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36–818 PDF 2007

THE EXPANDING AMERICAN HOMEOWNERSHIP

ACT OF 2007: H.R. 1852 AND RELATED

FHA MODERNIZATION ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 19, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–23

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MARSHA BLACKBURN, Tennessee 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin, 

ALBIO SIRES, New Jersey 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BARNEY FRANK, Massachusetts 

JUDY BIGGERT, Illinois 

STEVAN PEARCE, New Mexico 

PETER T. KING, New York 

PAUL E. GILLMOR, Ohio 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

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C O N T E N T S 

Page 

Hearing held on: 

April 19, 2007 ................................................................................................... 1

Appendix: 

April 19, 2007 ................................................................................................... 37

WITNESSES 

THURSDAY, APRIL 19, 2007

Diaz, Lautaro ‘‘Lot’’, Vice President, Community Development, National 

Council of La Raza ............................................................................................... 25

Harrison, Iona C., GRI, National Association of Realtors .................................... 23

Killmer, William P., Group Executive Vice President for Advocacy, National 

Association of Home Builders ............................................................................. 30

Montgomery, Hon. Brian D., Assistant Secretary for Housing, Federal Housing Commissioner, U.S. Department of Housing and Urban Development .... 8

Robbins, John M., CMB, Chairman, Mortgage Bankers Association .................. 27

Smith, Ed, Jr., Chairman, CAMB Government Affairs Committee, Chief Executive Officer, Plaza Financial Group, California Association of Mortgage 

Brokers .................................................................................................................. 28

APPENDIX 

Prepared statements: 

Miller, Hon. Gary ............................................................................................. 38

Sires, Hon. Albio ............................................................................................... 41

Diaz, Lautaro ‘‘Lot’’ .......................................................................................... 43

Harrison, Iona C. .............................................................................................. 48

Killmer, William P. .......................................................................................... 56

Montgomery, Hon. Brian D. ............................................................................ 65

Robbins, John M. .............................................................................................. 71

Smith, Ed, Jr. ................................................................................................... 88

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Statement of AARP .......................................................................................... 96

Joint letter to Chairman Frank and Chairwoman Waters from ACORN, 

HomeFree-USA, Housing Partnership Network, and Mission of Peace ... 135

Statement of Peter H. Bell, President, National Reverse Mortgage Lenders Association .............................................................................................. 138

Statement of the Consumer Mortgage Coalition ........................................... 143

Letter from the National Association of Realtors to Hon. Alphonso Jackson, Secretary of HUD, dated April 9, 2007 ............................................... 150

Letter to Chairwoman Waters from the National Council of State Housing Agencies, dated April 18, 2007 .............................................................. 152

(1)

THE EXPANDING AMERICAN 

HOMEOWNERSHIP ACT OF 2007: 

H.R. 1852 AND RELATED 

FHA MODERNIZATION ISSUES 

Thursday, April 19, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10 a.m., in room 

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

Present: Representatives Waters, Cleaver, Green, Clay, Maloney, 

Sires, Ellison, Wilson; Biggert, Miller of California, Capito, Garrett, 

and Neugebauer. 

Also present: Representative Frank, Ex Officio. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. Today’s 

hearing is entitled, ‘‘The Expanding American Homeownership Act 

of 2007: H.R. 1852 and Related FHA Modernization Issues.’’ Without objection, all members’ opening statements will be made a part 

of the record. 

We will be recognizing subcommittee chairs and ranking members for, I think, 5 minutes each, and there will be an additional 

5 minutes that will be given for recognition on both sides of the 

aisle. With that, I will recognize myself for the first 5 minutes. 

Good morning, ladies and gentlemen. I want to thank Ranking 

Member Biggert for joining with me to hold today’s hearing. Many 

members are anxious to see this bill move through the House, and 

I certainly am one of them. 

The bill introduced by me, and cosponsored by Chairman Frank, 

will revitalize the Federal Housing Administration (FHA), once the 

preeminent provider of mortgage insurance to low- and moderateincome families in the country. I believe that this FHA legislation 

is critically important to bringing stability to the mortgage lending 

market, particularly at the lower spectrum of the market. 

Everyone now knows about the perils of the subprime lending 

market with the dramatic rise in foreclosures and estimates that 

as many as 2 million mortgage loan defaults are predicted by year’s 

end. So the sooner we can reinvent FHA to become a viable FHA, 

the sooner we will be able to assist many low- and moderate-income borrowers who are left with few safe and viable mortgage opVerDate 0ct 09 2002 19:19 Aug 03, 2007 Jkt 036818 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\36818.TXT HFIN PsN: TERRIE
2

tions. Refinancing, reverse mortgages, and other FHA products are 

all important. 

Specifically, H.R. 1852 will facilitate the modernization of FHA 

and bring it into the realities of the housing market in the 21st 

century by: increasing loan limits in high-cost areas of the country 

like California, where the median price of a home in Los Angeles 

is $513,000, and New York and Massachusetts, where FHA has 

been driven from the market forcing many borrowers to turn to 

high-cost financing and other non-traditional loan products; authorizing zero down and lower down payment FHA loans for home buyers who could not otherwise make the down payment required 

under current FHA rules to make FHA more consistent with other 

private sector loan products, especially where the borrower has a 

strong record and credit history; directing FHA to underwrite to 

borrowers with higher credit risks than FHA currently serves that 

are still credit worthy to take out a mortgage loan but who have 

been otherwise driven into the subprime loan market with pre-payment penalties, ARMs, and ultimately unbearable mortgage interest rates that are leading to foreclosures; and permanently eliminating the current statutory volume cap on FHA reverse mortgage 

loans to permit FHA to meet the growing needs of home equity rich 

and cash poor seniors and Baby Boomers who will need help paying bills or home costs. 

In addition, H.R. 1852 includes a number of important changes 

to the FHA bill that passed the House last year. First, it eliminates 

the fee increases from last year’s bill for borrower who continue to 

make a down payment, scaling back the maximum up-front fee 

from 3 percent to 2.25 percent and the maximum annual fee from 

2.2 percent to .55 percent. These reductions will reduce FHA closing cost premiums for a hypothetical family buying a $300,000 

home by $2,250 in annual fees over a 5-year period of $20,000 compared to last year’s bill. 

The bill also adds a number of home buyer protections not included in last year’s bill for families taking out riskier zero-down 

payment loans and for borrowers who represent a higher credit 

risk. The bill gives HUD the authority to require pre-purchase 

counseling for riskier borrowers, requires a number of disclosures 

spelling out the costs and risk of zero down and lower down payment loans, and provides the borrower opt-in to receive notice of 

availability of counseling in the event a borrower falls behind in 

their loan payments. FHA has very strong loss mitigation measures in place so the borrower protections in the bill are a plus that 

are widely supported. 

Finally, the bill includes a provision authorizing loan limit increases for FHA rental housing loans in high cost areas where current FHA loan limits do not keep pace with local construction costs. 

I have said over and over again that there is an affordable housing 

crisis in America. I believe that the FHA modernization bill points 

us in the direction of a solution to help meet the housing needs of 

many Americans who still want to achieve the status of homeowner. 

Thank you. I will now recognize the ranking member, Mrs. 

Biggert, for 5 minutes. 

3

Mrs. BIGGERT. Thank you, Chairwoman Waters, and thank you 

for holding this hearing today. I would like to welcome today’s witnesses, many of whom are not new to the subject matter, and I 

look forward to hearing their views. I am especially eager to hear 

from Assistant Secretary Brian Montgomery about how the FHA 

program may be of assistance in this current mortgage foreclosure 

crisis. We heard from him on this subject on Tuesday as well. 

Clearly, the FHA has a role to play in the solution to this country’s rising foreclosure rate. As Assistant Secretary Montgomery indicated in testimony before this committee and others, FHA is already assisting credit-worthy borrowers in need of loss mitigation 

and restructuring assistance. According to the testimony that he 

delivered at Tuesday’s hearing in 2006, FHA assisted 75,000 families by preventing foreclosure through its loss mitigation program. 

Moving forward, I am sure that Ms. Waters will agree with me 

that one of the most important things that this Congress can do as 

we search for ways to help those who have been harmed by the 

subprime market is to give FHA the tools it needs to be a viable 

alternative for first time and lower income borrowers. That is why 

this hearing on FHA modernization is both timely and critical. By 

modernizing FHA we can provide another alternative for low-income borrowers who may otherwise be forced into higher cost 

subprime loans or even predatory products. By moving quickly to 

modernize FHA, we can provide a safe alternative for hundreds of 

thousands of lower income credit-worthy borrowers looking to either purchase a new home or avoid foreclosure. 

It is true that FHA cannot help all homeowners who are in the 

red, but it can help a good portion of them. Last month, both 

Chairwoman Waters and I introduced legislation aimed at reforming the FHA program. The bill that I introduced, H.R. 1752, is virtually identical to H.R. 1521, which passed the House by an overwhelming vote of 415 to 7 on July 25, 2006. H.R. 1752 is the same 

as the bipartisan compromise that was agreed to by Chairwoman 

Waters, Chairman Frank, and then-Chairman Mike Oxley in the 

last Congress. Given the overwhelming vote of 450 to 7, I had 

hoped that we could introduce the same bipartisan FHA modernization bill and move it expeditiously to the House Floor. The 

bill that I introduced incorporates all of the bipartisan agreements 

that were reached last year regarding how risk-based pricing and 

lower down payment requirements should be implemented. While 

the Frank-Waters bill implements some risk-based pricing and lowered down payment requirements, I am concerned that it will limit 

the flexibility that the FHA needs to serve additional low-income 

borrowers or to respond to ever-changing market conditions. That 

lack of flexibility translates into fewer borrowers being eligible for 

FHA assistance under the Frank-Waters bill. 

Let me outline several of the differences between last year’s bill, 

which I again introduced this year, and the Frank-Waters bill. 

First, the Frank-Waters bill permits only first-time home buyers to 

participate in a new low and no down payment loan program. My 

bill allows any FHA-qualified borrower to participate in the new 

FHA low loan program. Second, the Frank-Waters bill authorizes 

the FHA to implement risk-based pricing but it leaves in place the 

current outdated premium caps of 2.25 percent up-front and 0.55 

4

percent annually. And the zero and lower down payment loans 

would have the higher caps. My concern is that these limits on premium caps will prevent FHA from serving riskier borrowers who 

could be prudently served by charging a slightly higher premium. 

With the flexibility to charge slightly higher premiums, FHA would 

be able to serve borrowers with the lower FICO scores who are currently being served only by the subprime market at very high interest rates. With FHA mortgage insurance, lenders will charge 

borrowers the market mortgage interest rate. Without FHA insurance, they have no choice but to turn the borrower away or to 

charge for a risk in an increased mortgage interest rate. 

Just like last year’s House-passed bill, my bill implements premium caps, and enables the FHA to reach down and serve riskier 

borrowers, but in a prudent manner. The up-front premium is limited to a maximum of 3.0 percent, and the annual premium to a 

maximum of 2.0 percent. 

Third, my legislation includes another bipartisan agreement 

reached last year, the automatic reduction of annual premiums to 

no more than 55 basis points for loans that remain active after 5 

years. Automatic premium reductions can be a good thing. They 

can reduce refinancing and perhaps some defaults and foreclosures 

as well. In contrast, the Franks-Waters bill requires the refund of 

excess up-front premiums charged to higher risk borrowers, those 

with FICO scores below 560. I am concerned that this provision 

could have unintended consequences of limiting the number of borrowers that could be served by the FHA program because it may 

require initial premiums to be even higher. The refund provision 

would also be very difficult to implement. It is inevitable in an insurance fund that lower risk borrowers will subsidize higher risk 

borrowers. Refunds of this nature undercut the concept of insurance and is the logical equivalent of a healthy person requiring a 

100 percent refund of his or her health insurance premiums or a 

driver who does not get into an accident demanding his car insurance back. 

If I could be yielded the 5 minutes, and then I will yield? 

Chairwoman WATERS. Without objection. 

