mrs. Galante, I am sorry, do you want to finish that answer? 

Mrs. GALANTE. I think I finished. 

Dr. HAYWORTH. I thought so, too. 

The Chair recognizes Mrs. Biggert of Illinois for 5 minutes. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

And, Mrs. Galante, it is nice to see you here. 

Can you talk a little bit about the QM and the QRM rules? As 

they are being currently promulgated by the regulators, do they 

49 

have the potential to drive more business to the FHA at the exclusion of the private market, or will it—might the private market be 

able to increase in this area? 

Mrs. GALANTE. I think, as we have discussed on some prior occasions, the QRM rules still in process, multiple Federal agencies 

looking at what it will be. One of the aspects that was in the proposed QRM rule was higher retention levels for loans with higher 

downpayments, and there is a concern that will drive more business to the FHA. 

Obviously, we don’t know what the rule is going to be, so we 

don’t know what the ultimate impact will be. But we are concerned 

and are monitoring that as we are part of the discussions on QRM. 

Mrs. BIGGERT. Would there be anything that would be put in 

there that could ensure that the private market will have access, 

or is it just because of the way that they are drawn? 

Mrs. GALANTE. Again, I am not close enough to all of the negotiations on the QRM negotiations on what is ultimately going to come 

out, so I think it is difficult for me to answer that. 

Mrs. BIGGERT. And then, FHA has estimated that the capital reserve fund could withstand an additional decline in house prices, 

and talk about 4 percent beyond the baseline decline, without experiencing a negative capital situation. Does that mean that a decline 

in excess of 4 percent would result perhaps in a taxpayer-funded 

bailout of FHA? Would you need more money? 

Mrs. GALANTE. I appreciate that question, and the answer is this: 

Without any other kinds of policy changes, with no premium increases, if house prices again got to a much worse point than they 

are today, or than we project they will be today, then there will 

be—there is a possibility that we would need some additional support. But we are doing everything in our—and that is part of this 

five-point plan we are talking about. We are going to do everything 

in our power to look at actions that we can take to ensure that we 

avoid that situation. 

Mrs. BIGGERT. Thank you. 

And I think most of my other questions have already been asked, 

so I will yield back. 

Dr. HAYWORTH. The chairman recognizes Mr. Green from Texas 

for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. 

I thank the witness for staying with us, and I would like to explore a line of questioning that will help us better understand what 

FHA has done and continues to do with the economy. 

Let us start with loan originations. These FHA loans, tell us 

quickly, please, where—meaning in what facility—are most of them 

originated? Would that be a bank? 

Mrs. GALANTE. Yes. So, again, FHA is insurance, and private 

lenders are actually the ones that are originating the FHA loans. 

Mr. GREEN. Now, most of them today are originated with banks; 

is this correct? 

Mrs. GALANTE. Yes. There are financial institutions; banks are 

certainly part of it. 

Mr. GREEN. So banks benefit from it. Banks don’t do this for free, 

they do it for a fee, true? 

Mrs. GALANTE. Certainly. Yes. 

50 

Mr. GREEN. A loan-origination fee? 

Mrs. GALANTE. Certainly, yes. 

Mr. GREEN. And banks then hire people who do this type of 

work? 

Mrs. GALANTE. Correct. 

Mr. GREEN. My point is that there is a broader impact on the 

economy than just the person buying the home. The banks benefit; 

REALTORS® benefit because REALTORS® help persons buy 

homes. They assist with the homebuying process. Purveyors of 

products, they benefit when a home is built. And, by the way, 

builders benefit because they will build more homes if homes are 

selling. The purveyors of products, washing machines, and dryers, 

and stoves and carpet, all of these things go into homes, they benefit. The benefits go far beyond the simple purchase of the home. 

That is—and actually not the genesis of the process, because the 

builder constructed the home understanding that there was a market for it to be sold in. And then, of course, we have the manufacturers of products that benefit. 

So at a time when we need this countercyclical force, FHA is 

serving a meaningful, needed purpose. It not only helps us with 

selling the home, but the home becomes so important to other industries associated with the homebuying process and with the construction of the home. 

FHA is, in my opinion, an entity that, if it did not exist, we 

would probably try to create it or something similar to it, because 

it did not come into existence on a whim. There were some severe 

problems that we were contending with in the 1930s, and FHA was 

produced and gave us this exotic product known as a 30-year loan. 

I think we can attribute that to FHA, because at the time a 30- 

year loan was anathema, it was not commonplace; it is something 

that we have now. And we think little of the notion of getting one, 

but at one time it was very difficult to get a 30-year loan, if not 

impossible, because you had big balloons, and you had to refinance, 

and people of little means or modest means, middle-income Americans, they didn’t get homes to the extent that they do today. So 

FHA serves a meaningful purpose. 

Do you have empirical evidence to support the actual impact that 

you have had in the area of homes being sold by REALTORS®, the 

impact on builders, the impact on manufacturing, the impact that 

goes beyond the simple purchase of the home, which is important; 

but do you have empirical data that deals with those other industries and how they are impacted? 

Mrs. GALANTE. That data certainly exists. I don’t have the multiplier effect specifically in front of me, but absolutely there is no 

doubt that what you described is the case, and many of the data 

support that. I know for new construction, for example, you could 

essentially assume long term, a certain number of jobs per house 

built. 

So there is no doubt that there are many, many industries involved in providing jobs and economic benefit to communities as 

part of not just homeownership or new home purchase, but also 

just as a matter of refinancing. You can put additional money in 

people’s pockets if you refinance at today’s low interest rates, for 

51 

example. And that also puts more money in people’s pockets to 

spend on needed goods and services. 

Mr. GREEN. With my last 5 seconds, let me just say quickly that 

this service that is rendered has helped to keep unemployment that 

is high from being even higher, because if we didn’t have you with 

this 56 percent of first-time homebuyers— 

Dr. HAYWORTH. The gentleman’s time has expired. 

Mr. GREEN. Thank you, Madam Chairwoman. I am grateful. 

Thank you. 

Dr. HAYWORTH. The Chair recognizes Mr. Cleaver for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Mrs. Galante, I am in and out, and I actually hope somebody already raised this issue, because I think it is extremely pertinent to 

this conversation. 

One of the former Chairs of this committee, Henry Gonzalez 

helped create the Cranston-Gonzalez National Affordable Housing 

Act. And they created this, the 2 percent capital reserve ratio, and 

it was designed to strengthen the firm. 

One of the things that has not been discussed here today, a lot 

has been said about the capital ratio being below 2 percent, and 

so one of my pains is that many of my colleagues, perhaps on both 

sides, are not aware of the fact that there is a separate cash fund, 

and it was put in place to address the unexpected losses in the 

MMI Fund. I think that is maybe $33 billion? 

Mrs. GALANTE. That is correct. 

Mr. CLEAVER. If everything I am saying is close to correct—even 

correct it further if it needs correction—but what I am interested 

in is that fund is growing, and if that is true, then maybe this committee could benefit from having a contextual discussion from you 

about this, because I see them as inextricably connected, and we 

have not connected it in this discussion today. 

Mrs. GALANTE. Yes. So again— 

Mr. CLEAVER. And correct me gently. 

Mrs. GALANTE. This is complicated, and it is easy for people to 

mix things up in this case, but I just want to say again, total capital resources available to FHA today is the $33.7 billion, which 

consists of a financing account which is where we pay our claims 

out of, where we, so to speak, transfer funds into to actually pay 

expected claims. 

