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LEGISLATIVE PROPOSALS TO DETERMINE 

THE FUTURE ROLE OF FHA, RHS, 

AND GNMA IN THE SINGLE- AND 

MULTI-FAMILY MORTGAGE MARKETS, PART 2 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 8, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–57 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 8, 2011 ............................................................................................ 1 

Appendix: 

September 8, 2011 ............................................................................................ 33 

WITNESSES 

THURSDAY, SEPTEMBER 8, 2011 

Galante, Carol J., Acting Assistant Secretary for Housing/FHA Commissioner, 

U.S. Department of Housing and Urban Development ..................................... 14 

Isakson, Hon. Johnny, a United States Senator from the State of Georgia ....... 4 

Tozer, Theodore ‘‘Ted’’, President, Government National Mortgage Association 

(Ginnie Mae) ......................................................................................................... 17 

Trevino, Tammye H., Rural Housing Services Administrator, Rural Housing 

Service, U.S. Department of Agriculture ........................................................... 16 

APPENDIX 

Prepared statements: 

Galante, Carol J. .............................................................................................. 34 

Isakson, Hon. Johnny ....................................................................................... 50 

Tozer, Theodore ‘‘Ted’, ...................................................................................... 59 

Trevino, Tammye H. ......................................................................................... 70 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of Community Associations Institute .............................. 75 

Letter from Carol J. Galante supplying additional information for the 

record ............................................................................................................. 92 

Written statement of the Mortgage Bankers Association ............................. 94 

Written statement of the National Low Income Housing Coalition ............. 103 

(1) 

LEGISLATIVE PROPOSALS TO DETERMINE 

THE FUTURE ROLE OF FHA, RHS, 

AND GNMA IN THE SINGLE- AND 

MULTI-FAMILY MORTGAGE MARKETS, PART 2 

Thursday, September 8, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INSURANCE, HOUSING

AND COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:14 p.m., in room 

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Hurt, Capito, Garrett, Dold; Gutierrez, Waters, Cleaver, and Sherman. 

Ex officio present: Representative Frank. 

Also present: Representatives Hinojosa and Green. 

Chairwoman BIGGERT. This hearing of the Financial Services 

Committee’s Subcommittee on Insurance, Housing and Community 

Opportunity will come to order. We are going to start with two 

opening statements from the chairman and the ranking member, 

and then have our first witness. And then we will come back to 

anybody else on the committee who would like to make an opening 

statement. 

Thank you all for your patience. Those pesky votes sometimes 

get in the way of moving forward on time. 

With that, I will yield myself time for an opening statement. 

I would like to welcome everybody here today. Today we continue 

our work as part of a broader initiative that the Committee on Financial Services is undertaking, a comprehensive review of the 

mortgage finance system, including the secondary markets in the 

public and private sector. 

Combined, FHA, Fannie Mae, and Freddie Mac monopolize well 

over 90 percent of the mortgage market. The private sector can’t 

compete with the taxpayer-backed government housing programs. 

We must allow the private sector to capture as much of the mortgage market as possible, and the only way to do that is to phase 

out the government and taxpayer-backed capital to allow private 

capital to return. 

Today’s hearing is the second in a series—the first hearing was 

held on May 25, 2011 [Serial No. 112–32]—and we will again examine legislative proposals to help stabilize the housing market, facilitate the return of private capital to housing finance, and reduce 

2 

taxpayers’ liabilities. These proposals are a starting point for our 

continued constructive dialogue about the future role of the FHA, 

our Federal Housing Administration; the RHS, the Rural Housing 

Service; and Ginnie Mae in the single- and multiple-family mortgage markets. This hearing offers Administration officials an opportunity to weigh in on our reforms. It also offers the Administration a chance to provide input on the future roles of FHA, RHS, 

and Ginnie Mae; how best to ensure their financial soundness and 

wind down their government involvement in the mortgage market, 

while increasing private-sector participation. I guess I have said 

that an awful lot. 

Additionally, we have asked the Administration to comment on 

H.R. 2573, a bill introduced by Representative Hinojosa to reauthorize an expired program that allows FHA to provide Federal 

mortgage loan insurance to finance health care facilities. Does this 

program pose any risk to taxpayers? And are there private-sector 

alternatives? 

Finally, along with our panel of two witnesses, we have invited 

a special guest from the upper Chamber today, or as we sometimes 

call it the ‘‘House of Lords.’’ Senator Johnny Isakson of Georgia is 

here to discuss his views on the impact of the Administration’s 

March 31st proposed risk retention rule, specifically the Qualified 

Residential Mortgage, or QRM. As proposed, these rules could distort competition in the housing market, limit the availability of 

credit, raise costs for consumers, add uncertainty, and cost jobs. In 

addition, they could actually increase the market share of FHA and 

the GSEs, which would move us 180 degrees in the wrong direction. 