Mrs. BIGGERT. Thank you. Finally, the most significant difference 

between the bill I introduced and the Frank-Waters FHA reform 

proposal is of greater concern to me and many of my colleagues and 

that is the inclusion of a provision that creates a funding place 

holder that envisions using FHA funds to support the creation of 

a national housing trust fund. While the other provisions that I 

have mentioned are the ones that represent significant differences 

between our introduced bills, using FHA program funds to create 

a housing trust fund is the most objectionable, and I believe that 

it is not an appropriate use of FHA funds. Taking funds out of FHA 

and using them for a purpose unrelated to its core mission would 

threaten the solvency of the FHA fund and its ability to pay out 

on insurance claims. 

There is general agreement on the need for FHA modernization 

legislation. Furthermore, there is no doubt that the FHA program 

can be an important tool for the lower income borrower. The legislation that passed the House last year and was supported, again 

by both Chairwoman Waters and Chairman Frank, would make 

5

FHA more efficient and competitive with subprime industry by decreasing premiums for borrowers, permitting no down payment 

loans, and increasing access to ownership. Removing the housing 

trust fund provision will allow us to work together on a bipartisan 

bill that can be moved expeditiously to the House Floor and that 

will receive overwhelming bipartisan support. We can even put it 

on the suspension calendar. The quicker we pass FHA reform in 

the House, the quicker we can send it to the Senate, and get it onto 

the President’s desk, and I think relief is needed now. 

I want to commend Chairwoman Waters for her timeless efforts 

last Congress to pass FHA reform legislation by such an overwhelming bipartisan vote, and I look forward to working together 

to again achieve this goal. Again, thank you for holding this important hearing, and I look forward to hearing the testimony today 

from our distinguished witnesses. 

And I will yield. How many minutes do I have left? 

Chairwoman WATERS. You have about 2 minutes. 

Mrs. BIGGERT. Okay, I will yield 1 minute to Mr. Miller and 1 

minute to Mr. Neugebauer. The gentleman from California. 

Mr. MILLER OF CALIFORNIA. Thank you. It is good to have you 

here today. We are looking at a situation in the marketplace where 

we need to utilize every tool we have available to provide options 

for people to acquire a home. In areas such as California, we have 

an FHA program that has been available for 70 years. And if you 

look at the drop in utilization in California because we are a high 

cost area, it is really stunning. In 2000, FHA insured 109,074 mortgages in California. In 2005, it was 51,037. In my district alone in 

2000, we had 7,000 mortgages. It dropped to 80. You are looking 

at a 99 percent drop in an area that arguably needs the benefit of 

an FHA program or a conforming program as much as any other 

State in the Nation does. In fact, in high cost areas it is much 

harder for people to get into—is my minute up? Thank you very 

much. 

Chairwoman WATERS. I think you have 1 additional minute, Mrs. 

Biggert. Who did you yield that to? 

Mrs. BIGGERT. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Well, thank you, Madam Chairwoman and 

Ranking Member Biggert. I think this is an important discussion 

we are having. We have been having a lot of discussions about 

subprime lending and making sure that we do not impact the marketplace with actions that we take here in Congress, certainly making FHA more relevant is a very important piece of policy that we 

are considering. Homeownership is at an all-time high. We need to 

continue to provide the ability for folks to do that, to experience the 

American dream. 

I am concerned about a couple of things, one in the new bill is 

I want to make sure that we make available, being able to participate in FHA programs a broader spectrum and making it less onerous for some of our mortgage brokers to participate in some of the 

requirements that we are putting on them. In our previous bill, we 

had some provisions in there to make it easier. And then the second piece of it is we need to make sure that this new program is 

actuarially sound. We do not need to be going down a road where 

we jeopardize the integrity of the FHA program. And one of the 

6

things that was mentioned is it looks like we are going down the 

road now of another extortion from an organization for money for 

purposes other than what that organization is proposed and chartered to do. And creating other funds and taking money out of FHA 

when we are embarking down a road of a new program, I think, 

is a very dangerous precedent. 

Thank you. 

Chairwoman WATERS. I recognize the gentleman from Massachusetts, Chairman Frank, for 5 minutes. 

The CHAIRMAN. Thank you, Madam Chairwoman. I work with 

my friend from Texas on a lot of issues, and there are a lot of areas 

where this committee can cooperate across party lines, but nowhere 

have the differences that do exist between the parties been made 

more clear than in his last statement when he described the effort 

by the gentlewoman from California and myself to provide more 

funding for affordable housing as ‘‘extortion.’’ The FHA is a Federal 

agency created by Federal law. And the notion that it is ‘‘extortion’’ 

to try to use some of the surplus funds it has been generating to 

help provide affordable housing greatly defines the difference between the parties. 

I noticed that the gentlewoman from Illinois—who temporarily 

had to leave and who has been a very constructive member also— 

said, ‘‘Well, we should not be using FHA funds for other purposes.’’ 

Maybe she missed this, but during the entire period of Republican 

majority rule, that is exactly what was happening. The FHA was 

producing surpluses which went into the general treasury, and 

they have been used to support such non-housing related issues as 

the war in Iraq, nuclear testing, or anything else the Federal Government does. This notion that money should not come from the 

FHA for other purposes is a very new one because the FHA has 

been a money maker for the rest of the Federal Government in the 

past. Now it is true that many of us—including the gentlewoman 

from California and I—believe that if the FHA continues to generate surpluses, and we certainly will guarantee that first claim on 

any monies goes to keep the FHA functioning, but the question is 

should the surpluses go into the general treasury and help offset 

everything else the Federal Government does, such as farm subsidies, the war in Iraq, bridges to nowhere, and all of those other 

purposes for which it was put, or should we target it towards affordable housing? 

The gentlewoman from Illinois also expressed surprise, and to 

some extent disappointment, that the gentlewoman from California 

and I have a different version of the bill than the one that passed 

last year. And the gentlewoman from Illinois correctly noted that 

last year the gentlewoman from California and I supported a different version of the bill but, again, maybe she forgot something 

happened in the interim: the election. The gentlewoman from California and I are strongly committed to trying to help homeownership, to bring down costs for housing in general, and to help the 

middle class, but also to do something about that very significant 

fraction of our population who are not adequately housed, and who 

that pay too much for housing. Last year we did the best we could, 

we were not in the majority. We were being constructive. In fact, 

I think you could say we were setting a good example for our 

7

friends. When you are in the minority, you recognize that you are 

not going to write the major pieces of the bill and you cooperate 

to get the best deal you can. That is what the gentlewoman from 

California and I did. I know there have been people who have been 

surprised that we have not lived up to their stereotypes and that 

we have, in fact, been cooperative and conciliatory given the circumstances. Things are different now. And there are a lot of things 

that the parties have in common, but we have always had the view 

that we should be reaching out to help people who are in economic 

distress and now that we represent the majority, we plan to do 

that. 

And let me talk specifically about the terms under which the 

FHA would be lending to people with more credit risk. Yes, the bill 

that we are supporting says that if you or someone with higher 

credit risk and a lower credit score borrows the money and diligently pays it back, you should not, in the end, be charged more 

by your own Federal Government than someone making 3 times as 

much money as you. That is the radical proposition which we are 

advocating. We recognize there is a risk, and we said, okay, there 

will be some higher up-front premiums. But we say that if you 

meet your obligations, if you work very hard and pay back what 

you owe, why should you pay more than somebody who makes far 

more money than you because other people in your situation previously defaulted? 

Now the gentlewoman said, ‘‘Well, that rule was strict, what is 

available?’’ No, only if you consider the higher credit risk people to 

be a closed pot. I, along with the gentlewoman from California, 

have been preaching, and I think finally we are going to win and 

we are going to admit California, Massachusetts, and New York to 

the Union. We are going to allow them to fully participate in Federal housing programs: FHA, Fannie Mae, and Freddie Mac. They 

have been somewhat excluded for some time. That will generate 

some revenues, and we intend to take some of the additional revenues generated within this set of programs and use them to make 

the radical proposition—that if you are of a higher credit risk and 

you borrow money and you get your mortgage insurance from the 

FHA and you pay back every penny you were supposed to, that you 

will not be charged more by your own Federal Government—true. 

That is the best thing we can do about the subprime market. 

And there was also a comparison to insurance. Well, this is the 

Federal Government. I do not think that the Federal Government 

ought to—I know there is a dispute about whether or not we 

should help the poor at the expense of the wealthy but is there 

really an argument that we should penalize lower income people by 

charging them more for exactly the same mortgage insurance as 

someone who makes 3 times as much because somebody else who 

makes the same amount they do did not pay it back? So, yes, that 

is what we are saying. We are saying that if the FHA is to generate surpluses, as it has for 12 years, rather than that money 

going for earmarks in the agricultural surpluses and wars and 

trips and other things, it should be recycled to some extent for affordable housing, which does help everybody as you add to housing. 

One of the problems we have had is a housing program whereby 

we have only done vouchers so we have added to the demand for 

8

housing without increasing the supply. And we also believe that in 

dealing with people in the subprime category, we should extend to 

them the ability to go to the FHA and be helped. And if they make 

their payments like anybody else, they should not be charged more 

than anybody else. 

I thank the gentlewoman for her leadership, which has been so 

strong in this area. 

Chairwoman WATERS. Thank you very much, Mr. Chairman. All 

time has been exhausted on both sides. We are going to move to 

our panel. On our first panel we have the Honorable Brian D. 

Montgomery, Assistant Secretary for Housing, Federal Housing 

Commissioner, U.S. Department of Housing and Urban Development. Welcome, Mr. Montgomery. 

STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, 

ASSISTANT SECRETARY FOR HOUSING, FEDERAL HOUSING 

COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

Mr. MONTGOMERY. Thank you very much, Chairwoman Waters, 

Chairman Frank, and Ranking Member Biggert, for inviting me 

here today to testify about the modernization of FHA. I want to 

begin this morning also by thanking not only just both of you, but 

again Chairman Frank and Ranking Member Bachus, for your 

strong leadership on this issue, and that goes for the entire committee as well for allowing me to testify on how best to fix FHA. 

Yes, last year, our hard work, our collective hard work paid off 

to the tune of 107 cosponsors. They were evenly split between both 

sides of the aisle. Yes, and a resounding 415 to 7 vote on the Floor 

of the House. Well, this year, as we all know, we have two bills 

pending before this committee. Both bills would raise loan limits in 

high-cost areas. They would eliminate FHA’s antiquated down payment requirements. And they would allow, to varying degrees, riskbased pricing to occur and eliminate the burdensome cap on reverse mortgages. Yes, we look forward to working with this committee on a bipartisan basis like we did last year in helping craft 

a comprehensive bill that would provide underserved Americans 

with a safe mortgage at a fair price. And speaking of fair price, 

when borrowers pay FHA insurance premiums, they are essentially 

buying a prime interest rate. An FHA-insured loan is generally 3 

to 4 percentages lower than a subprime loan. When comparing 

these two loan types on a $225,000 mortgage, this rate differences 

translates into an average savings of $300 a month. That is $137 

over the life of the loan. 

In recent years, the primary users of many subprime loans have 

been minority and lower income first-time home buyers, many of 

whom struggle to qualify for prime loans due to underwriting or 

down payment requirements. It is our belief that had FHA had a 

minimum, and I say a minimum, amount of flexibility like that 

proposed in the FHA modernization, we could have better served 

many of these borrowers. The impact on African-American and 

Latino borrowers has been particularly profound. For instance, according to our 2004 numbers, 40 percent of African Americans and 

23 percent of Latinos pay an interest rate 3 percentage points higher than market rate. 

9

As you all know, the volume of subprime lending is declining 

rapidly. While this may appear to be good news, the departure of 

a strong subprime presence means many lending institutions may 

turn their backs on lower income borrowers. In order to offset this 

thinning of credit, there needs to be a mortgage alternative we like 

to call, ‘‘Back to Basics,’’ which would provide a wide swathe of 

lower-income borrowers with the credit and loan options they require, and that is a modernized and reinvigorated FHA. 

As I mentioned before, we are seeking the following changes. 

First, we are proposing to eliminate our complicated down payment 

calculation and 3 percent minimum cash investment requirement. 