The capital reserve account is the additional account, but it is 

part of that $33.7 billion, but it is a piece that is specifically supposed to be for unexpected claims above and beyond the expected 

ones that we transfer into the financing account. 

So that is the total capital resources available to FHA today. 

And the capital reserve ratio is actually based on yet another calculation of the total insurance in force and the expected economic 

value, so of that—of the book of business and the—minus the potential claims over time. So it is kind of two different calculations 

that you have to keep in mind. 

Mr. CLEAVER. But we have more funds there today than we had 

last year at this time. 

Mrs. GALANTE. That is correct. 

Mr. CLEAVER. That is so relevant to the discussion. I find it painful that my colleagues were not able to get that information out. 

52 

I actually have no other questions, but it would be my hope that 

somehow we are able to get some kind of discussion or some information to Members about Gonzalez-Cranston, or is it CranstonGonzalez? 

Mrs. GALANTE. Cranston-Gonzalez. 

Mr. CLEAVER. I apologize to Mr. Cranston, but I do think it is 

relevant, and we need to get some information out. Is there any— 

do you have any ideas on how we can get members of this committee aware? 

Mrs. GALANTE. Again, we are happy to continue to have conversations, have individual meetings, have dialogues, and work sessions. We do produce the annual report to Congress. We also 

produce quarterly reports that are delivered that go into some pretty good detail. 

Mr. CLEAVER. Do you think Members are reading those? 

Never mind. I was speaking out of turn. 

Dr. HAYWORTH. The gentleman’s time has expired. 

The Chair would like to thank Mrs. Galante for remaining with 

us, and with that, 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 their responses in the record. 

Mrs. BIGGERT [presiding] The Chair now calls the second panel. 

I would like to welcome the second panel and thank you for your 

patience. I don’t think we expected that to go quite that long. But 

we will start right away. And I would like to introduce the panel: 

Mr. Matthew Scire, Director of Financial Markets and Community 

Investment, U.S. Government Accountability Office; Dr. Andrew 

Caplin, professor of economics, Department of Economics, New 

York University; Mr. Henry Cunningham, Jr., CMB, president and 

CEO of Cunningham and Company, on behalf of the Mortgage 

Bankers Association; Mr. Patrick Sinks, president and chief operating officer of the Mortgage Guaranty Insurance Corporation, on 

behalf of the Mortgage Insurance Companies of America; Mr. Moe 

Veissi, 2012 president, National Association of REALTORS®; and 

Ms. Sarah Rosen Wartell, executive vice president, Center for 

American Progress Action Fund. 

And thank you all for being here. Without objection, your written 

statements will be made a part of the record, and you will be recognized for a 5-minute summary of your testimony. We will start 

with Mr. Scire. You are recognized for 5 minutes. 

STATEMENT OF MATTHEW J. SCIRE, DIRECTOR OF FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SCIRE. Thank you. Madam Chairwoman, and members of the 

committee, thank you for the opportunity to be here today to discuss FHA’s mortgage insurance program. Since 1934, FHA has 

been an important player in the mortgage market, especially for 

first-time home buyers. FHA insures these loans under its Mutual 

Mortgage Insurance Fund. Recently HUD released the results of its 

latest independent actuarial review finding that the capital ratio 

used to measure the financial soundness of the fund had declined 

53 

to 0.24 percent, well below the statutory minimum of 2 percent. 

This is the third consecutive year that HUD reported not meeting 

the minimum capital ratio. 

Let me start by describing the reasons for the capital ratio’s 

steep decline since its peak in 2006. Put simply, the ratio declined 

because the economic value of the fund dropped sharply at the 

same time that the insurance-in-force grew. This rapid growth in 

the amount of all loans FHA insures was due to the growing demand for FHA mortgage insurance. By the end of 2011, FHA had 

outstanding insurance that was almost 4 times the level it had at 

the end of 2006. 

We previously reported that the sharp decline in the fund’s economic value was due to several factors, including more pessimistic 

forecasts for house prices which would result in higher claims and 

more pessimistic assumptions about losses. HUD attributes last 

year’s drop-off in its estimate of the fund’s economic value to further declines in home prices which resulted in higher than expected defaults, claims, and losses on claims. Also, HUD points to 

changes in the model itself. These include accounting for loans that 

had previously been seriously delinquent and assuming that loans 

likely affected by delays in the foreclosure process would result in 

claims in 2012. From a budgetary perspective, the worsening expectations for loan performance ultimately resulted in HUD recognizing a $10 billion increase in the reestimated cost of the program 

for 2009 and a similar amount for 2010. 

The capital reserve account has also seen declines in recent years. If this account, which now stands at $4.7 billion, were to be 

depleted, FHA would require additional Federal funds to cover its 

costs on outstanding insurance. 

Last month, we reported a number of challenges that FHA faces 

given its rapid growth. To its credit, FHA has taken some important steps. It raised premiums, tightened underwriting, raised requirements of its lenders, and put in place more risk-based approaches to manage its growing workload. Also, with approval of 

Congress, FHA created the Office of Risk Management and Regulatory Affairs to bring focus to risk assessment and management. 

However, the efforts of this office have been limited by staff resources and leadership turnover, and its efforts to assess risk and 

similar efforts by the Office of Single Family Housing have not 

been integrated. Here we think there is more that FHA can do to 

put in place an integrated and timely process for assessing and 

managing risks, particularly risks linked to its rapid growth. Further, the Office of Single Family Housing continues to face human 

capital challenges but has not done all it could to identify and put 

in place the skills and resources that it needs. Also, it can do more 

to plan for likely turnover in staff, a pressing challenge given that 

half of its headquarters staff and nearly two-thirds of its field staff 

are eligible to retire in the next 3 years. 

Returning to FHA’s fund, we continue to believe that FHA can 

do more to measure its financial condition. In particular, past reviews have relied on a single economic forecast to determine compliance with a 2 percent capital ratio requirement. However, this 

approach does not fully account for the variability in future house 

prices and interest rates and therefore may tend to overestimate 

54 

the fund’s value. Last year, we recommended that FHA use an alternate approach known as stochastic simulation to estimate the 

fund’s capital ratio for purposes of assessing compliance. This approach uses hundreds of different economic paths and offers the 

prospect of more reliably estimating the fund’s value. 

Twenty years ago when the 2 percent capital ratio was first mandated, the Congress required that FHA reach the 2 percent threshold in 10 years. Today, it may be appropriate for the Congress to 

specify the time period by which it expects FHA to return the capital ratio to 2 percent, taking into account FHA’s statutory operational goals and role in supporting the mortgage market. 

GAO is committed to providing Congress with effective oversight 

of the FHA program, including its efforts to rebuild the fund’s capital ratio. We look forward to supporting this committee’s efforts. 

This concludes my opening remarks. Thank you again for the opportunity to speak today. I will be glad to take any questions you 

may have. 

[The prepared statement of Mr. Scire can be found on page 105 

of the appendix.] 

Mrs. BIGGERT. Thank you so much. Dr. Caplin, you are recognized for 5 minutes. 