Private-sector businesses need regulatory relief, certainty, and 

common sense, not unfair competition from Washington. And 

Americans need jobs, which is what businesses, not governments, 

create. The bottom line is that the government needs to get out of 

the housing business, let the private sector return, and allow the 

free market to work. Housing typically leads us out of recession, so 

we must get this right. 

With that, I recognize Ranking Member Gutierrez for his opening 

statement. 

Mr. GUTIERREZ. Good afternoon, and thank you, Chairwoman 

Biggert, for holding this hearing. I would like to welcome our witnesses, especially the Senator, and thank them for being here today 

as we continue to discuss the role these agencies play in our Nation’s housing. 

When the subcommittee convened on the same subject in May, 

we received feedback from industry representatives that I suspect 

will be echoed in the testimony we hear today. First, that hearing 

highlighted the fact that our communities continue to struggle, and 

that the housing market remains particularly fragile. Second, the 

witnesses acknowledged that government housing programs have 

played a critical, stabilizing role by providing access to loans for 

creditworthy borrowers. The agencies represented here today have 

prevented the housing crisis from spiraling out of control, and done 

so while managing risk to the American taxpayer. Third, we heard 

loud and clear that any additional proposals intended to reduce 

FHA’s footprint in the housing market must be carefully considered 

3 

and be incremental. Otherwise, we risk causing additional disruption at a time of continued economic instability. 

I would like to note that Congresswoman Waters reintroduced 

the FHA reform bill in July, a bill that makes it easier for FHA 

to go after bad lenders, strengthens oversight for the single-family 

program, and raises FHA multifamily loan limits in very high-cost 

areas. This is substantially the same FHA reform bill that passed 

this committee and the House of Representatives with broad bipartisan support a little over a year ago. 

The discussion draft that we are considering again today contains some of those bipartisan provisions, but it has several others 

that I am concerned will limit access to homeownership at a time 

when the housing market is still struggling. The proposal to increase the downpayment requirement from 3.5 to 5 percent could 

effectively cut cash-strapped individuals out of the housing market. 

I have to tell everyone that it kind of feels like ‘‘Groundhog Day’’ 

on this issue, because we have seen it before. A similar amendment 

was struck down in this very committee by a vote of 52–12 and 

failed substantially when it was raised in the House of Representatives. 

The draft also substantially reduces FHA loan limits and sets 

new county-by-county limits. In the State of Illinois, we have probably a couple dozen counties. This change would be an added administrative burden to FHA and would make it more difficult for 

small lenders to offer FHA loans in their communities. That sounds 

a lot like the kind of unnecessary government regulation that stifles business and economic growth that my Republican colleagues 

often condemn. County by county. Every bank is going to have to 

figure it out. More government regulation. 

Even more importantly, the change will make homeownership 

more expensive for families across the Nation. A reduction in loan 

limits is already scheduled, and it is simply too risky to implement 

further reductions at this time. 

Finally, I am concerned that moving the Rural Housing Service 

under the authority of the FHA will prove expensive to implement, 

will lead to minimum gains in efficiency, and could result in less 

attention to rural housing needs. A large-scale reorganization like 

the one proposed would be extremely disruptive to both agencies at 

this time. Why are we spending more money to create more government agencies? Let us keep it the way it is until we can implement 

some of the other aspects of this. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you, Mr. Gutierrez. 

Now, we will turn to our first panel. And then after that, we will 

have the remainder of the opening statements. I would like to welcome Senator Johnny Isakson of Georgia. It is nice to see you back 

in this Chamber. 

Senator ISAKSON. It is good to be home again. 

Chairwoman BIGGERT. That is good. 

So with that, I recognize you for 5 minutes for your statement. 

4 

STATEMENT OF THE HONORABLE JOHNNY ISAKSON, A 

UNITED STATES SENATOR FROM THE STATE OF GEORGIA 

Senator ISAKSON. Chairwoman Biggert, Ranking Member Gutierrez, and other members of the subcommittee, thank you very much 

for having me testify before this very important subcommittee on 

the very important investigation that you are doing. You have my 

written statement, which I will not read. I will try and emphasize 

what I think is so important on the QRM issue, the housing market, and mortgage credit in this country. 

Chairwoman BIGGERT. Let me just say that without objection, 

your written statement will be made a part of the record. 

Senator ISAKSON. Thank you, Madam Chairwoman. 