Second, our proposal seeks to provide FHA the flexibility to set insurance premiums commensurate with the risk of the loans. In so 

doing, we could reach deeper into the pool of prospective borrowers 

while protecting the financial soundness of the FHA mortgage insurance fund. 

Lastly, I would like to mention the proposed increase in FHA 

loan limits. By increasing the loan limits to 65 percent and 100 

percent of the conforming loan limit, which we support, FHA would 

once again be a player in high cost areas, regions that have previously been out of play, such as the entire State of California and 

most of the Northeast. What is more, raising the floor to 65 percent 

of the conforming loan limit has the added benefit of giving families better access to newly constructed housing, which is on average 

more costly. 

Finally, before closing, I would like to take a moment to assure 

you of FHA’s readiness to proceed. Regarding our capacity to manage our book of business, the inspector general recently completed 

its annual audit of FHA’s financial statements. In short, we received a clean opinion. In fact, this marks the 14th consecutive 

year of clean audits. However, it is the first in which absolutely no 

material weakness were identified, that it never happened. What 

this means is that when FHA reports on its financial position at 

the end of each year, the reports are accurate and fairly portray 

the financial status of the FHA mortgage insurance fund. With 

such a long history of success, and the continual improvements to 

our processes, I am not sure why some people question our ability 

to manage the FHA funds. And in light of the recent GAO report 

taking us off the high-risk list for the first time since 1994, there 

should be no doubt—no doubt—that we can manage our programs. 

If we were not fiscally sound, trying to implement change would 

spell disaster but this GAO report, as well as our most recent 

audit, reveals that FHA is both financially stable and consistent. 

In conclusion, I believe that FHA should continue to play a key 

role in the national mortgage market, and I am here today to make 

the case for changes to the National Housing Act that will permit 

us to continue to fulfill this critical mission. 

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

to testify today. 

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

page 65 of the appendix.] 

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

I recognize myself for questions for 5 minutes. As has been said 

over and over again, and as was said by Mrs. Biggert this morning, 

10

we did a fantastic job of getting bipartisan support for FHA modernization in the last session of Congress, and I am looking forward 

to cooperation from both sides of the aisle so that we can move this 

legislation and open up opportunities for people who have been 

thrown into the subprime market and who find themselves certainly in great difficulty now. 

I have heard some of the concerns that were registered by Mrs. 

Biggert, which I suppose caused her to want to carry a bill to make 

sure those concerns were addressed. Do you agree that we need to 

do anything differently than we did in the last bill? If so, what? 

And I would like for you to specifically comment about our housing 

trust fund and this legislation. 

Mr. MONTGOMERY. Thank you. Let me discuss the trust fund 

first. To be honest, we do not know enough yet about how this trust 

fund would be structured, where the funds would go. I, speaking 

for FHA, have IT system requirements as the world’s largest mortgage insurance company, government mortgage insurance company, and the world’s largest mortgage company for minorities. I 

would like to be able to have the ability to get professional staff 

that would enable us to carry out our mission, especially in a reformed FHA, and to be able to pay them similar to other government agencies do. So speaking selfishly for FHA, I could use those 

funds to help do some of what I just articulated. So I will say until 

we know more about how the fund would be structured, I certainly 

appreciate the concept, and am very sympathetic to the concept, 

but until we know more about it, it would be difficult for us to say 

that we would wholeheartedly support it. 

Chairwoman WATERS. Do you agree that there is a housing crisis? 

Mr. MONTGOMERY. I have said publicly many times that there is 

a housing crisis in this country, and I have said publicly in other 

settings, in particular for persons with disabilities and for the elderly. 

Chairwoman WATERS. Do you agree that FHA modernization 

could open up opportunities for many folks who could not be serviced or who get thrown into a subprime market that places them 

at great risk? 

Mr. MONTGOMERY. Absolutely. 

Chairwoman WATERS. Do you agree that it is important that this 

bill moves without any obstruction so that we can have a reformed 

FHA? 

Mr. MONTGOMERY. If I could respond to that, and also to your 

first question as to the differences. Under the premium structure, 

Madam Chairwoman, that you have versus the Biggert bill, by having a cap of 2.25 percent versus a cap of 3 percent, that precludes 

us from being able to help lower income, higher risk borrowers because of the actuarial requirements of the mutual mortgage insurance fund. While I can understand why you would have your cap, 

and Mrs. Biggert has hers, we would propose, and so support as 

we did last year, to have the maximum flexibility. And that is one 

of the reasons for some of the predicament that we are in on the 

subprime—to be able to go to 3 percent because as you heard me 

say previously, looking at the difference between FHA even at 3 

percent, by the way, the difference between 3 percent—1 percent 

11

and 3 percent on a $225,000 loan is about $26. And you heard me 

say with the subprime borrowers at 3 points above par, the difference on that $225,000 home is about $300 a month. So, again, 

we think by having the 3 percent, would some borrowers like that? 

It gives them flexibility. We can reach lower income, lower FICO 

score borrowers, including many subprime borrowers whom we cannot reach today. 

Chairwoman WATERS. But we are going to agree that we are not 

going to let that difference stop this bill, is that right? 

Mr. MONTGOMERY. I am sorry, ma’am? 

Chairwoman WATERS. We are not going to let that difference get 

in the way of getting a bill passed and onto the President’s desk? 

Mr. MONTGOMERY. Well, since I do not have a vote in this process, I will let you all decide that. In all candor, Madam Chairwoman, everybody has worked so hard on this bill and that is the 

good news here. We all know we need to modernize and reinvigorate FHA, but we feel strongly that we need the ability to reach 

higher risk, lower FICO score borrowers and we can do that at 3 

percent—more of them I should say, more of them than we can at 

2.25 percent. 

Chairwoman WATERS. Thank you, Mr. Montgomery. And I will 

recognize our ranking member, Mrs. Biggert, for 5 minutes for 

questions. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. Commissioner 

Montgomery, could you explain the importance of allowing FHA to 

assess the risk of each individual borrowers when setting mortgage 

insurance premium prices? 

Mr. MONTGOMERY. Well, that is critical. We are an insurance 

company; we are in the risk business. We are in the business of 

helping lower income borrowers with little savings for a down payment and perhaps some blemishes on their credit. That is what we 

have done for decades now. But we take very seriously protecting 

the solvency in the FHA fund so we put each risk category through 

a rigorous test, through an actuarial review. Our Office of Evaluation conducts that. And it is critically important for us to be able 

to identify any number of different variables for all borrowers. By 

the way, that pool of borrowers that we have profiles that we can 

look at is some 4.5 million or so different risk profiles. 

Mrs. BIGGERT. How does this type of price structure allow FHA 

to help more low-income borrowers? 

Mr. MONTGOMERY. Well, as you heard me mention previously, 

well, let me add a little bit to that. Let’s say the up-front premium 

is 1 percent on a $225,000 house. Your payment for the up-front 

mortgage insurance is about $14—$13.90 and change. At 2 percent, 

you are at about $26. And at 3 percent, you are at roughly $39.95 

or so. So the difference is not much. Now the $225,000 figure in 

this room sounds like a low amount. But as Congressman 

Neugebauer from Texas knows, that is a big home in the South and 

in the Midwest and in other parts of the country. As a matter of 

fact, 75 percent of our mortgages currently are below $150,000. 

And the average cost on average, the median for FHA, is somewhere around a $130,000 mortgage. So the $225,000 example is 

half that for the lower income—or the lower priced home. 

12

Mrs. BIGGERT. If the bill that we had last year was enacted tomorrow, how quickly could you implement the reforms? 

Mr. MONTGOMERY. Well, like we did last year, and we are doing 

this year, in some cases we are preparing for a victory party let’s 

say that we may not have. I say that in that we cannot wait. Hopefully, we will get a reformed FHA bill through. We cannot wait 

until that moment in time to say, ‘‘What do we do now?’’ So we 

were meeting last year, and we have been meeting this year with 

our IT staff. We are prepared to make the changes to our underwriting system to what is called our total scorecard. And to begin, 

we also have been putting together what the training for lenders 

would look like. We would be ready on day one. We would be more 

ready on day two, but we will be ready on day one. 

Mrs. BIGGERT. Okay. I understand that FHA has nearly the 

same delinquency rate as the subprime market but the foreclosure 

rate is much lower. Could you explain what tools you use between 

the delinquency or default and foreclosure and whether this accounts for the lower foreclosure rate? 

Mr. MONTGOMERY. Well, the subprime market has a foreclosure 

rate twice that of FHA. And, yes, our 90-day delinquent rates are 

within points of each other. I think that the fact that our foreclosure rate is half points to your point and that is, yes, we have 

a very vigorous loss mitigation program, we require lenders to 

reach out and to work with borrowers who are in trouble and, yes, 

we saved 75,000 families last year—FHA-insured families from 

foreclosure. I think that point is more important today than probably at any point in the last several years, especially as we see 

many other families who have subprime products facing some financial crisis in their life. 

Mrs. BIGGERT. How many additional borrowers could you serve 

if last year’s House bill was enacted? 

Mr. MONTGOMERY. Well, based on last year’s bill, we expected 

our volume to essentially to double between now and 2012, not including the reverse mortgages, by 2012 we would be serving 1.2 

million borrowers under FHA, about double what we are today. 

Mrs. BIGGERT. How many people could you serve if nothing is 

done, if there is no change, and we do not have any modernization 

bill? 

Mr. MONTGOMERY. Well, right now we are serving roughly 

500,000 borrowers. As you know, our volume of business has been 

in a free fall for about 3 or 4 years. The good news is that, through 

some process improvements, we have sort of stopped the hemorrhaging, but we think again in Mr. Miller’s State and others, the 

fact that they cannot use this product did not make any sense to 

us. That is why we want to improve it. 

Mrs. BIGGERT. Is there a difference in how many people you 

could serve if the Waters-Frank bill was enacted versus last year’s 

bill or the current situation? 

Mr. MONTGOMERY. It would be more difficult at the 2.25 percent increase for us to serve borrowers with incomes less than $45,000 

a year and with FICO scores below about 600. Because of the actuarial review that we conduct and, yes, we are an insurance company, risk is our business, we would have to probably raise the 

cash investment on those types of borrowers above 3 percent. 

13

Mrs. BIGGERT. Thank you. I yield back, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. Are there any other 

members who wish to be recognized for questions for Mr. Montgomery? Mr. Cleaver, in order of seniority unless you are not ready, 

then we will go to Ms. Maloney. 

Mrs. MALONEY. I defer to him because he was here first. 

Chairwoman WATERS. But he said it is okay. 

Mrs. MALONEY. Okay. Well, first of all, I just want to really congratulate Chairwoman Waters and Chairman Frank for moving so 

swiftly on this, first going to the Katrina area and moving a GSC 

bill that is going to put some housing money out of the government 

into the ground to help the people. And really revitalizing the FHA 

program, the Expanding Home Ownership Act is part of the puzzle 

we need to help the predatory lending tsunami and making it 

available to people and really making it more flexible. There are 

ways that we could change it so that it is available and more flexible to people in need. And this bill goes a long way towards doing 

that. And I really cannot thank the chairwoman, the timing of it 

could not be more important to get this going forward, and to have 

had a bill with a fair and balanced approach. 

One area in the GSA/GSE bill that Chairwoman Waters moved 

forward, Mr. Baker and I added daycare, which is in a crisis in this 

country. It is not there. People are opening up their homes for 

daycare, licensed daycare. In New York City, there is a waiting list 

of hundreds of thousands of people. It is not there and it takes a 

man and a woman to put the food on the table and pay the rent 

now and too often in American society. So both are working and 

we need more daycare. And I am going to be working on an amendment that would be part of FHA, expanding it in a certain framework, so that daycare loans and financing could be there in a flexible way not only for new construction but for homes that are going 

to have licensed daycare in it. That is the only daycare that is 

growing in New York is licensed daycare in their homes. And I 

would like the gentleman, if he could, to respond to this concept? 

We added it to the GSE bill as one of the areas that you can get 

secondary market financing. It is a creative way to get money into 

the system to help with this critical issue that is confronting families of America. 