STATEMENT OF ANDREW CAPLIN, SILVER PROFESSOR AND 

PROFESSOR OF ECONOMICS, DEPARTMENT OF ECONOMICS, 

NEW YORK UNIVERSITY 

Mr. CAPLIN. I would like to thank you all for permitting me to 

testify regarding FHA’s Mutual Mortgage Insurance Fund. My 

message is somber and is intended as a call to arms. The situation 

is serious and the risks great. These risks are not being properly 

accounted for in the actuarial report. There is a far higher probability than currently projected that a large bill will be due taxpayers, that FHA-backed home buyers will face foreclosure, and 

that Congress will be called upon to significantly recapitalize 

FHA’s insurance fund. History will judge us poorly if we bury our 

heads in the sand. Time is most definitely not on our side. 

There are two crucial steps FHA can take to better account for 

the risks it faces and thereby safeguard its Mutual Mortgage Insurance Fund. The first is to fill a profound gap in the actuarial review. This makes it impossible currently to answer basic questions 

such as: one, what proportion of recent FHA-backed borrowers has 

already defaulted; two, how many such borrowers remain at serious risk of default; and three, how many of those who are still at 

risk are likely to ultimately default? 

The centrality of these questions is evident. The answers determine the risks that FHA programs pose to taxpayers and their role 

as guarantors. They determine the probability that FHA-backed 

homebuyers will face the trauma of foreclosure. They determine the 

probability the Congress will be asked to recapitalize FHA’s insurance fund. They determine the likely timing and size of any such 

request or requests. 

The fact is that the actuarial report does not answer these questions. Rather than projecting the success and failure of FHAbacked borrowers, it projects the performance of FHA-backed mortgages. This results in downward biased loss projections. Work initiVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
55 

ated some 2 years ago with Joe Tracy, Executive Vice President 

and Senior Advisor to the President of the Federal Reserve Bank 

of New York, suggests this bias may be highly significant. 

While it sounds like a narrow technical issue, the distinction between projecting borrower performance and projecting mortgage 

performance is of highest practical significance. In recent years, the 

FHA’s streamlined refinance program has been in high demand. In 

this program, FHA-backed mortgages can be refinanced to prevailing lower rates without any new underwriting. I regard this as 

an excellent program. The problem is not with the program but 

rather with the actuarial report which treats each such refinance 

as if it extinguished FHA’s insurance obligation. In truth, there is 

no cancellation of the underlying insurance and little in the way 

of additional fees to FHA. By lumping refinancing together with 

prepayments in which FHA’s insurance obligation is extinguished—for example, following a successful home sale—the actuarial report overestimates FHA’s past and future success rates. 

My ongoing work with Joe Tracy suggests that the resulting 

underestimation of losses is significant. In this period of falling 

rates and housing market trauma, streamlined refinancing appears 

to have been the most prevalent method of repayment. How could 

it be otherwise? There has been a significant incentive to refinance 

as rates on standard FHA-backed mortgages have tumbled. In the 

meantime, there has been little opportunity for successfully selling 

recently purchased homes and moving. If our preliminary findings 

on mortgage payment determinations hold up to further work, as 

we expect they will, default rates on recent FHA mortgages will 

stay at elevated levels for years after they are currently projected 

to decline. 

Joe’s and my slow progress on our research results from difficulties in gaining access to FHA data. This has forced us to seek and 

ultimately to find alternative data sources. FHA would have been 

far better served had we been able to contribute to their work on 

risk assessment and risk mitigation. Yet, IFE alone has access to 

FHA data. I propose that HUD instruct IFE immediately to reestimate the loss model linking together FHA mortgages that are refinanced one into another. By itself, asking for the model to be rerun 

is not enough. The current monopoly not only produces low transparency but also reduces our understanding of FHA risks. To allow 

this to continue is to invite tragedy. 

I propose, therefore, that Congress supply HUD with the additional resources it requires to make data available to outside researchers, including the Federal Reserve Bank of New York. Risk 

assessment will be dramatically enhanced once additional teams 

are encouraged to participate. The resulting improvements will 

help FHA retain its reputation for helping homebuyers while safeguarding taxpayers. 

The eyes of history are on us. It is time to act. 

[The prepared statement of Dr. Caplin can be found on page 72 

of the appendix.] 

Mrs. BIGGERT. Thank you so much. Mr. Cunningham, you are 

recognized for 5 minutes. 

56 

STATEMENT OF HENRY V. CUNNINGHAM, JR., CMB, PRESIDENT AND CEO, CUNNINGHAM AND COMPANY, ON BEHALF 

OF THE MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. CUNNINGHAM. Thank you, Madam Chairwoman, and members of the committee. 

FHA is at an important crossroads today. Since the onset of the 

financial crisis, FHA has played an important countercyclical role 

in our Nation’s mortgage market. Considered irrelevant just a few 

short years ago, the agency is now providing much needed liquidity 

during a period marked by the prolonged retreat of private capital. 

I think it is fair to say the housing recovery, although very fragile, 

would not have taken place without FHA. However, FHA singlefamily programs haven’t been immune to the historic disruptions 

that have roiled our markets and that is why we are here today. 

The actuarial report is sobering and calls for a fresh look at FHA’s 

fiscal health and the role it plays in our housing finance system. 

First, I want to take a few minutes to examine the steps this 

committee and FHA put in place that have allowed the agency to 

better manage its risk exposure. In 2008, Congress passed the 

Housing and Economic Recovery Act. That legislation terminated 

the failed seller-funded downpayment assistance programs that 

were responsible for the disproportionate level of FHA’s defaults. It 

also permitted FHA to raise premiums, a tool FHA has used twice 

in the last 2 years. During that period, FHA has taken other important administrative actions designed to protect its financial stability. 

These include the following: increasing downpayment requirements from 3.5 percent to 10 percent for less creditworthy borrowers; eliminating FHA’s approval of loan correspondence; raising 

lender net worth requirements; re-examining reverse mortgage 

policies; and finally, establishing the Office of Risk Management. 

MBA recommended these steps and commends HUD and FHA for 

taking these necessary measures in order to reduce taxpayer exposure and strengthen FHA for the long term. 

These measures are working. They are allowing FHA to weather 

the economic downturn and are putting it on track to raise its capital reserves above the 2 percent level mandated by the statute. 

The change in premiums alone has been largely credited by the actuaries for raising FHA’s total cash plus investments by $7.7 billion. 

While these steps have proven successful, FHA is not out of the 

woods. The actuarial report found nearly a 50 percent chance that 

FHA’s capital ratios could slip below zero, potentially requiring a 

capital infusion from the Treasury. Another recession or a drop in 

home prices could be a tipping point that causes greater losses for 

FHA. 

So what can we do to help FHA emerge healthy? We can start 

by getting the Qualified Residential Mortgage rule right. As it is 

currently proposed, the rule would require a 20 percent downpayment to obtain the QRM while FHA requires just a 3.5 percent 

downpayment. The QRM definition appears to conflict directly with 

the efforts by Congress and the Administration to reform the housing finance system. It would make it more difficult for private capVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
57 

ital to re-enter the housing finance market, and it would lead to 

overutilization of FHA’s programs. 

Another key component of putting private capital on the front 

lines is to revitalize a secondary mortgage market. MBA has put 

forward a suggested framework for a limited but clearly defined 

government role in the single family and multi-family mortgage 

markets. 

Our recommendations carefully balance the government’s ability 

to ensure liquidity with the need to protect taxpayers from the 

credit and interest rate risk associated with mortgage finance. It 

is a plan that promotes the return of private capital while limiting 

the government’s footprint in mortgage finance, helping the market 

function efficiently while protecting taxpayers. 

Madam Chairwoman, MBA believes the tools FHA has put in 

place, the strong leadership at HUD, and continued congressional 

focus on issues like the QRM in housing finance reform will help 

FHA emerge from this downturn and allow it to continue playing 

its important role in the mortgage markets. 