For reference only, let me give you my life experience in singlefamily housing. I spent 33 years, 11 of them as a salesman and 

sales manager for a real estate company, and 20 of them running 

that real estate company. In the latter years of my service, before 

I came to Congress, we averaged selling more than 10,000 singlefamily homes a year in metropolitan Atlanta and utilized every 

type of conventional financing, as well as FHA, VA, and securitized 

loans. 

During that career I went through 4 housing recessions: 1968; 

1974; 1981–1982; and 1990–1991. They were all devastating, but 

nothing anywhere close to the pervasive devastation of the current 

crisis. And what you are looking at is going to be important to the 

recovery of the housing market. 

When the Dodd-Frank bill came before the United States Senate, 

and the 5 percent risk retention proposal on mortgages was made, 

I got involved with Mary Landrieu, Kay Hagan, and other Members of the Senate to develop what became known as the Qualified 

Residential Mortgage rule to the Dodd-Frank bill. It was intended 

to create an exception for risk retention. And this is critically important in the entire testimony. The Dodd-Frank bill eliminates 

from risk retention Freddie, Fannie, and FHA, but any other lender would be required to hold 5 percent risk retention in a residential mortgage that it made. Five percent risk retention is a tremendous burden that very few people could actually meet. 

So we put in the Qualified Residential Mortgage to address the 

crisis that was caused in 2007. We did not have a downpayment 

recession; we had an underwriting recession. Rules became looseygoosey; people made mortgages to folks as long as they could fog 

up a mirror. They didn’t check their qualifications, they didn’t appraise the houses, they didn’t check their income ratios, and we 

made bad loans. They became securitized and sold. And, in fact, 

partially because of congressional delegation, Freddie and Fannie 

owned a portfolio of those loans which began the crisis that started 

in September 2008 when they all collapsed. 

So our intention was to ensure in the bill that you could exempt 

from risk retention any loan made that met the Qualified Residential Mortgage standards, which meant: good ratios of debt to 

monthly payment or income to monthly payment; a credit report 

that demonstrated you could make the payments that you would 

end up having to pay; a background check that included third-party 

verification of your employment, credit run and appraisals made; 

and all the normal underwriting we saw for years and years. With 

5 

that done, you could exempt yourself from the 5 percent risk retention, which would attract tremendous private capital into the residential mortgage market. 

Unfortunately, when the rule got to the FDIC, the Comptroller 

of the Currency and the others on the committee writing the rule 

published that the chairman referenced in March added to those 

requirements a minimum 20 percent down to avoid risk retention. 

And that is what I am here to really emphasize today. 

Beginning with 1967’s creation of the 90 percent loan, and 1982’s 

creation of the 95 percent conventional loan, during the last 45 

years, the American housing market has depended in large measure on loans that were up to 95 percent loan to value, conventional 

loans. Those loans had additional insurance on the amount of the 

loan above 80 percent called private mortgage insurance, which 

was double underwriting and double security for the lender, so 

their principal risk was 80 percent of the purchase price, the same 

difference you would have if you required a 20 percent cash downpayment and made an 80 percent loan. 

The effect of the rule that has been circulated, and to the credit 

of the FDIC—Chairman Bair and others—they postponed the comment period from the end of June until the beginning of August to 

get more comments in about QRM. I do not know what process 

they are in, but 39 other Members have joined me in a letter from 

the Senate asking them to review the rule and remove the requirement for 20 percent down, and instead allow loans up to 95 percent 

of value as long as there is private mortgage insurance and credit 

enhancement on that amount of the debt above 80 percent. 

The reason we did it is this: The consequences of the QRM rule 

as it is written going in place will be devastating for FHA. Because 

they are exempt, everybody will move to FHA because of its downpayment of 3.5 percent, and I respect the Chair’s move to consider 

5 percent. Whichever it is, it is a lower downpayment. As I understand it, almost 40 percent of the loans made in 2010 were by 

FHA, and 10 years ago, it was 2 percent. The whole marketplace 

has descended on them because of the evacuation of readily available credit and capital into the conventional mortgage market. 

The QRM rule will impact between 40 and 50 percent of the traditional housing purchases in America and remove those people 

from competitiveness at a time when we need people coming back 

to the marketplace to stabilize values and begin to build back the 

U.S. housing market. 

So my message to the subcommittee today, and it is the same 

message I have shared with the Comptroller of the Currency, 

Chairman Bernanke, Chairman Bair and others is that the QRM 

rule is a well-intended rule that has devastating consequences. It 

will put pressure on FHA, Freddie Mac, and Fannie Mae to the extent they can’t stand it. It will reduce the flow of conventional capital into the mortgage markets. It will cause more job loss, less construction, and a more protracted housing recession. All those things 

I hate to predict, but they, in fact, would take place. 