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

Whenever I hear the word ‘‘daycare,’’ my ears perk up because I 

have a 51⁄2 month old at home. Conceptually, Congresswoman, certainly we would love to hear more about how your bill would work 

and certainly understand the plight of many lower income families 

and how they juggle both work and taking care of their children. 

We certainly look forward to having those discussions with you in 

that area. 

Mrs. MALONEY. Secondly, on the subprime crisis that we are confronting, I think we all agree that preserving homeownership is 

just as important as expanding it. And what in your opinion, 

whether it is in this bill or through another vehicle, should Congress do to make sure that we help those people who are being affected by the current subprime crunch, many of whom were exploited, they were targeted? First of all, how do you think it could 

be incorporated in your bill or rather in Congresswoman Water’s 

14

bill to expand the way the FHA could help people restructure loans 

in crisis or any other ideas that we can have as we move forward 

to help people stay in their homes? 

Mr. MONTGOMERY. The good news is that we are helping 

subprime borrowers today. As a matter of fact, we are on track this 

year to help people getting out of a subprime loan or refinancing 

into an FHA loan, we are on track to do conservatively about 

60,000 this year with the existing FHA structure. Many families on 

their own obviously have figured out they are in a predicament and 

reached out to us for help. But we think the best way relative to 

refinancing is to have that latitude for people getting out of a 

subprime loan into an FHA loan, to have the latitude to go to a 

3 percent up-front premium because these would be some higher 

risk borrowers. 

Mrs. MALONEY. Well, specifically, one idea that I have, or one 

hurdle that is out there I have read about, is that some homeowners who would otherwise make good candidates with an FHA 

loan with a decent track record on time payments may be barred 

from refinancing with FHA if they are not current on their existing 

loan. Oftentimes, because they are suffering from the payment 

shock of the interest rate reset, jumping from the teaser rates to 

a higher level, do you think looking into changing this requirement 

might benefit homeowners and FHA if it could be done in a way 

that is responsible? 

Mr. MONTGOMERY. Absolutely and that is something we are looking into today. I discussed at Tuesday’s hearing, since it would 

present a new risk category for us, that the Credit Reform Act of 

1990 requires us to put that new risk category, that would be delinquent borrowers but for the reset they had good credit let’s say 

for the previous 12 months, we are looking at that right now. 

Mrs. MALONEY. And, lastly, because my time is running out, 

could this change be done administratively by HUD or should there 

be a legislative fix for it? 

Mr. MONTGOMERY. The Credit Reform Act requires that we put 

it through a stress test. We are doing that right now. And I would 

have that authority based on the outcome of the review. 

Mrs. MALONEY. Okay, thank you very much. 

Chairwoman WATERS. Thank you. Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. Commissioner, I appreciate your being here, and I think the intent of this 

committee is to make FHA a more relevant factor in the marketplace. One of the concerns I have is when you were talking about 

flexibility a while ago, our financial markets are very sophisticated 

today. And one of the reasons I believe that your business is down 

is due to your inability to really respond to market conditions. I 

want to go back to the rate thing just a little bit. Now, it is my 

understanding if you initiate some of these new programs, those 

programs will be bracketed as a category and you will have to actuarially measure what your loss ratios are on these new types of 

products that you are putting out. And doesn’t it make sense for 

you to have the flexibility to be competitive to be able to price those 

based on what your actuarial findings actually are? 

Mr. MONTGOMERY. Absolutely, Congressman, I think the FHA 

Commissioner should have that flexibility. 

15

Mr. NEUGEBAUER. And doesn’t it also make sense that if in some 

cases, if those certain types of products that you are doing are actually performing better, you have the flexibility to actually lower 

those premiums, that if in some cases, those certain types of products that you are doing are actually performing better, you have 

the flexibility to actually lower those premiums, and obviously 

make them more affordable for some of our borrowers? 

Mr. MONTGOMERY. Again, yes sir, we certainly agree, and in fact 

had the Commissioner, me, or whomever at the previous flexibility 

to adjust premiums, look at today, we are still discussing having 

that flexibility now almost a year to the day from last year’s hearing. I suspect we could have helped a lot more lower income borrowers during that year period had we had that flexibility. 

Mr. NEUGEBAUER. And I want to go back to a little bit of some 

things about, whether it is a housing fund, what we are talking 

about is retained earnings, we are talking about profits. What do 

you do—if FHA begins to make more money and stay on the same 

financial course, what do you do with the earnings? And if we are 

talking about distributing, I guess we feel like in some cases those 

are excess earnings. I have never made earnings in excess before 

but I would like to get to that point. But one of the things that I 

think is important is if you are managing an entity that is trying 

to move towards an affordable housing goal, doesn’t it make sense 

then to be able to maybe make some investments internally within 

FHA and possibly give you the ability to create some new kinds of 

products and programs rather than having to worry about those 

monies being taken out arbitrarily from FHA? 

Mr. MONTGOMERY. As I referenced earlier, if we had the ability 

to make some of the IT improvements, one of the programs that 

they use is computer languages that you and I probably had when 

we were in college that most people under 30 have never heard 

of—Fortran and COBOL. We have a fantastic CIO but we cannot 

be the priority in every category. And so, yes, there are some improvements that we need to make and it would be good to have the 

flexibility to do so. 

Mr. NEUGEBAUER. You and I had this conversation, I think, when 

we were talking about the last bill, and that is that you depend 

upon the originators to go out there and to sell your product. While 

you can put the product together and you have something, the ability for FHA to expand their business is going to depend on, number 

one, the acceptability of the product, and number two, the availability of people to go out and originate those, is that correct? 

Mr. MONTGOMERY. That is correct. We do allow and have brokers 

and lenders and other certainly sell our products so to speak, we 

require that. 

Mr. NEUGEBAUER. And one of the things that is not in the new 

bill that concerns me is the fact that we had put a requirement, 

we had talked about allowing for some of the smaller originators 

to, rather than having to have an expensive audit, and we all know 

with today’s environment, we have had a little dose of SarbanesOxley, we know what the cost of these audits, they have skyrocketed. And for our small business people who want to have a little small mortgage business, that makes it a very difficult process 

for them. Would you support being able to look at an alternative, 

16

a bond or something like that, for some of our smaller originators 

to be able to participate in your programs? 

Mr. MONTGOMERY. We have had previous discussions on the 

bond and relative to the responsibility to protect the solvency of the 

mutual mortgage insurance fund, a surety bond, while good at the 

State level, doesn’t give us a lot in that respect. But let me say 

though that I am very sympathetic, Congressman, for the mortgage 

brokers here, aware of that, to those small businesses. I go out and 

I attend their conferences, I travel a lot, I meet with mortgage brokers and when a small business, a father and son, a mother and 

daughter, or two sisters, whatever, who are mortgage brokers and 

love it, taxes say we do not make a lot but we cannot use the FHA 

product. It doesn’t make any sense to me for a government program to be so onerous so that small businesses cannot use it. So 

we are where we need to be in that respect yet although we have 

discussions with the mortgage brokers and there are a couple of 

things that we have been discussing and ultimately we allow more 

mortgage brokers to use the program. 

Mr. NEUGEBAUER. I think it is going to be imperative that we do 

that. 

Chairwoman WATERS. Thank you, your time has expired. Mr. 

Cleaver for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman, and thank you 

for scheduling this meeting and for having the initiative to push us 

toward transforming the FHA. Mr. Montgomery, like a lot of people, Baby Boomers at least, I came out of college and bought my 

first home with FHA, an $18,000 home. And at that time, everyone 

I knew buying homes were going through FHA. I think it served 

its purpose well. And, of course, today in your testimony when you 

talked about the drop in the FHA share of the market in Chairwoman Waters’ district, that just is mind-boggling. What I would 

like to ask or find out from you is Freddie Mac has said that they 

are going to buy up to $20 billion in subprime mortgages. You cannot compete with the giants but is there a way, a possibility, for 

you to beef up your portfolio, is it possible for FHA to buy any of 

the subprime mortgages? 

Mr. MONTGOMERY. Thank you, sir. As I mentioned here in this 

very room on Tuesday during the hearing, we are helping subprime 

borrowers today. You may have heard me reference earlier that we 

are on track to assist, we think, about 60,000 conservatively this 

year who are getting out of a subprime loan in FHA. With the reformed and modernized FHA, especially to have flexibility on the 

premiums, there is no doubt in my mind we can assist many more. 

Now that is not to say we are going to throw open the barn door 

so to speak. We have to protect the solvency of the Mutual Mortgage Insurance Fund so many families, all of whom, would still 

have to go through our eligibility and underwriting criteria. 

Mr. CLEAVER. There is a lot of discussion going on about Freddie 

Mac, Fannie Mae, and the size of their portfolio, and it seems to 

me that the best way to reduce that portfolio to bring it into some 

kind of normality would be for FHA to increase its share of the 

market. If you had an opportunity to write on that sheet of paper 

with your left hand, what would be the best thing that could happen for FHA to begin to rise again what would it be? 

17

Mr. MONTGOMERY. Well, certainly upgrading our IT systems and 

being able to pay some of our professional staff more. But as far 

as the retail thing, being able to help borrowers having the maximum flexibility on the up-front premiums and on the annual premiums would allow us to help higher risk, lower FICO score borrowers in an actuarial sound manner. And, again, we are helping 

many today and it is our strong belief we can help many more with 

a reformed, modernized FHA. 

Mr. CLEAVER. But what could this committee do? 

Mr. MONTGOMERY. Pass an FHA bill. 

[Laughter] 

Mr. MONTGOMERY. I normally don’t get that question so I appreciate the efforts to try and pass the FHA bill. 

Mr. CLEAVER. That is good. That is the best response. Is there 

a plan to increase multi-family loan fees? 

Mr. MONTGOMERY. Relative to the OA budget, there is a proposal 

in there different from the proposal last year that was rescinded 

to increase in some instances the fees for, we are talking about 

multi-family here, to increase their insurance premiums. That will 

go out for public comment here in the next several weeks. It has 

not happened. I want to stress that. And please understand that 

we will put it out for public comment and be mindful of any comments that we receive. 

Mr. CLEAVER. Thank you, Madam Chairwoman. I yield back the 

balance of my time. 

Chairwoman WATERS. Thank you. The gentleman from California, Mr. Miller, for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, I will take blame for the 

security bond language in last year’s bill because I had it put in 

there. And I did it for a reason—mortgage brokers originate more 

loans than any other group in the marketplace out there. And yet 

if you look at the cost prohibitive, time consuming financial audits 

and net worth requirement, it limits brokers’ participation in the 

FHA program. And you wanted a minimum amount of flexibility, 

which I think is an understatement, I want to give you a maximum 

amount, but in some of these areas where we are talking about instead of as some might transfer assets, we all know how this is 

done, you can transfer assets and make your audit look really good, 

assets disappear, in the construction industry, we have been required for years to put up surety bonds and it has worked very, 

very well. And if it is a cash audit or it is a surety bond for the 

given amount of money, which equates to the same, one is accessible if there is a problem, I do not understand why we would limit 

participation in a program that I will state from my area when it 

has dropped 99 percent in 5 years, you and I both look and say 

there is a severe, severe problem here. And when you look at the 

largest group of loan originators in this country and we say how 

do we also provide flexibility for them as we are trying to provide 

for you and with that flexibility safeguard the requirements so we 

are not saying, okay, just do it without any safeguard. But somebody is going to write a surety bond, I know people who write surety bonds and they do not go out there and arbitrarily write a surety bond without knowing they have something to go after if that 

occurs. So why do you think that we cannot structure a reasonable 

18

approach to including more individuals to be able to work with 

FHA and provide an alternate such as surety bond? 

Mr. MONTGOMERY. We are trying to find a reasonable approach. 

Mr. MILLER OF CALIFORNIA. But you are willing to work? Okay, 

Maxine, you heard that, he is willing to work, so we need to look 

at this, okay. That is a good approach. 

Mr. MONTGOMERY. Just on the surety bond there is no national 

standard for surety bonds, they vary from State to State. But I do 

want to stress again that we are very sympathetic— 

Mr. MILLER OF CALIFORNIA. Well, that is why I have been fighting for optional Federal charters for the insurance industry because 

every State requires a different base, some allow third party insurers, some do not, so I do not disagree there, but if the bond is written in a fashion acceptable, I do not know why that would be precluded from the conversation? 