Thank you for the opportunity to testify today. 

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

page 75 of the appendix.] 

Mrs. BIGGERT. Thank you so much. 

Mr. Sinks, you are recognized for 5 minutes. 

STATEMENT OF PATRICK SINKS, PRESIDENT AND CHIEF OPERATING OFFICER, MORTGAGE GUARANTY INSURANCE 

CORPORATION, ON BEHALF OF THE MORTGAGE INSURANCE 

COMPANIES OF AMERICA (MICA) 

Mr. SINKS. Thank you, Madam Chairwoman. I am pleased to be 

here representing the Mortgage Insurance Companies of America 

to discuss FHA’s actuarial soundness. Since private mortgage insurance and FHA operate in similar markets historically, MICA 

has offered the industry’s insight into FHA’s financial condition 

and suggested ways to improve its operation. 

MICA was one of the few members of the housing sector which 

advocated for the 1990 reforms to FHA that mandated a 2 percent 

capital ratio in the actuarial report that is the subject of today’s 

hearings. 

I would like to make two basic points: first, FHA is on the brink 

of becoming a subsidized program and steps must be taken immediately to put it on track to financial soundness; and second, while 

FHA and private MI serve similar markets, the historic balance between the government and the private sector has been destabilized 

in recent years. The balance should be restored to bolster the FHA 

and allow private capital to serve the market to its full capacity. 

Returning the FHA to actuarial soundness and returning the FHA 

and the private sector to their historical norms are not mutually 

exclusive goals and in fact can be achieved in tandem. 

We believe the committee should focus on two significant points 

made by the actuarial study. They are as follows: First, although 

press reports have focused on the fact that the capital ratio of the 

entire Mutual Mortgage Insurance Fund is at 0.24 percent, the 

capital ratio for the traditional single family program is half that, 

0.12 percent. This is a ratio of 846 to 1. A small, much smaller reVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
58 

verse mortgage program is boosting the overall capital ratio of the 

FHA to the 0.24 percent. 

Second, according to the HUD report to Congress, within just a single-family program, there is only $1.2 billion of economic net 

worth supporting just over $1 trillion of insurance-in-force. This 

should be of concern since the FHA insures 100 percent of each 

loan so its potential loss exposure is the full $1 trillion. 

There are three reforms to FHA that would help return it to actuarial soundness. They are as follows: First, FHA must build capital and therefore it should raise its premium immediately. It can 

be done without new legislation. FHA should raise the annual premium to the maximum allowed under current law. Further, to ensure that the FHA provides a greater cushion for the taxpayer, it 

should be required to keep premiums at this higher level until the 

capital ratio returns to 2 percent and for several years thereafter. 

Second, by statute, FHA’s minimum downpayment is 3.5 percent, 

while private MIs are generally at 5 percent. In view of the market 

realities today of falling and stagnant home prices, FHA’s minimum downpayment requirements should be increased to 5 percent. 

Third, the way FHA’s loan limits are calculated skews them so 

they are as high as possible, exposing the FHA to greater loss. Two 

specific changes need to be implemented in this regard: One, since 

currently FHA uses house price data going back to 2008 rather 

than the most currently available data to get the area limit, FHA 

should use the most currently available house price data in setting 

its limits so that they are realistic given the change in house prices 

over time. 

Two, current law requires that the FHA limit for a county in an 

MSA is set at the median house price for the highest priced county 

within the entire MSA. The law should be changed so that FHA 

is no longer required to target its limits to the highest priced county within an MSA. 

Finally, part of the answer to ensuring the long-term viability of 

the FHA and providing protection to the taxpayer is to restore the 

balance of the FHA in the private sector to its historical norms. 

This has been a goal expressed by Secretary Donovan. One means 

of accomplishing this is to eliminate the fees charged by the GSEs 

on top of the MI premium. As noted in the HUD report to Congress, these fees made privately insured loans more expensive than 

comparable FHA loans. If the GSEs believe that they need more 

credit risk protection, they can require deeper MI coverage. This 

would be less expensive to the borrower and safer for the taxpayers. In fact, since the crisis began, the private MIs have paid 

$28 billion in claims and receivables to the GSEs, reducing taxpayer loss by 15 percent. In addition to restoring this balance, the 

FHA and the private MIs should work more closely together complementing each other’s strengths to ensure that the low downpayment market is served in an efficient and consistent manner. 

In conclusion, we believe that, like in 1990, FHA is at a crossroads and there are actionable steps Congress can take to put FHA 

on the road to actuarial soundness, allow the private sector to take 

a greater role, and further protect the taxpayer. 

Thank you very much. I will be happy to answer any questions. 

59 

[The prepared statement of Mr. Sinks can be found on page 125 

of the appendix.] 

Mrs. BIGGERT. Thank you, Mr. Sinks. Mr. Veissi, you are recognized for 5 minutes. 

STATEMENT OF MAURICE ‘‘MOE’’ VEISSI, 2012 PRESIDENT, 

NATIONAL ASSOCIATION OF REALTORS® (NAR) 

Mr. VEISSI. Thank you, Madam Chairwoman, and members of 

the committee. Thank you for the opportunity to offer our views on 

the importance of the Federal housing mortgage insurance program. My name is Moe Veissi. I am the 2012 president of the National Association of REALTORS®. But more importantly, I am a 

practicing real estate professional with more than 40 years experience as a REALTOR® and broker-owner of Veissi Associates in 

Miami, Florida. 

The 1.1 million members of the National Association of REALTORS® represent a broad array of housing and industry professionals who are committed to making the American Dream possible. In front of you is the written text. And I wanted to chat with 

you for my balance of the 5 minutes about FHA and how important 

it is to the housing community of America, not just from the financial and economic standpoint that we talk about but, more importantly, independently how it knits the fabric of the American community together. 

We have found and have evidence that folks who own a home 

live in their home longer, their marriages stay together longer, 

their kids get better educated, and they go on to profit from better 

jobs. There is significantly less time spent in front of the TV. There 

is less teen pregnancy. I can go on and on and on. Homeownership 

in America knits the fabric of America together. Anytime you do 

anything to diminish homeownership in America, you diminish the 

moral character and the promise of America to Americans today. 

Some of the things that weren’t talked about but questions 

asked, were, what happens when a home is sold? Let me tell you 

what happens when a home is sold in America. Number one, 

$60,000 of additional money is spent in the first 18 months from 

the time that home is closed. That is new roofs, landscaping, painting, furniture, carpeting. And every time two homes are sold, one 

brand-new job is created. So in America, with our prospects of 

about 4.5 million sales this year, we will generate over 2.2 million 

jobs. 

When FHA was first promulgated in 1934, it wasn’t a matter of 

doing something specifically for the mortgage market or even insuring mortgages. What it was thought of to be was an institution 

available to provide money for homeowners who didn’t have the 

money to repair homes during the Great Depression and afterwards. But what it really was thought to be was a job creation bill. 

And that was because they figured on that time, what we are going 

to do is we are going to create a few bucks for the folks who didn’t 

have the money to repair their homes. Now we will. And that is 

exactly how it came about. 

You diminish America’s opportunity in any capacity, especially 

today when we are just beginning to remove ourselves from one of 

the most horrendous housing situations that the country has ever 

60 

seen, and you do that at peril to destabilize the recovery of the 

American housing market. We anticipate that probably in 2012, we 

will see an appreciation rate of about 1.2 percent. After that, we 

will see a better appreciation rate. That comes from our economists 

at the National Association of REALTORS®. We also anticipate, frankly, that some of the areas in the country 

that were overbuilt—one of which was Miami with a tremendous 

amount of vertical development—may, according to our chief economist, see in 2012 one of the few places in America that will appreciate in double-digit figures for that year. And we have seen things 

in my travels across the country, the Phoenix-Scottsdale area and 

to the Las Vegas area, that REALTORS® there are beginning to 

tell us, the market is moving. It is not just the light at the end of 

the tunnel. It really is a diminishment of the existing inventory 

that exists today. And that is a great indicator. Do something to 

create a problem with that, diminish that, kill that, worry—not 

just the industry but the consumer and the prospects of America 

today to buy and create homeownership, and I think you diminish 

the economic prospect of America itself. Of the last eight recessions, six—six fully have come out because you have a robust and 

a very rounded and energetic real estate economy. 

In conclusion, NAR believes in the importance of the FHA mortgage and insurance program and believes that FHA shows tremendous leadership, strength, and vitality during this crisis. We wholeheartedly support the FHA program and we stand ready to work 

with Congress to enhance FHA’s mission, service, and purpose. 

Thanks for the opportunity. 

[The prepared statement of Mr. Veissi can be found on page 138 

of the appendix.] 

Mrs. BIGGERT. Thanks so much. Ms. Rosen, you are recognized 

for 5 minutes. 

STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE 

PRESIDENT, CENTER FOR AMERICAN PROGRESS ACTION 

FUND 

Ms. ROSEN WARTELL. Thank you, Madam Chairwoman. Let me 

start by reflecting that it is actually remarkable that FHA has not 

yet required any supplemental support given that yet so many 

other mortgage invested institutions have needed help. FHA has so 

far weathered the worst housing collapse arguably in history while 

serving primarily low- and moderate-income borrowers and playing 

a key countercyclical role that has prevented a more devastating 

overcorrection in the housing market. Without FHA, one could estimate at least a million homeowners might not have had access to 

mortgage credit in the wake of the crisis, which would have further 

chilled housing demand, depressed prices, and exacerbated the 

downturn. 

FHA’s ability to play this role is a function of its government insurance model where stronger books of business help cover losses 

from weaker periods. FHA faces significant losses ahead from loans 

that it insured in the years immediately prior to the financial crisis, especially a large number of loans with seller finance assistance. But its more recently insured loans are projected to have significant economic value. 

61 

The capital reserves of the MMI fund, beyond the expected 

losses, are nonetheless uncomfortably low. More than anything 

else, FHA’s solvency depends upon whether and the extent to 

which housing prices continue to fall in the next 2 years. As we 

have heard the actuaries say, absent further adjustments FHA’s 

capital reserves can likely withstand a further drop in house prices 

over the next 2 years, larger than most forecasts. But even if house 

prices continue to fall and the cushion is insufficient, FHA still has 

tools to bolster its reserves by further adjusting premiums or tightening underwriting. 

I would argue that FHA should focus on premiums and should 

consider charging higher premiums on higher value loans in its unusually large market at the current time. 

Low interest rates leave room for borrowers to absorb slightly 

higher fees without creating an affordability barrier to access. In 

contrast, higher underwriting standards, especially higher downpayment requirements on top of the currently already tightened 

standards, could make it difficult for a broader swath of homeowners to obtain mortgages, putting further downward pressure on 

housing demand, continued weakness in house prices and potentially creating further risk to the MMI fund. 

Other longer-term policies could also strengthen FHA. Congress 

should consider structural reforms such as that proposed by the bipartisan Millennial Housing Commission in 2002 to make FHA a 

more nimble but disciplined government corporation with independent oversight of its performance and serving underserved markets and meeting financial targets but with greater flexibility in 

product, design, and personnel to meet those needs. Risk sharing 

is another way that FHA could limit its risk exposure while improving its operations. Full insurance coverage is necessary at 

times to attract capital during downturns for untested products 

and to serve underserved markets. But the government may be 

able to reduce its risk and expand its markets by taking advantage 

of a risk partner’s assessment and mitigation capabilities. 

Finally, let me note that FHA’s role in the housing finance system of the future very much depends on how policymakers act on 

other policy issues, particularly how they wind down the Government-Sponsored Enterprises and build a new housing finance system in their place. If you strip all government backstop from the 

conforming market, FHA will likely be forced to maintain or even 

grow its current inflated market share and sustain its first loss 

risk. If the government maintains an explicit guarantee on select 

types of conforming mortgages, standing behind private capital and 

charges for it so that it can hold actuarially sound reserves against 

its guarantee, FHA would be able to return to a more manageable 

share of the market when prices stabilize. 

I also share the concerns expressed by Mr. Cunningham that the 

current QRM proposal could unnecessarily drive business and risk 

to FHA that could well be served by the private sector. 

In closing, I note that if the recent crisis taught us anything, it 

is the imperative to closely monitor the business practices and the 

actuarial health of our essential financial institutions, as this committee has appropriately chosen to do today. Congress and FHA ofVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
62 

ficials together have the tools available to ensure that FHA continues to play its essential role while protecting the taxpayers. 

Thank you. 

[The prepared statement of Ms. Rosen Wartell can be found on 

page 147 of the appendix.] 

Mrs. BIGGERT. Thank you so much. You all must be well-seasoned witnesses because you have all held right to the 5 minutes, 

and we really appreciate it this afternoon. 

I ask unanimous consent to enter into the record written testimony from Brian Chappelle of Potomac Partners LLC. Without objection, it is so ordered. 

We will now turn to questions from the Members. We will adhere 

to the 5 minutes. And I will recognize myself for 5 minutes. 

Mr. Caplin, you have concerns that FHA is understating their 

losses. Can you explain your concerns and to what extent FHA is 

understating their losses? 

Mr. CAPLIN. Yes, I am very concerned that they are understating 

it. It is to do with something that looks technical but is incredibly 

important today. The technical point is that they are measuring 

losses on mortgages. So when you hear about the 2009 book of 

business, that means the mortgages that have been refinanced into 

2009. That does not mean the people who first bought a home in 

2009. So when you hear that there is a much better book of business in 2009, that mixes together people who are purchasing new 

in 2009 and those who have refinanced into 2009. It is not surprising that those who couldn’t refinance are doing worse because 

there is a qualification criteria in order to refinance, which is that 

you have to be current. 

The big deal is that many terminations of mortgages that, in 

fact, do not cause cancelation of the FHA mortgage obligation are 

treated exactly the same as if they gave rise to a cancellation of 

that obligation. That means that there is an absolutely incorrect 

assessment of the risk of future default. It is simply flat out wrong. 

It is understated because every time anybody streamlined refinances, they get counted as a mortgage termination that ends 

FHA’s insurance obligation. It does not. 

Mrs. BIGGERT. Thank you so much for that. I appreciate it. 

Mr. Cunningham, do you think that the QRM definition adheres 

to the Administration’s GSE White Paper? 

Mr. CUNNINGHAM. I think that the QRM, as proposed, requires— 

I don’t think the White Paper anticipated or didn’t indicate any 

particular downpayment requirements. So I think that the White 

Paper didn’t anticipate that. I think the rule, as proposed, has gone 

beyond that. 

Mrs. BIGGERT. So it really just popped up after the White Paper 

came out? 