Mr. MONTGOMERY. Well, in reference to your previous comment 

about being sympathetic and discussing with them other options, 

we are having those discussions as recently as several weeks ago 

with the mortgage brokers. 

Mr. MILLER OF CALIFORNIA. Okay, so let’s say that is still on the 

table and we can still do that. If you look at the situation we are 

facing in the mortgage market today, I think it is profound how we 

need to reform FHA. What are the benefits FHA—do you think an 

FHA program has over other options that might be available in the 

marketplace today? 

Mr. MONTGOMERY. It is a back-to-basics approach. We have 

never had anybody call our toll-free number and say, ‘‘I do not understand my FHA loan.’’ Your first payment is equal to your last 

payment, no pre-payment penalties, no teaser rates, no hidden 

costs. The benefits are far more than what some of these other 

loans— 

Mr. MILLER OF CALIFORNIA. So you think the FHA can really 

complement the private sector in providing a broader base for your 

project to be applied? 

Mr. MONTGOMERY. Well, we are a government mortgage insurance program that works in partnership with lenders, originators, 

and brokers. To me it is the best of both worlds. You have a private 

delivery system and the beauty of a government program with a 73 

year track record. 

Mr. MILLER OF CALIFORNIA. And so if we are going to do something that could likely double the business you currently generate 

let’s say, which we think you are being held back tremendously, a 

very safe program, it works, it’s beneficial, there is really no reason 

why we shouldn’t include the largest originator of loans, and that 

is the mortgage brokers, in your program and be somewhat flexible, 

yet provide safeguards on how they apply your program and are involved in it, would you not say there are options for us there? 

Mr. MONTGOMERY. We are again having those discussions with 

them and will continue to have them and try to find a reasonable 

compromise. Again, recognizing I have to be mindful of the FHA 

insurance fund. 

Mr. MILLER OF CALIFORNIA. Okay, I agree with that. And I think, 

Madam Chairwoman, that we worked very well last year in constructing a bill that we all thought would do the best and provide 

19

the most for our basic communities, and I really trust that we can 

do that again this year, that we can come together and look at good 

and bad and both and say, ‘‘How do we come to some reasonable 

compromise?’’ ‘‘How do we expand a program that we absolutely 

understand and acknowledge is beneficial to the market today, that 

in many cases has been impacted because of lack of participation 

of FHA and GSEs.’’ And I know for the last 3 years, you and I have 

looked at this issue, how do we expand it, and I think we are all 

going in a good direction, it is just how we get there and do we get 

there in a way that we think is acceptable, and can be applied in 

a broad base fashion. So I look forward to working with you on this 

bill as it proceeds. 

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

recognize Mr. Green of Texas for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman, and thank you 

very much for hosting this hearing and presenting this piece of legislation. My understanding of the history of the legislation is that 

the essence of this legislation was captured in previous legislation 

that was supported by this House and my prayer is that we will 

receive the same support in this session of Congress. 

Mr. Montgomery, thank you very much for being here today. I 

am so honored to share with my colleagues that you have been 

very helpful in the current position that you are in, you have been 

very responsive, and you have gone out of your way to be helpful. 

You came to Houston, Texas, I believe, to help us with one of our 

concerns and for this we greatly appreciate you. Just a couple of 

really quick questions. The first is you give an example in your testimony of a $225,000 loan and you explain how this will—if FHA 

were the financier, the borrower would save $137,000 over the life 

of the loan. Would you kindly go through this as expeditiously as 

possible because I do have a second question? I want people to hear 

from you how you believe you can best serve people with reference 

to this example. 

Mr. MONTGOMERY. I will give you the very quick answer, we 

price for the risk and the mortgage insurance. Subprime lenders 

price for the risk and the interest rate. And, thus, you can see the 

stark, very stark contrast between at a cap of 3 percent, $39 more 

a month versus upwards of $300 more a month, and, yes, $137,000 

over the life of the loan. 

Mr. GREEN. And do you consider yourself in terms of positioning, 

your position somewhere between prime and subprime, is that a 

fair statement? 

Mr. MONTGOMERY. We are far closer to prime for this reason, 

when a borrower gets an FHA loan through the mortgage insurance, they are essentially buying a prime interest rate. 

Mr. GREEN. And the final question has to do with today’s news, 

we find that we have many persons who are being foreclosed on, 

how would your FHA alternative be a safer alternative than a 

subprime alternative? 

Mr. MONTGOMERY. By far the fact that we are the most transparent loan process out there with the full faith and credit of the 

U.S. Government backing these loans. There are no surprises with 

an FHA loan between the no prepayment penalties, which are crippling families today, no teaser rates, no sticker shock. And, as I refVerDate 0ct 09 2002 19:19 Aug 03, 2007 Jkt 036818 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\36818.TXT HFIN PsN: TERRIE
20

erenced earlier, no one has ever said, ‘‘I didn’t understand my FHA 

loan’’, because it is a back to basics approach. 

Mr. GREEN. I thank you very much, and I thank you again for 

coming to Houston. Madam Chairwoman, I yield back the balance 

of my time. 

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

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

Commissioner, for coming. I noticed in your testimony that one of 

the proposed changes is to increase the loan limits, FHA loan limits, and then you get into some fairly technical kinds of comparisons as to why that is important. Could you just briefly tell me, 

what are the loan limits and what are you looking to increase them 

to? 

Mr. MONTGOMERY. Right now for the high-cost States, such as 

California and most of the Northeast, we are at about 87 percent 

of the conformity rate, which is about $360,000 a year. 

Mrs. CAPITO. That is your max-out rate? 

Mr. MONTGOMERY. That is just for those high-cost States. Essentially for everyone else with a few exceptions, give or take, the 

maximum is around $200,000 a year. 

Mrs. CAPITO. Okay, I know one of the hurdles of home buying, 

particularly first-time home buyers, is that down payment, and we 

passed a piece of legislation, the American Dream Down Payment 

Act, to try to help first-time home buyers jumping over that hurdle. 

Does your product meld with that? Do your brokers, are they able 

to couple those together? Do you see that as helping with the potential growth of FHA loans? How do you perceive that? 

Mr. MONTGOMERY. Well, the realities have estimated last year 

about 45 percent of loans were made with no down payment. Our 

proposal does away with the requirement for a 3 percent cash investment but essentially runs the gamut in between from a 97 percent LTV up to 99.95 LTV, if you will. Because of the risk-based 

approach and families having some choice, how much they want in 

an up-front premium or in an annual premium, they can in many 

cases have that choice. It is just like families have today, some 

families elect to pay a little higher interest rate to keep more 

money in their pocket so they can pay for a new refrigerator or upgrades to their home and the like. 

Mrs. CAPITO. And how does the FHA from say, the West Virginia 

Housing Development Fund, is there a good communication between State availability of loans and the FHA? And do you feel like 

you are working together to maximize the resources? 

Mr. MONTGOMERY. We are working together. We can always 

work together better but again in the high-cost States, the State 

housing finance agency has difficulty offering an FHA product because of our constraints on the premium structure and certainly on 

the loan limits. 

Mrs. CAPITO. Okay, thank you. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. Mr. Clay for 5 minutes. 

Mr. CLAY. Thank you so much, Madam Chairwoman. And thank 

you for holding this hearing today. Mr. Montgomery, my question 

is not strictly about FHA. We have a national crisis with home 

foreclosures and it will affect the national economy in an adverse 

21

way and the effect on some local economies will be devastating. 

Millions of families will lose equity and their standard of living. I 

noticed today that even Freddie Mac has decided to purchase $20 

billion in these troubled loans. The executive director of the Equal 

Housing Opportunity Council report on CBS News that home mortgage foreclosures are up in both the City of St. Louis and St. Louis 

County, which I represent, when compared to 2005. In 2006, foreclosures were up 44 percent in the City and 34 percent in St. Louis 

County. What is HUD’s position on this crisis? And is HUD designing any special initiatives to combat the rapidly rising foreclosures? 

Mr. MONTGOMERY. I think the best way to help many subprime 

borrowers get out of their loans today is through a modernized 

FHA, the same song I was singing here last year, and have for the 

last 20 months. Now relative to the bill that got through this committee last year and through the House, this year though since October of last year we have been doing home buying counseling, 

working with many nonprofit groups trying to get the word out, 

working with Realtors to help many families. But while we are 

helping, as I mentioned before, subprime borrowers today, the best 

way to do it is to pass this bill to help more. 

Mr. CLAY. What is HUD’s opinion on the proper amount of government intervention into the market? I think that Freddie Mac 

has really stepped up to the plate to actually say we will help salvage some of these people’s American dream of maintaining their 

home and holding onto that property. What is the government’s 

proper intervention in a crisis like this? 

Mr. MONTGOMERY. With all due respect to my colleagues at 

Fannie Mae and Freddie Mac, they are private corporations. They 

have the ability to make decisions overnight. I am not saying I 

need that ability. But beyond the obvious remedy, modernizing 

FHA, there are some things we can do in the here and now that 

we are working on and are on track to help at least 60,000 

subprime borrowers this year. Some of these fixes I discussed here 

in the hearing in this room on Tuesday, and we are putting those 

through a risk analysis, as the Credit Reform Act requires, and we 

should know how those will come out in the next month. 

Mr. CLAY. So some of those 60,000, you will be able to save their 

homes, or get them into another form of financing? 

Mr. MONTGOMERY. We are on track to help 60,000 this year. It 

is our conservative estimate, through FHA reform, that we could 

help easily 200,000 more—200,000 or more in addition to the 

60,000. 

Mr. CLAY. Thank you. Thank you so much for those answers. 

And, Madam Chairwoman, I yield back. 

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

Ellison for 5 minutes. 

Mr. ELLISON. Thank you, Madam Chairwoman. Sir, thank you 

for coming to visit with us today. I just have a few questions and 

they are of a more general nature. Could you share with us your 

assessment of what the unmet housing needs are for Americans 

today? 

Mr. MONTGOMERY. Are you talking about relative to rental housing or homeownership? 

Mr. ELLISON. I mean in general. 

22

Mr. MONTGOMERY. Let me take two groups in particular, the elderly and persons with disabilities, an industry group, AUSA, estimates that there are probably 10 seniors waiting for every Section 

202 property. That is the elderly housing program HUD has. We 

have 10 on a waiting list for every one that gets into the property. 

Some of the disability groups have also talked to us about the urgent need for housing and as part of our early budget we have 

some demonstration projects that we think will help mitigate that 

need. 

Mr. ELLISON. Thank you. That is similar to the information I received, particularly with seniors, but also just general low-income 

housing. In Minneapolis, there is a significant waiting list there. 

Could you speak to what in your view happens to a community 

when there is such a shortage of housing for certain sectors like 

seniors, low-income people, or people with disabilities. What do 

they do? Are they the homeless? 

Mr. MONTGOMERY. I cannot speak for the homeless group, that 

is a little out of my lane, but for many decades, certainly pre-dating 

my arrival at FHA, there has been a shortage of housing for lowincome families throughout America. And we are trying to do what 

we can in this tight budget environment to help even more through 

the use of Low-Income Tax Credits, through home funds and others. But certainly I have said publicly, yes, there is a production 

problem relative to helping some of those groups, and we are trying 

to fix that. 

Mr. ELLISON. I have had a lot of conversations about housing recently and one individual indicated to me that the reason that we 

are in this housing—in the subprime lending foreclosure situation 

we are in today is because there has been, over the last 30 years, 

a liberalization in the rules with regard to making mortgages available to people because we place value on getting people into homeownership. Do you have any views on that? 

Mr. MONTGOMERY. Well, I can speak for FHA. Some of what you 

read and hear, some of the no-income and no-asset stated income 

products, while inherently that is not a bad product for many families, in the many ways it was used we have some of the problems 

we are looking at today and that is something FHA does not do. 

We have rather rigorous and strict requirements relative to things 

such as income verification, and social security numbers, so that is 

certainly one of the concerns that we will not do under FHA, at 

least certainly while I am there. 