Mr. CUNNINGHAM. It was after the White Paper came out. The 

regulators collectively proposed the rule that you see before you 

today. 

Mrs. BIGGERT. Is the Mortgage Bankers Association concerned 

about the QRM? 

Mr. CUNNINGHAM. We are concerned about the QRM and are 

equally concerned about the QM. We think that both of those 

should be considered together. We actually think that the QM is 

63 

a better starting place. The concept of a borrower qualifying for a 

mortgage is certainly a way to promote sustainable homeownership. So I think that it is important to have a bright line test for 

qualifying a borrower. If you don’t have a bright line test, you are 

going to have lenders that are going to be more conservative, denying homeownership for a lot of potential homebuyers. 

Mrs. BIGGERT. Thank you. And Mr. Sinks, is it your belief that 

private capital stands ready to get into the market space when the 

government vacates? 

Mr. SINKS. Yes, it is. We believe we have the capacity to fulfill 

the space that will be left by the FHA. There is plenty of capital 

in the industry today. And we also know that—there is a lot of discussion about new entrants coming into the industry. I think once 

there is greater certainty around—as Mr. Cunningham said—the 

resolution of QRM and the resolution and the future of the GSEs, 

then we will most definitely see capital back to the MI industry 

and therefore we will have capacity. 

Mrs. BIGGERT. Thank you. Mr. Scire, are there private sector alternatives to the FHA insurance for homebuyers, particularly at 

the higher end of the market? Do we have the alternatives now? 

Or are there alternatives that should be? 

Mr. SCIRE. We haven’t really done the work to take a look at 

what that part of the market looks like, so I really can’t answer 

that question. I would be glad to look into it, though, for you. 

Mrs. BIGGERT. Okay. Thank you. 

Ms. Rosen Wartell—I am sorry. I think they left the second part 

of your name off up there. Fannie and Freddie had been bailed out 

by the taxpayer to the tune of over $180 million to date. What potential exposure do taxpayers have to bail out FHA? 

Ms. ROSEN WARTELL. As I mentioned in my testimony earlier, I 

think that there are steps that FHA has the ability to take that 

could well prevent any exposure. And if there ends up being shortterm exposure, much of that has the ability to be repaid from revenue that could be earned over time from these very strong books 

of business that FHA has. So as Secretary Donovan said, no one 

should be comfortable, given the limited cushion. 

Mrs. BIGGERT. Thank you. I am going to have to yield back. I am 

over my time. Thank you. Mr. Green from Texas, you are recognized for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. And I thank the 

witnesses for appearing. So as not to allow your testimony to be 

misconstrued at some later point in history, is it correct to say that 

not one of you has concluded that FHA should be eliminated? If 

you are in agreement with me, would you kindly extend a hand 

into the air? I know it is something that you might not ordinarily 

do at a hearing, but we do this in court with something called voir 

dire. So if you would, if you think that FHA has a meaningful role 

in the housing market, kindly raise a hand, please. 

All right. For the record, please let it reflect that all of the witnesses have concluded that FHA has a meaningful place in the 

housing market. 

If you think that FHA has been a benefit in stabilizing and helping with the recovery that has not been completed—I understand 

that we are not there—but do you agree that FHA has been a benVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00067 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
64 

efit in helping us to get through this downturn in the market in 

that it has acted as a countercyclical force? If you agree with this, 

would you kindly extend a hand into the air? 

Let the record reflect that all of the parties agree that FHA has 

been a countercyclical force in helping us with the recovery. 

Now, friends, I am doing this because I have been here long 

enough now to know that later on, there will probably be some talk 

of FHA going away. I don’t think that this is what your testimony 

was intended to convey. As a matter of fact, Mr. Veissi, your testimony showed the importance of FHA, which is what I attempted 

to do earlier as well. And also, it indicates the multiplier impact 

on jobs. A great number of jobs are created not by FHA itself but 

when houses are sold, you go beyond just the buyer and the seller 

to all of the various other industries that are associated with the 

selling of a home. 

Finally, let me ask this: The QRM, important. The QM, important. Do you have a number that you have given considerable 

thought to that you would like to share today? I don’t want to put 

you on the spot, Mr. Cunningham. But this appears to be an area 

where you have some degree of expertise. Where are you on the 

QRM? 

Mr. CUNNINGHAM. I am not sure I understand your question. 

Mr. GREEN. What percentage would you conclude would be a 

good number? 

Mr. CUNNINGHAM. As I indicated, I think honestly the QM, the 

Qualified Mortgage, is the better place to start. Focus not on hard 

guidelines that might be mandated or legislated that could necessitate change in the future but rather focus on the borrower, qualifying a borrower for the mortgage that they are applying for. 

Mr. GREEN. I am available to hear other comments because I 

may not have the opportunity—yes, Mr. Veissi, with the REALTORS®? 

Mr. VEISSI. I want to make sure that we understand that the 

downturn in the real estate—at least I understand the downturn 

in the real estate market was not because we produced a bad product or we had bad people buying. It was because we had horrible 

underwriting standards and significantly little oversight. You can 

take a look at a VA mortgage today with the lowest foreclosure rate 

across-the-board, and they require zero down. Look, the reality is, 

if you have a qualified individual who is willing to commit to make 

the payments and they are reasonably invested in that, that is exactly where you go. That is where you go. 

Mr. GREEN. As a matter of fact, there are some persons who cannot afford a downpayment but are paying rent that exceeds what 

a mortgage would be. And they would be a good risk. But the question is, how do you get to them in a systematic way, such that you 

don’t find yourself underwriting loans that may cost taxpayers 

some money in the future? 

Yes, Ms. Rosen? 

Ms. ROSEN WARTELL. May I comment on the QRM? I will note 

that the statute did not include a downpayment—it listed a numbers of factors as relevant to the characters of QRM exemption and 

it did not list downpayments. And there is a deep concern that by 

setting a particular downpayment threshold, you bifurcate the marVerDate Nov 24 2008 14:53 Jul 06, 2012 Jkt 072628 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\72628.TXT TERRIE
65 

ket and create less liquidity in one market, raising the prices and 

essentially diminishing availability for the borrowers who have 

those lower downpayment amounts which will drive business to 

FHA. So I would argue that almost regardless of the threshold, you 

will have that market bifurcation effect. 

Mr. GREEN. I thank all of you. My time has expired. I am one 

of those who is of the opinion that we can mend FHA, that it has 

a meaningful role. There is no need to move to some far extreme 

such that it will no longer be effective and in effect not exist. 

Mrs. BIGGERT. The gentleman’s time has expired. 

Mr. GREEN. And I thank you for being here today, witnesses. 

Mrs. BIGGERT. The gentleman from Florida, Mr. Posey, is recognized for 5 minutes. 

Mr. POSEY. Thank you, Madam Chairwoman. I would like to 

thank everyone on the panel. You are all very informative. I think 

you all brought some good information to us. There is not any of 

you who didn’t enlighten me significantly. 

Mr. Sinks, did I understand you to say that you think there currently exists a market sufficient to replace FHA if FHA was to vaporize tomorrow? 

Mr. SINKS. We are not advocating that the FHA vaporize, but we 

do believe that they have a role and if they return to their historical norm in terms of that role, there is enough private capital in 

the private MI industry to support the market. 

Mr. POSEY. Has it always been there? 

Mr. SINKS. Certainly, in recent times it has, yes. 

Mr. POSEY. Then why did they even go to FHA if there were private alternatives available? 

Mr. SINKS. I think it is a combination of factors. Back in 2007 

and 2008, the private industry lenders and mortgage insurers 

tightened up their underwriting guidelines, and the FHA was able 

to step in and pick up that part of the role. As time has moved on, 

one of the things we have experienced now, as I mentioned in my 

testimony, on the conventional loan side, which is the loans that 

go to the GSE, they have loan level price adjustments in their pricing. And as a result of that, the FHA becomes a better execution, 

so more consumers are going to FHA. In addition, the downpayment requirement, the difference of 3.5 percent at the FHA versus 

5 percent that is generally with the MIs— 

Mr. POSEY. Ah, so there is a difference. A downpayment does 

make a difference then? 

Mr. SINKS. Yes, sir. 

Mr. POSEY. So it doesn’t sound like really truly we have a market 

that is willing to step in and pick up at the more reasonable downpayment level than actually. 

Mr. SINKS. That is correct. 

Mr. POSEY. I thought I heard you say that right. And what you 

said apparently isn’t exactly what you meant. But thank you. 

Mr. Veissi, if the FHA’s more minimal downpayment program 

was eliminated, what do you think would happen to the market? 

We have people who are suggesting we raise FHA downpayments 

to 20 to 30 percent in an effort to make the loans more secure 

when, as you just mentioned, and an example I often use, VA has 

a 2.5 percent loss ratio, the lowest of anybody that I know of, and 

66 

most of their loans are zero downpayment. But should the FHA low 

downpayment program go away, what do you think the impact 

would be on the market? 

Mr. VEISSI. If we are talking the 20 percent down, we have done 

some statistical analysis. We figure that probably it would take the 

normal homeowner—the new first-time homebuyer somewhere between 9 and 14 years to save enough money to make that 20 percent downpayment. In the fragile recovery period that we are in 

today, you would literally devastate the real estate market by 

doing something like that. FHA has done an enormous amount of 

good for not just the real estate market today but for the first-time 

homebuyer in these last 4 or 5 years. About 75 percent of all firsttime homebuyers last year made that purchase through FHA. I can 

tell you because I do this every day, and I travel the country and 

speak to our people every day, that trying to extract a loan from 

a conventional bank is like trying to beat up a rock and get blood 

out of a turnip. It just ain’t happening. So unless there is another 

alternative way and we have beat this one to death, especially during these tight times, you are going to see the real estate recovery 

really stagnate. And that is enormously important to understand. 

Do that, and you really will wrench out the recovery and probably 

the economic recovery of this country. 

Mr. POSEY. Thank you. That is a good world perspective on it actually. Mr. Cunningham, your thoughts on the same thing? 

Mr. CUNNINGHAM. I agree with those comments exactly. I think 

that FHA has played an important part in our fragile housing recovery. I think it provides stability in the housing market, liquidity 

in the housing market. I think that the proposals for QRM, if we 

could eliminate the debt-to-income requirements and loan-to-value 

and focus on QM, I think that would be a significant move in the 

right direction. I think that it is very important for us to provide 

a government role in housing to provide liquidity in the marketplace. 

Mr. POSEY. So generally, the consensus, I think, is that we don’t 

agree with the concept that the best way to eliminate a large inventory of housing is to make it more difficult to buy them? 

Mr. CUNNINGHAM. Correct. 

Mr. POSEY. Thank you. Thank you, Madam Chairwoman. 

Mrs. BIGGERT. Thank you. The gentleman from North Carolina, 

Mr. McHenry, is recognized. 

Mr. MCHENRY. I just wanted to ask broadly—my colleague on 

the other side of the aisle asked a few broad questions of the panel. 

I just want to start by asking whether anyone on the panel would 

say that FHA having as large a role in the mortgage marketplace 

is a healthy thing. Would any of you volunteer to say that? Okay. 

All right. So we are not talking about—there is not a discussion on 

this committee about eliminating FHA. There is a discussion about 

fixing it. And you know some of us look at FHA and say, when 

FHA is playing such a large role in the mortgage marketplace, perhaps there is something severely wrong with the mortgage marketplace, right? Which everybody on the panel—I think you would 

think, obviously, right? It is sort of a reality here. So to Mr. Sinks, 

with the temporary conforming loan limits being raised, then October 1st, they went back down under law; and then this Congress 

67 

acted—I voted against this measure on the House Floor—I think 

it was bad policy to raise the loan limits back up. So we saw a 

month of activity when the loan limits went back down. Did you 

see the private sector filling in where FHA could no longer serve? 

Mr. SINKS. Yes. 

Mr. MCHENRY. Okay. That is a very elaborate answer. Fantastic. 

It is a wonderful answer. I love that. 

Mr. SINKS. If I may, the announcement that the loan levels are 

going to drop, typically what happens in the lending community is 

they will start making those adjustments prior to the effective 

date. So even though the effective date was October 1st, we were 

seeing lenders in August and September making those changes. So, 

it is a definitive yes. 

Mr. MCHENRY. So you saw the private capital filling in, right? 

Mr. SINKS. Yes. 

Mr. MCHENRY. And was that a healthy thing? Did you think that 

that was a positive? 

Mr. SINKS. Yes. We believe that was positive. 

Mr. MCHENRY. I ask this, I know it is a very simple and basic 

question, but there is a lot of debate here. We heard from Secretary 

Donovan. We have heard from the Administration. They said, it 

was a healthy thing that the loan limits went back down. Let me 

just ask broadly of the panel, is that a good thing, that the loan 

limits go back down for FHA? 

Mr. CUNNINGHAM. I would contend that it is not. And I will use 

North Carolina as an example. I have offices scattered across North 

Carolina. We have—and I have a loan officer in Charlotte who has 

been anxious about the FHA increase back to the old limit. And in 

Charlotte, that would mean increasing from $270,150 to $303,000. 

But that amount of increase, he has a potential three borrowers 

waiting in the wings on the FHA’s mortgagee letter that are proposing to buy a house that otherwise could not buy a house. 

Mr. MCHENRY. Why? Why couldn’t they buy it? 

Mr. CUNNINGHAM. Downpayment. 

Mr. MCHENRY. How much downpayment do they have? 

Mr. CUNNINGHAM. How much downpayment? I don’t know exactly how much they have. 

Mr. MCHENRY. Okay. So this is less about FHA, your example, 

than about the failure of the rest of the mortgage market? 

Mr. CUNNINGHAM. It is actually— 

Mr. MCHENRY. My time is limited, sir. So let me just go across 

the panel. 

The loan limits going back down, is that a better thing or a 

worse thing, in your opinion? If we could just go very briefly. I have 

1 minute. 

Mr. SCIRE. I think it is an appropriate thing for the Congress to 

weigh in on this as to what is the market segment in which it expects FHA to operate. 

Mr. MCHENRY. Okay. 

Mr. CAPLIN. The risk assessment is not at an adequate level to 

provide an answer. 

Mr. VEISSI. Anything that would impact a downpayment and condense the amount of prospective purchasers or the ability for them 

68 

to get mortgaging would devastate the real estate market, especially now. 

Mr. MCHENRY. Okay. 

Ms. ROSEN WARTELL. When there is not only availability of mortgage insurance but funding and capital for access that is provided 

to the secondary market, then FHA’s market share should be significantly smaller. 