Mr. ELLISON. I would like to ask you now about housing with regard to people who are ex-offenders coming out, have you had occasion to examine housing for these individuals who have prior contacts with the criminal justice system, perhaps even felony records, 

is that something you have had any occasion to think about or 

work on? 

Mr. MONTGOMERY. I have not, Congressman, but I would certainly be interested in discussing that with you at a later date. 

Mr. ELLISON. In the course of your work, and in your reading, 

have you recognized or found out whether or not this particular 

population is having some unique difficulties with regard to obtaining housing? 

23

Mr. MONTGOMERY. Well, there are certainly many groups who 

have unique difficulties obtaining housing and relative to this 

group, I would certainly love to hear your views on that at a later 

time. 

Mr. ELLISON. Okay, thank you very much. 

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

We appreciate the time that you have put in here this morning. I 

hope that you will pay attention to our housing trust fund and understand that it is very key to getting a bill out of here and some 

of those other issues, I think, working with Mrs. Biggert, we can 

resolve. Thank you very much. 

Mr. MONTGOMERY. Thank you. 

Chairwoman WATERS. I will now call the second panel. Our second panel consists of: Ms. Iona Harrison, GRI, National Association 

of Realtors; Mr. Lautaro ‘‘Lot’’ Diaz, vice president, community development, National Council of La Raza; Mr. John M. Robbins, 

CMB, chairman, Mortgage Bankers Association; Mr. Ed Smith, Jr., 

chairman, CAMB Government Affairs Committee, chief executive 

officer, Plaza Financial Group, California Association of Mortgage 

Brokers; and Mr. William P. Killmer, group executive vice president for advocacy, National Association of Home Builders. 

While our panel is getting seated, I ask unanimous consent to 

have the written statements of the AARP and Consumer Mortgage 

Coalition, as well as letters of support from the National Council 

of State Housing Agencies and HUD counseling intermediaries entered into the record. Without objection, such will be the order. 

Thank you very much. We will start our panel with Ms. Iona 

Harrison. 

STATEMENT OF IONA C. HARRISON, GRI, NATIONAL 

ASSOCIATION OF REALTORS 

Ms. HARRISON. Good morning. 

Chairwoman WATERS. Welcome. 

Ms. HARRISON. Chairwoman Waters, and Ranking Member 

Biggert, thank you for the opportunity to speak before you today. 

My name is Iona Harrison and I am a broker-owner with Realty 

Executives/Main Street USA in Upper Marlboro, Maryland. I am 

here to testify on behalf of 1.3 million members of the National Association of Realtors. We thank you for the opportunity to present 

our views on the importance of the FHA Mortgage Insurance Program and the urgent need for reform. In fact, when Realtors come 

to Capitol Hill next month, FHA reform will be one of their primary talking points. 

Consumers need a safe, affordable mortgage alternative. In 2006, 

1.2 million families entered into foreclosure, 42 percent more than 

in 2005. 

Chairwoman WATERS. Excuse me, Ms. Harrison, will you pull 

your mike a little bit closer so that we can hear you. It will not 

move. 

Ms. HARRISON. Thanks. 

Chairwoman WATERS. Oh, all right. 

Ms. HARRISON. I think he was leaning on it. 

Chairwoman WATERS. Okay. 

24

Ms. HARRISON. In 2006—is that better—1.2 million families entered into foreclosure, 42 percent more than in 2005. Predatory 

lending, exotic mortgages, and a dramatic rise in subprime lending,coupled with slowing home price appreciation have all contributed to this crisis. When the Federal Housing Administration was 

established back in 1934, consumers faced a similar lending crisis. 

At that time, FHA was an innovator and led the private market 

in offering safe, affordable home loans to American families. Since 

its inception, FHA has insured more than 34 million properties. 

However, the FHA has failed to keep pace with borrower needs and 

changes in the private market and is no longer a viable alternative 

for many borrowers. At the same time, the subprime and non-traditional mortgage markets have boomed. Many of these loans offer 

low teaser rates which reset to much higher rates after a few years. 

In many cases, these borrowers qualified only on their ability to 

make the initial payment and face large prepayment penalties if 

they attempt to refinance. Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the 

end of 2007. Faced with significantly higher monthly payments, 

many borrowers will face the possibility of losing their homes. 

Realtors support efforts to give consumers affordable alternatives 

to the more risky loans that are currently being heavily marketed. 

We believe the FHA could again be a viable, affordable alternative 

for borrowers with less than ideal credit. 

Today, we ask you to advance legislation that would reform the 

FHA Mortgage Insurance Program in several important ways. Increases in FHA loan limits are needed not just in high-cost areas, 

but nationwide. Such increases are critical for FHA to assist home 

buyers in places like California but also areas where home prices 

exceed the current maximum limit but are not defined as high cost, 

such as Illinois, Ohio, and Arizona. 

Second, we ask you to eliminate the statutory 3 percent minimum down payment on FHA-insured mortgages. In 2005, 43 percent of first-time home buyers financed 100 percent of their home. 

NAR research indicates that if FHA were allowed to offer this option, 1.6 million families could benefit, including many low-income 

and minority home buyers. Eliminating the statutory 3 percent 

minimum cash investment will provide consumers a safe option 

away from non-traditional products. 

Third, NAR supports legislation that would provide FHA with 

the ability to charge borrowers different premiums based on risks 

of the borrowers and type of loan product. Currently, all FHA borrowers, regardless of risk, pay virtually the same premiums and receive the same interest rate. Giving FHA the flexibility to charge 

different borrowers different premiums based on risk will allow 

FHA to increase their pool of borrowers. Risk-based pricing makes 

sense in the private market and does for FHA as well. 

Fourth, NAR supports moving the Condo Program into the 203(b) 

Program and combining all single family programs into the Mutual 

Mortgage Insurance Fund. From a conceptual and accounting 

standpoint, it makes sound business sense to place all single family 

programs under the MMIF. We also recommend that HUD lift 

many of the barriers that make condominium purchase difficult 

under FHA. We believe the current policies limit sales and homeVerDate 0ct 09 2002 19:19 Aug 03, 2007 Jkt 036818 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\36818.TXT HFIN PsN: TERRIE
25

ownership opportunities, particularly in market areas where 

condos are one of the few remaining affordable housing alternatives. 

In addition to the reform measures I just outlined, the National 

Association of Realtors has provided HUD Secretary Jackson with 

a proposal that would allow FHA to help many families with recent 

or impending interest rate adjustments refinance into a loan they 

can afford. Our proposal is to allow credit-worthy borrowers, who 

may not be current on their existing loan, to refinance into an FHA 

loan. Many of these homeowners who might otherwise qualify for 

FHA-insured mortgage are preempted by guidelines that prohibit 

refinancing the loans that are not current. We believe FHA can design a set of prudent guidelines where credit-worthy borrowers 

could refinance and avoid losing their homes. NRA has also encouraged HUD to conduct a large public-awareness campaign to fully 

inform homeowners of their options once FHA reforms are in place. 

Realtors would support these efforts as a natural extension of our 

FHA education brochure which we produced with HUD last year. 

FHA is the only national mortgage insurance program that provides financing to all markets at all times. Now more than ever, 

FHA needs to be strengthened so that it will continue to be available to borrowers when they need it most. Realtors stand ready to 

work with Congress and HUD to breathe new life into the FHA 

and ensure all Americans can afford to buy and keep their homes 

for as long as they choose. 

Thank you again for the opportunity to testify on this important 

issue. I stand ready to answer any questions that you may have. 

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

48 of the appendix.] 

Chairwoman WATERS. Thank you very much. Mr. Lautaro ‘‘Lot’’ 

Diaz? 

STATEMENT OF LAUTARO ‘‘LOT’’ DIAZ, VICE PRESIDENT, 

COMMUNITY DEVELOPMENT, NATIONAL COUNCIL OF LA RAZA 

Mr. DIAZ. Good morning. 

Chairwoman WATERS. Good morning. 

Mr. DIAZ. My name is Lot Diaz, and I am vice president of Community Development at National Council of La Raza (NCLR). For 

the past 20 years, I have been working to promote safe and affordable communities for working families. At NCLR, I oversee the 

NCLR Homeownership Network, a group of 43 counseling agencies 

working nationwide. 

I would like to start by thanking Chairwoman Waters and Ranking Member Biggert for inviting NCLR to participate in the dialogue. I would like to congratulate the members of this committee, 

and Ms. Waters in particular, for the hard work on FHA reform. 

The Expanding American Homeownership Act of 2007 improves 

on the previous versions of the bill. In the past 8 years, I have seen 

FHA go from a product of choice in our communities to one used 

by far fewer families. Since FHA has an important role to play, 

now is the time for a modernized FHA program. 

In my time here today, I would like to discuss three main points: 

Why a stronger FHA is good for Latinos; the importance of greater 

26

access to homeownership counseling; and other ways FHA can promote Latino wealth building. 

Let me start with why we need a stronger FHA. FHA has been 

a traditional way for Latino families to achieve homeownership, 

however aggressive subprime marketing in our communities have 

pushed FHA to the sidelines. The number of Latinos using FHA 

have been decreasing every year. At the same time, many of our 

families do not have good loan options to choose from. As a result, 

they are vulnerable to predatory lenders. A competitive FHA would 

be a safe alternative for Latinos with fewer loan options. 

In addition to affordable loans, Latino families benefit from 

homeownership counseling. NCLR created a network of housing 

counselors 10 years ago. Now we are serving more than 33 Latino 

communities across the country. Last year, we helped nearly 3,000 

families purchase their first home. Participants cite counseling as 

one of the most important factors in their ability to successfully 

purchase. Research also shows that these families are far less likely to default. H.R. 1852 increases the availability of counseling for 

FHA borrowers. This is especially important for borrowers who 

would access the newer products such as zero down payment and 

interest-only loans. 

Last year, we also helped over 1,000 families who were already 

homeowners. Some were falling behind on their loan payments; 

others needed help to be refinanced in a more affordable mortgage. 

For many families in danger of default, time is the enemy. The earlier we can talk with the borrowers regarding their late payments, 

the better. Counselors are working hard to get the word out for 

their services but this is not enough. Counselors need more resources and they need to get to the borrower before it is too late. 

Congresswoman Waters and Congresswoman Velazquez worked on 

this issue. The opt-in provision of H.R. 1852 will allow families access to foreclosure prevention assistance. FHA borrowers will be 

able to sign a form saying they want a counseling agency to contact 

them in the case of default. We believe this is a powerful tool that 

will connect families with intervention services when they need it. 

One successful example of foreclosure assistance is Ms. Vega. 

She came to visit the Spanish Coalition for Housing in Chicago a 

couple of months ago. Her mortgage payments jumped unexpectedly and she could not make them. The initial repayment plan offered by her servicer was too expensive. Our counselors were able 

to negotiate on her behalf and because of their work, the terms of 

Ms. Vega’s loan have been modified. If it weren’t for the Coalition’s 

work, she would have lost their family’s home. 

There are other noteworthy additions to this FHA modernization 

bill as well. The bill includes rewards for families to pay on time. 

Clearly, on-time payers have proven that they are a lower risk. 

Legislation would reduce the insurance premium over time. We 

also support raising the FHA loan limits in high-cost areas. Clients 

in our groups in California; Seattle, Washington; Boston, Massachusetts; and Alexandria, Virginia, for instance, face high housing 

prices. FHA would be available to more families if the loan limits 

were higher. Finally, the cap placed on fees will keep FHA affordable to all of our borrowers, which is really important. 

27

Let me close by offering a couple of suggestions to further 

strengthen the bill: increase funds for housing counseling to 

$100,000 million and make sure counseling agencies can earn fees 

for the services they provide to industry; reinstate the FHA discount for families that got counseling through HUD-certified programs; and finally FHA should set the bar for industry ethical 

standards. We need a code of ethics to hold originators accountable 

given the potential changes to the FHA program. 

Thank you. I would be happy to answer any questions at your 

convenience. 

[The prepared statement of Mr. Diaz can be found on page 43 of 

the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Robbins? 