Mr. MCHENRY. Yes. Okay. I appreciate your testimony and your 

answers on this. I think that the key thing to understand was that 

FHA and our fellow housing programs were intended for the least 

among us, not the greatest among us. And when FHA is stepping 

in, in very high home value areas and subsidizing very high-networth individuals, we are simply giving a subsidy to folks who 

could otherwise get lending elsewhere, not those who are at the 

margins who are struggling to get into a $100,000 or $200,000 

house. 

Mrs. BIGGERT. The gentleman’s time has expired. The gentleman 

from California, Mr. Sherman. 

We are approaching a vote and also another committee coming 

into this room. So this will be our last questioner. 

Mr. SHERMAN. Thank you. 

In reference to the gentleman from North Carolina, he comes 

from a State without a high-cost area in the State. And so, it is 

very easy for him to vote against a bill that would prevent a major 

recession from hitting Los Angeles. But I assure him that if a recession starts in Los Angeles, it will reach to North Carolina. 

Mr. MCHENRY. Would the gentleman yield? 

Mr. SHERMAN. 20 seconds. 

Mr. MCHENRY. I appreciate that. I certainly understand your 

perspective on it. But when we are talking about Federal policy, 

subsidizing a $500,000 house is very different than helping somebody who is trying to get— 

Mr. SHERMAN. You have never seen a $500,000 house in the San 

Fernando Valley. I assure you, it is smaller and the people who live 

in it are more working class than those in the $250,000 houses in 

much of North Carolina. And that is why having a law that distinguishes between your State and mine is necessary. And if you want 

to see every home in Los Angeles drop by $100,000, and think it 

won’t hit North Carolina, we are an interconnected economy. 

I will also point out that this increase, as temporary as it is, affecting only roughly 10 markets around the country, is not subsidizing the borrowers at over $625,000. Before this panel came in, 

we heard from the Secretary of HUD, who testified that the loans 

in amounts between $625,000 and $729,000 outperformed the other 

loans. They subsidize the FHA’s other work. So the people in my 

district are happy not to see a collapse in home prices and are 

happy to pay insurance premiums that help subsidize what goes on 

in North Carolina. 

Mr. Veissi, I think you already have it on the record. But if we 

define ‘‘qualifying residential mortgage’’ as requiring in all cases a 

20 percent downpayment, what happens to home prices nationwide? 

69 

Mr. VEISSI. We have the physical evidence that shows that you 

could affect home prices across-the-board as much as a 15 percent 

downturn. 

And I just want to comment for just a second. Real estate is local 

in nature. It is not across-the-board. You made great mention of 

the fact that prices in California are not the same as Sevierville, 

Tennessee, or Houston, Texas, or even Miami, Florida. And you 

have to be sensitive to the fact that real estate is uniquely different 

in location, from place to place. 

Mr. SHERMAN. So that would be location, location, and location 

being relevant to real estate? 

Mr. VEISSI. Yes. 

Mr. SHERMAN. And I would also add to your 15 percent comment, 

we heard from the earlier panel that if we saw anything over a 4, 

5, or 6 percent decline in home values in this country, that would 

cost FHA—would use up its reserves. And God knows what it does 

to Fannie and Freddie. But a 15 percent decline in home values nationwide would do more to increase the Federal deficit than anything I can think of. And I have been called a liberal Democrat, so 

I can think of a lot of things. 

The other comment I would make is that, like Mr. Veissi’s responses, if we could increase in the high-cost areas Fannie and 

Freddie, wouldn’t that open the door to private mortgage insurance 

taking some of the risk, diminishing the Federal risk, reducing 

FHA’s role, all the things that some of our colleagues are talking 

about? Not that I am not grateful for the FHA. But if we could do 

Fannie and Freddie? 

Mr. VEISSI. I think anytime you give private money real comfort 

in knowing that there exists parameters you are going to have 

them come back into the marketplace wholesale and be more competitive on that level. And then, FHA will take a much smaller portion of the marketplace. I think that goes without saying. Plus, 

what you heard from the testimony this morning was that the 

higher-cost loans had a lesser amount of foreclosure than those 

even in the smaller places. 

Mr. SHERMAN. We may have expensive homes, but we do pay our 

mortgages. And the final thing I want to point out is this idea that 

there was no harm, no foul. People prepared for this in high-cost 

areas, like the area I represent—the gentleman from North Carolina does not—and completed their transactions and their sales in 

the summer. They were ready to go for a few months. But if we 

had not gotten that higher FHA, you would have seen a spiraling 

down in prices. 

And for the record, Mr. Veissi is nodding. I yield back. 

Mrs. BIGGERT. Thank you. And just for the record, Mr. Scire, are 

there controls on how much money FHA can draw down from the 

Treasury? 

Mr. SCIRE. So if FHA were to use up the amounts that are in 

the capital reserve account, they would, in consultation with OMB, 

draw on permanent indefinite authority to make up whatever difference would be required to replenish what is needed for the financing account through the capital reserve account. So this permanent indefinite authority provides whatever appropriated dollars 

70 

might be needed in order to make the capital reserve account 

whole. 

Mrs. BIGGERT. So there is no limit? 

Mr. SCIRE. No. 

Mrs. BIGGERT. Thank you. 

The Chair notes that some Members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

Again, thank you. Thank you for your patience, and thank you 

for being here. You have been very helpful, I think, in bringing 

your testimony to us, and we thank you so much. And with that, 

this hearing is adjourned. 

[Whereupon, at 2:08 p.m., the hearing was adjourned.] 

(71) 

A P P E N D I X 

December 1, 2011 

72 


72628.001
73 


72628.002
74 


72628.003
75 


72628.004
76 


72628.005
77 


72628.006
78 


72628.007
79 


72628.008
80 


72628.009
81 


72628.010
82 


72628.011
83 


72628.012
84 


72628.013
85 


72628.014
86 


72628.015
87 


72628.016
88 


72628.017
89 


72628.018
90 


72628.019
91 


72628.020
92 


72628.021
93 


72628.022
94 


72628.023
95 


72628.024
96 


72628.025
97 


72628.026
98 


72628.027
99 


72628.028
100 


72628.029
101 


72628.030
102 


72628.031
103 


72628.032
104 


72628.033
105 


72628.034
106 


72628.035
107 


72628.036
108 


72628.037
109 


72628.038
110 


72628.039
111 


72628.040
112 


72628.041
113 


72628.042
114 


72628.043
115 


72628.044
116 


72628.045
117 


72628.046
118 


72628.047
119 


72628.048
120 


72628.049
121 


72628.050
122 


72628.051
123 


72628.052
124 


72628.053
125 


72628.054
126 


72628.055
127 


72628.056
128 


72628.057
129 


72628.058
130 


72628.059
131 


72628.060
132 


72628.061
133 


72628.062
134 


72628.063
135 


72628.064
136 


72628.065
137 


72628.066
138 


72628.067
139 


72628.068
140 


72628.069
141 


72628.070
142 


72628.071
143 


72628.072
144 


72628.073
145 


72628.074
146 


72628.075
147 


72628.076
148 


72628.077
149 


72628.078
150 


72628.079
151 


72628.080
152 


72628.081
153 


72628.082
154 


72628.083
155 


72628.084
156 


72628.085
157 


72628.086
158 


72628.087
159 


72628.088
160 


72628.089
161 


72628.090
162 


72628.091
163 


72628.092
164 


72628.093
165 


72628.094
166 


72628.095
167 


72628.096
168 


72628.097
169 


72628.098
170 


72628.099
171 


72628.100
172 


72628.101
173 


72628.102
174 


72628.103