STATEMENT OF JOHN M. ROBBINS, CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION 

Mr. ROBBINS. Good morning, Chairwoman Waters, and Ranking 

Member Biggert. Thank you for holding this hearing and inviting 

me to share MBA’s views on reforming the FHA. I have spent over 

36 years working with FHA and have made billions of dollars in 

loan originations to families who have achieved the dream of homeownership through FHA’s programs. When I started in the mortgage business, FHA programs helped us to serve many borrowers 

who otherwise could not get a loan. Today, the story is very different. In 2003, FHA made up approximately 16 percent of our 

overall production. Last year, however, only a little more than 1 

percent of our business went to FHA. While the mortgage market 

has grown significantly, our use of the FHA program has dropped 

precipitously. Lenders have progressed, reacting to quickly changing and efficient technology. Unfortunately, FHA has not. While 

the needs of low- and moderate-income home buyers, of first-time 

home buyers, and of senior homeowners have changed, FHA has 

not followed its historic path of adopting to meet borrowers’ changing needs. 

MBA strongly supports FHA and believes that it still plays a 

critical role in today’s marketplace. Most of FHA’s business is directed toward low- and moderate-income and minority borrowers, 

the very strata that is most challenged to be part of the American 

Dream. At the same time, we have watched with growing concern 

as FHA has steadily lost market share over the past decade, potentially threatening its long-term ability to help underserved borrowers. As the market continues to evolve around FHA, the great 

fear is that many aspiring homeowners will either be left behind 

or forced into higher cost alternatives. 

MBA notes with great concern that the Administration’s fiscal 

year 2008 budget proposal estimates that the FHA Mortgage Insurance Fund will go into the red next year unless changes to the existing program are made or additional appropriations are provided. 

MBA agrees with the Administration that the FHA’s Mutual Mortgage Insurance Fund would run in the black with little or no premium increases necessary if FHA reform proposals were passed 

this year. 

28

MBA applauds the introduction of FHA reform bills, H.R. 1852 

and H.R. 1752, and that they started the reform effort early in the 

110th Congress. MBA strongly supports changes to FHA’s single 

family and multi-family loan limits and down payment flexibility 

and requirements including the elimination of the complicated 

down payment formula. The down payment is one of the primary 

obstacles for first-time minority and low-income borrowers. We believe Congress should empower FHA to allow it to meet today’s 

needs and anticipate tomorrow’s. The MBA believes changes should 

also be made in three areas: FHA needs more flexibility to introduce innovative new products; invest in new technology; and manage their human resources. Finally, MBA also supports changes to 

the Home Equity Conversion Mortgage Program. MBA’s surveys 

show that FHA’s HOEPA product comprises 95 percent of all reverse mortgage and is thus tremendously important for senior 

homeowners. 

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

in expanding affordable homeownership opportunity for the underserved and addressing the homeownership gap. For low- and moderate-income families, FHA should be the financing considered first 

because it has the lowest rate and provides the borrower the best 

opportunity to become a successful homeowner. However, the current loss of market presence means we are losing FHA’s impact. 

The result is that some families are either turning to more expensive financing or just giving up. I urge Congress to enact legislation 

to reform FHA to increase its availability to home buyers, promote 

consumer choice, and ensure its ability to continue serving American families. MBA stands ready to work with you on this important issue. Thank you. 

[The prepared statement of Mr. Robbins can be found on page 71 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Smith? 

STATEMENT OF ED SMITH, JR., CHAIRMAN, CAMB GOVERNMENT AFFAIRS COMMITTEE, CHIEF EXECUTIVE OFFICER, 

PLAZA FINANCIAL GROUP, CALIFORNIA ASSOCIATION OF 

MORTGAGE BROKERS 

Mr. SMITH. Good morning. Thank you very much for having me 

here, Congresswoman Waters, and Mrs. Biggert. On behalf of the 

California Association of Mortgage Brokers, of which I am the vice 

president of government affairs and industry relations, I want to 

bring a different perspective to the table, I am actually a practicing 

mortgage broker who deals with customers on a daily basis. For 

the past 24 years in my marketplace, I have seen many, many families come to my office, sit down with me, and we have structured 

an opportunity for them to have the American Dream. Part of that 

conversation normally when we get started is the expectations of 

homeownership, their dreams of homeownership. We talk about the 

future of building generational wealth. Those conversations occur 

in every time and in every opportunity that I have to serve someone with doing a mortgage for them. 

Over the past few years, I have seen the FHA loan product in 

our marketplace in California completely disappear. The colleagues 

29

who are here obviously have articulated that fact over and over 

again. My perspective that I want to bring to you is the ground 

level eyeball conversations that we have. When someone walks into 

our office and looks into buying a home—a median priced home in 

southern California is over $500,000—this has a devastating effect 

on them. We are now, because of the loan limits in California being 

low, California not being designated as a high-cost State, we have 

very limited opportunities and products available to deliver a sustainable loan. Over the past few years, we have gone to the 

subprime market. The subprime market has now been the conventional solution to the lack of sustainable loan products through 

FHA. I used to do FHA loans all the time. We do not do those anymore because it is not applicable in our marketplace, the loan limits are too low. So, consequently, we have gone to 100 percent financing with subprime loans. We have gone to interest-only products which keep people in a low payment opportunity to be able to 

maintain those homes, but we try to develop a sustainable plan for 

them to keep their homes, to refinance into their homes. Many of 

those plans and dreams have not occurred. After 2 years or 3 years, 

those interest-only products have reset, payment shock has set in, 

and their financial dynamics have completely changed, which puts 

them in a position of financial peril. 

We all know where we are with foreclosures. We are dealing with 

foreclosure rates that are escalating throughout the country, especially in your district and in my marketplace in San Diego. What 

alternatives do we have now other than to go out to the marketplace and try to find another sustainable product for them that is 

not available? The liquidity, the availability of loans and products 

has diminished dramatically. Those customers sit there and look 

me in the eye and ask me, ‘‘Smitty, what am I going to do? How 

can I keep my home for my family?’’ I have to research, dig and 

try to find products to keep people in their homes that are not 

there anymore. FHA is a very viable solution to the subprime crisis 

that we are in right now. It delivers a sustainable product that has 

no prepayment penalties, fixed rate loans, and impounds for taxes 

and insurance. These are the type of financial instruments that, if 

we have available to us, we will be able to put people in their 

homes, keep them in their homes, and preserve the homeownership 

opportunities that they have started with. 

One of the things that is a big drawback throughout America, 

and specifically in California, is that the mortgage broker, the 

small business, does not have the availability of the FHA product. 

We are the number one delivery channel for home loans in America. We produce approximately 70 percent of every home loan in 

America. If we do not have the opportunity to deliver that sustainable product to low- and moderate-income individuals, we are cutting 70 percent of the opportunities out for people who want to 

keep their homes. 

What I would encourage us to do is to have a solution that keeps 

us, the mortgage broker, the person who is in the community, who 

lives in the communities, who works in the communities, we go to 

church with our customers, we build our businesses on referrals. It 

is incumbent upon us to work hard for each and every customer we 

have because we live and work with them. We operate on repeat 

30

business. If giving us the opportunity—if giving mortgage brokers 

the opportunity to deliver the FHA product, I believe that would 

be the first step in the solution to the foreclosure ratios that we 

are having now and to build a long-term base for sustainable—for 

maintaining sustainable homes and build net worth for customers 

in the future. 

[The prepared statement of Mr. Smith can be found on page 88 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Killmer? 

STATEMENT OF WILLIAM P. KILLMER, GROUP EXECUTIVE 

VICE PRESIDENT FOR ADVOCACY, NATIONAL ASSOCIATION 

OF HOME BUILDERS 

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

Biggert, and members of the subcommittee. My name is Bill 

Killmer and I am the National Association of Home Builders Group 

vice president for advocacy. We thank you for the opportunity to 

testify on behalf of NAHB on the subject of FHA revitalization. 

First, I want to thank the members of this subcommittee for your 

strong bipartisan support of FHA reform during the 109th Congress and for taking action so quickly here in the 110th. 

The ongoing turmoil in the subprime mortgage markets greatly 

increases the urgency for enactment of FHA legislation. While 

subprime mortgage programs have played a valuable role in expanding homeownership opportunities, some lenders have resorted 

to less rigorous lending practices that have harmed borrowers in 

the housing finance system. The unfortunate experience of such 

borrowers provides the compelling reason why FHA needs the tools 

to meet its mission objectives more effectively. Indeed, I believe 

that much of the trouble in the subprime mortgage market and the 

hardships it has produced for many borrowers could have been 

avoided if the FHA had been in a better position to respond to 

changing market forces in the past few years. The popularity and 

relevance of FHA single family mortgage insurance programs 

waned over the past 2 decades as its programs failed to keep pace 

with mortgage market developments and needs. That vacuum was 

exploited during the past 5 to 7 years as competing subprime mortgage loan programs lured many borrowers into untenable situations. 

FHA’s lack of responsiveness to market needs has placed many 

borrowers in highly risky and inappropriate loan structures where 

they were charged unreasonably high fees and interest rates and 

often faced onerous pre-payment terms. Many of these borrowers, 

despite limited cash resources and/or tarnished credit, could have 

qualified for market rate FHA-insured loans. In numerous instances, this is due to statutory constraints that have limited 

FHA’s ability to respond to the needs of borrowers who might have 

otherwise chosen FHA. 

So NAHB looks forward to working with the committee in the 

coming weeks to advance comprehensive FHA reform legislation 

that includes, among many other worthy changes, the following key 

reforms. 

31

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

enable deserving potential home buyers to buy homes in many 

high-cost areas. The artificially low limit restricts choices for home 

buyers who use FHA-insured mortgage loans. They are pushed to 

the lowest echelon of available homes throughout the country and 

in many areas FHA loan limits preclude borrowers from purchasing new or recently constructed homes. So NAHB supports recalibrating local loan limits to 100 percent of the area median and 

increasing the national floor for FHA loan limits. 

Second, NAHB believes that FHA can effectively serve a broad 

range of borrowers while acknowledging that the risk of default 

varies widely. In fact, some delineation in credit risk is necessary 

if FHA is going to prudently provide an alternative to subprime 

borrowers who cannot get reasonable loan terms on conventional 

loans. To be competitive, FHA must also have greater flexibility in 

establishing down payment requirements and both comprehensive 

reform bills currently before the subcommittee contain provisions 

that would alter the present structure for determining the amount 

of cash a borrower would have to invest to qualify for an FHA-insured loan in addition to the parameters to which the mortgage inserts premium would be determined. NAHB has long supported efforts to provide the FHA flexibility in these areas, and we look forward to working with this committee to advance such needed reforms. 

Third, in many communities condominiums represent the most 

affordable path to homeownership. Unfortunately, FHA’s requirements for condo loans are burdensome, differing significantly from 

requirements for mortgage loans that are secured for single family 

detached homes. The net result is a severe limitation on the availability of FHA-insured mortgages for those attempting to purchase 

a condo unit. So NAHB supports efforts to consolidate all of the 

single family mortgage insurance programs under one section of 

the National Housing Act. This would be a major step in reopening 

FHA-insured financing to this critical affordable market segment. 

Fourth, FHA’s Home Equity Conversion Mortgages, or HECMs, 

allow homeowners who are at least 62 years old to access equity 

in their homes without having to make mortgage payments until 

they move out of their home. HECMs have found increasing acceptance among seniors as a financial alternative. However, the current 

program cap and the unrealistically low loan limit keep FHA from 

serving this growing segment of the population. Reform legislation 

should also ensure that seniors are able to employ HECMs to purchase homes that are more suitable to their current lifestyle and 

activities, including newly built homes that typically offer lower 

maintenance and operating costs. 

And, finally, NAHB supports efforts to increase limits on FHAinsured multi-family loans in high-cost areas. Currently, there are 

some areas in the country where construction costs are so high that 

use of the FHA programs is just not possible. With severe shortages of affordable rental housing in most of the high-cost markets, 

this change would enable developers to provide much needed new 

affordable housing to low- and moderate-income families. 

Thank you once again for this opportunity, and I would welcome 

any questions you may have. 

32

[The prepared statement of Mr. Killmer can be found on page 56 

of the appendix.] 

Chairwoman WATERS. Thank you very much. We are going to 

move right into our questions now, and I will recognize myself for 

5 minutes. For the first set of questions, I want to go directly to 

you, Ms. Harrison. You said you submitted a set of recommendations to HUD. Do we have a copy of those recommendations by any 

chance? If not, would you please submit them. 

Ms. HARRISON. It has been sent to staff and we can make sure 

that you and the other members of the committee receive those directly. 

Chairwoman WATERS. I would appreciate it because it sounds as 

if you have some very, very good recommendations. I have heard 

twice now about the condo problem. 

Ms. HARRISON. Yes. 

Chairwoman WATERS. Mr. Killmer has referenced it and you referenced it first, so would you explain to me what is the problem 

with the financing of condos by FHA? 

Ms. HARRISON. Certainly, ma’am, thank you. There are several 

provisions, at this moment condos are financed, there are four different funds that FHA uses. Single family is the MMIF fund. What 

we propose is that condos be moved to the single family, the MMIF, 

because it is an appropriate place for it to be and it does not have 

the problems with—occasionally funds stop for these programs 

under the other fund. The continuity of funds is important for us 

as Realtors and for home buyers because if you have written a contract to purchase a home, one assumes that the funds will be there 

when you are ready to close. And if the availability stops due to 

some other constraint in a multi-family area or some other problem, it is extremely frustrating, and we are talking about probably 

a major life event for that first time home buyer who is purchasing 

the condo. There are other—the smaller strictures, for instance, if 

you are buying a condominium in a development, you have to prove 

that 51 percent of those are homeowner occupied. I myself can remember—and this has not changed throughout time, so you can 

see that the paperwork involved in even trying to ‘‘prove’’ who lives 

in a house at some time can be very difficult and that prevents a 

borrower from perhaps purchasing a home, and this was in the 

Fort Washington area of Maryland, that would have been a very 

feasible option in every other way but the funding was not available. 

Chairwoman WATERS. I get it. We are going to take a look at 

that. 

Ms. HARRISON. You are a quick study. 

Chairwoman WATERS. The other thing that I am going to ask you 

and others maybe to refer to in the few minutes that I have left 

is, is this refinancing of existing mortgages by FHA a problem, or 

is it not allowed? 

Ms. HARRISON. Currently, my understanding is that if the homeowner is considered to be in default, that does not even have to be 

in foreclosure, they are behind on their payments, they are not allowed to refinance, and we think that if they are credit worthy in 

every other respect that the opportunity to refinance into an FHA 

33

product would prevent a defaulting borrower from becoming a foreclosure borrower. 

Chairwoman WATERS. Okay, so you would suggest to me that we 

could help to straighten out the situation for those who are about 

to be in trouble, or may have gotten into trouble already, so that 

they could refinance and FHA would be able to save them from losing their homes right now with this crisis that we have going on, 

is that correct? 

Ms. HARRISON. That is our proposal and, yes, we believe that is 

indeed possible, but of course it would call for expeditious passage 

of legislation to allow that. 

Chairwoman WATERS. Okay. 

Mr. ROBBINS. Very briefly, let me add? 

Chairwoman WATERS. Yes? 

Mr. ROBBINS. Madam Chairwoman, one of the problems is that 

it is very difficult to get to borrowers when they go into delinquency. Like human nature dictates, sometimes when you owe people money, they are the last ones you want to talk to. And so they 

do not respond to queries and many times we have to use consumer 

groups and whatever means we have to get to them. Under current 

FHA regulation, at the time they go into delinquency, FHA could 

not come in and be one of the solutions or represent one of the solutions. So Commissioner Montgomery’s ability to change that language, I think, would be imperative to helping many, many homeowners who are trapped in those mortgages today. 

Chairwoman WATERS. All right, we will certainly make note of 

that. I am going to go to our ranking member, Mrs. Biggert, now 

for questions for 5 minutes. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. Mr. Killmer, 

how do we ensure that there are adequate underwriting standards 

for FHA products so that the expansion into a pool of risky borrowers will not pose a threat to the Mutual Mortgage Insurance 

Fund? 

Mr. KILLMER. I think that is a careful balance that the subcommittee has to strive for—clearly diving deeper into that pool is 

going to help the broad strata of folks that FHA could reach. 

NAHB believes that the provisions that are in both of the bills go 

in the right direction in terms of risk-based credit pricing and the 

changes in the down payment requirements and certainly the mortgage insurance premium provisions. And we would urge that those 

provisions be as simple and straightforward given the nature of the 

complexity for the borrower to understand so that they will be utilized to a more full extent. 

Mrs. BIGGERT. Thank you. Would anyone else like to respond to 

that? 

Mr. ROBBINS. Yes, just a very brief comment for you. 

Mrs. BIGGERT. Mr. Robbins? 

Mr. ROBBINS. Part of the foreclosure issue that we are going to 

be facing and looking at currently was caused by low FICO scores, 

no income, and no asset underwriting. FHA, I would like to remind 

all of the Congress, that FHA uses specific underwriting, more traditional underwriting, in the approval of their loans. And so it is 

relatively rigorous and should not be confused with what caused 

some of the problems that we are currently facing. 

34

Mrs. BIGGERT. Thank you. Ms. Harrison, in one of my former 

lives, I did real estate as an attorney. In Illinois, there was a court 

case which after that required attorneys to be present at closings. 

And one of our jobs obviously was to go over the loan agreement 

and explain that to the purchaser. How close are the Realtors to 

examining the loan documents since Realtors are the ones that 

really are on the forefront of encouraging a buyer to be able to 

come up with the monies for a home, and I was just wondering if 

Realtors ever really see, well, this person really is never going to 

make it but we are going to go ahead with the sale? 

Ms. HARRISON. That is an excellent question and we as Realtors, 

indeed Realtors and not attorneys, and certainly we would never 

set ourselves out to be attorneys, traditionally accompany our 

buyer clients and our seller to the settlement table and sit there 

and will assist them with our own advice but the need for counsel 

and to review documents is still something that we would encourage our buyers to do, to have their own counsel. In the State of 

Maryland, you often make settlements in an attorney’s office, but 

very often it may simply just be a settlement officer not actually 

an attorney who explains the documents. And, quite frankly, if you 

have seen—if any of you have seen loan documents recently, they 

are extraordinary in their complexity. I remember the former secretary, Mel Martinez, said that he as an attorney was absolutely 

floored by the volume of documents that they look at. We give people the opportunity to examine their Truth in Lending statement 

at the time that they are making loan closing and again will offer 

what expertise we have. But once again we are facilitators of the 

transaction and certainly would never set ourselves up to give 

them that type of advice. 

Mrs. BIGGERT. Thank you. I will yield back so we can continue. 

Chairwoman WATERS. Thank you very much. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. Since we have a 

vote coming, I will be brief. In H.R. 1852, which was introduced by 

Chairwoman Waters and Financial Services Chairman Barney 

Frank, it includes a requirement for pre-purchase counseling for 

zero or lower down payment borrowers, the higher risk borrowers. 

I am interested in getting a response from each of you. Do you feel 

that is cumbersome, that it burdens those who are in the business 

of trying to get these mortgages done? 

Mr. SMITH. I would like to take that answer. 

Mr. CLEAVER. Thank you. 

Mr. SMITH. On behalf of our organization, financial literacy skills 

and financial literacy subsets are the cornerstone of our process. 

We strongly advocate financial literacy skills for individuals at an 

earlier age, even before they start buying a home, but especially 

when it comes to buying the largest investment of their life. Currently, under some government subsidized programs, down payment assistance programs, in order to qualify for those programs, 

you have to participate in pre-purchase counseling. From our Association’s standpoint, we strongly agree with that and it helps not 

only in that particular transaction but those skill sets can be extrapolated into future financial decisions. We strongly agree with 

that and it is not a cumbersome process. 

Mr. CLEAVER. Thank you. Ms. Harrison? 

35

Ms. HARRISON. Yes, we, the National Association of Realtors, 

support borrowers having the option of getting information about 

the availability of counseling services and recognize the importance 

for many families to get that extra instruction to make financial 

decisions about this very important purchase. 

Mr. ROBBINS. I would also add that we support counseling 

strongly, but not mandatory counseling, because it increases costs 

to the borrower and slows down the process. 

Mr. CLEAVER. I am sorry, the last part? 

Mr. ROBBINS. Because it increases the cost to the borrower and 

slows the process down. So we support counseling absolutely but 

not mandatorily required. My understanding is that it is not mandatory in the bill, it gives the commissioners guidelines to determine the extent of counseling that should be available. But it is our 

experience that counseling has been really effective to avoid poor 

decision-making because of lack of information. And so we have 

been working very hard to expand those services broadly and any 

time it could be inserted into the process, we found it helpful to 

low- and moderate-income buyers. 

Mr. DIAZ. Yes, I would say that we join with the others and are 

in strong favor of the provisions that are in the bill, would not find 

them cumbersome, but only say that if this moves forward as part 

of the reform legislation, that the Congress work to appropriate 

enough HUD funds so that the counseling services would be available. 

Mr. CLEAVER. I think in the HUD budget, there is like $50 million? 

Mrs. BIGGERT. Would the gentleman yield just for a quick insert 

here? 

Mr. CLEAVER. Yes. 

Mrs. BIGGERT. We have a problem in Illinois where in one county, it started out just in a small section but there is a requirement 

for counseling and it is for everyone no matter what size mortgage 

it is, and there just are not the people there to do the counseling, 

people cannot close, and they are losing houses because their mortgage does not go through. So we need to look closely at that. 

Chairwoman WATERS. Let me just, if I may, Mr. Cleaver, ask you 

to yield, so that Mr. Ellison may ask a question, and then we are 

going to adjourn the committee. We have votes, and have about 8 

minutes left on the Floor. May I? 

Mr. CLEAVER. I yield to the ranking member of the committee. 

Mr. ELLISON. Madam Chairwoman? 

Chairwoman WATERS. Yes. 

Mr. ELLISON. The questions I have maybe I can catch one of our 

panelists in the hallway. Okay, well, let me just ask you this question, and particularly Mr. Smith, your experience as mortgage 

originator, after you do the deal, the mortgage originator takes 

their fees out and then moves it on and a loan officer will—after 

the loan goes to the secondary market, what happens to loans that 

end up in foreclosure once they enter the secondary market and are 

securitized, could you speak to that reality and how that impacts 

on the generalized effect of the foreclosure phenomena we see happening nowadays. 

36

Mr. SMITH. That is a good question. Once a transaction is closed 

with a mortgage broker and it is actually moved on to the secondary market, that loan is then taken over by a loan servicer. 

That loan servicer is the one who is in communication with the 

customer on a monthly basis collecting payments and paying taxes 

if it is impounded. Once that transaction goes beyond—gets into default, that customer is notified and called and continuously attempted to be contacted to work out some type of plan or to determine what in fact the problem is to get that person back on track. 

Yes, sir? 

Mr. ELLISON. If I could just follow up real quick. So one of the 

things that I have been concerned about is who is left to do a workout with the customer once the mortgage has been sold to the secondary market, the bank no longer has it, who in your view is in 

a position to re-work the terms of that mortgage so that it doesn’t 

end up in foreclosure? 

Mr. SMITH. The loan servicer would be the first avenue of redress 

for the consumer who has experienced a payment default. And 

there are programs, I need to be real clear with you, the loan 

servicer on the secondary market is extremely, extremely motivated in working with the customer to keep that loan on the books 

and get it back into a paid-as-agreed status. 

Mr. ELLISON. Thanks. 

Chairwoman WATERS. I would like to thank all of the members 

of the committee for being here today to help us learn more about 

this FHA reform that we have embarked upon, and I would like 

to also thank the panelists for taking time from their busy schedules to travel to be here with us today. Your information is invaluable. We will get an FHA reform bill through this Congress. We 

certainly have a few differences to work out, but I am convinced 

that just as we were able to move the bill before, we will be able 

to move it again, and it will be a bill that I think most people can 

embrace. So thank you so very much for being here today, and I 

look forward to working with you. 

Mr. SMITH. Thank you very much. 

[Whereupon, at 12:00 p.m., the hearing was adjourned.] 

(37)

A P P E N D I X

April 19, 2007

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