Madam Chairwoman, I appreciate your allowing me to comment 

on it, and I will be happy to respond to any questions the committee might have. 

6 

[The prepared statement of Senator Isakson can be found on 

page 50 of the appendix.] 

Chairwoman BIGGERT. Thank you very much, Senator. 

What you have had to say shows that what started out has 

changed dramatically because of the regulations? 

Senator ISAKSON. What started out as an intention to exempt 

from risk retention qualified loans has turned into a definition of 

a qualified loan that is going to make it impossible for most Americans in the marketplace to get a loan other than through FHA, 

Freddie or Fannie. 

Chairwoman BIGGERT. Okay. What would be the ramification if 

QRM remains as it is right now to those loans that are not under 

QRM? Would the property value change and others if they don’t 

qualify, but they still get a mortgage? Is that going to have an effect on the actual value of the property? 

Senator ISAKSON. QRM was designed as an exemption to the 5 

percent risk retention. 

Chairwoman BIGGERT. Right. 

Senator ISAKSON. So if QRM stays the way it is, and it only applies to loans with 20 percent down or more and the other parameters written in it, then it greatly eliminates the amount of 90 and 

95 percent conventional financing in the marketplace to almost 

zero and puts FHA in the position of carrying the full burden for 

the entire country. This would be a devastating load on FHA, 

which is already under stress. 

I want to reiterate that a conventional 90 and 95 percent underwritten loan requiring private mortgage insurance to insure the 

amount of the loan above 80 percent would be just as competitive 

as a 20 percent down loan with no private mortgage insurance requirement, which is what the QRM rule is trying to promote. So 

the net effect is going to be a great restriction in the available conventional money for 90 and 95 percent loans in the marketplace. 

And the few people who will make them will price them high because they control the marketplace, which ends up hurting the consumer as well. 

Chairwoman BIGGERT. So it decreases competition? 

Senator ISAKSON. From a lending standpoint, it does. Already, in 

anticipation of this rule going into effect, private mortgage insurance companies have closed. Most mortgage brokers in the marketplace are not operating. There has already been a devastating effect on the mortgage industry just because of the anticipation of 

this rule. And it will be even worse on the overall housing industry 

if it goes into effect as it is written. 

Chairwoman BIGGERT. Can you estimate how many jobs would 

be lost from that? 

Senator ISAKSON. No. I know when to stop guessing at things, 

and I would not want to guess at something like that. 

Let me just say this: We will never get our job market back until 

construction comes back. The City of Atlanta, in my State of Georgia, has 10.2 percent unemployment, about 1.1 percent higher than 

the rest of the country, principally because we were a major southeastern Sunbelt growth State with a lot of construction. Those jobs 

are gone, and they are not going to come back until residential 

housing comes back. And we are never going to get below 8 percent 

7 

in unemployment until we do return the construction industry to 

some sense of viability. That is not a chicken-or-egg question; it is 

residential housing first, and then it is commercial properties and 

apartments second. 

Chairwoman BIGGERT. Thank you very much. 

I would you like to recognize the ranking member of the full committee, Mr. Frank, for 5 minutes. 

Mr. FRANK. Thank you. I appreciate it. This is a very important 

conversation to have. And I agreed that 20 percent was too high, 

but we have some disagreements that I wanted to talk about. 

First, as one of those who helped write the bill, I differ with the 

Senator’s interpretation of the purpose. I thought risk retention 

was very important, and I wanted it to be the rule, not the exception. 

I just finished reading Michael Lewis’ ‘‘The Big Short’’ and 

Gillian Tett’s ‘‘Fool’s Gold.’’ I don’t think there is much question 

but that the ability to make loans and not have to pay a penalty 

if they went bad was an enormous contributor to this. And I guess 

I have a couple of questions. First, Senator, you mentioned mortgage insurance. My problem with mortgage insurance is it is there 

if the loan goes bad, but for that very reason it is not a deterrent 

to making loans that shouldn’t be made. The mortgage insurance 

would hold you harmless. So I don’t understand how mortgage insurance—I understand the purpose of mortgage insurance in some 

ways, but I don’t see it as a substitute for risk retention. How is 

mortgage insurance a deterrent for the lender making bad loans? 

Senator ISAKSON. Let me apologize at the outset. I didn’t realize 

you had snuck in. I certainly would have recognized you when I 

recognized— 

Mr. FRANK. I wouldn’t say that I snuck in, Senator. I thought I 

kind of walked in. 

Senator ISAKSON. Quietly came in. 

That is an excellent question, and it allows me to elaborate on 

something, a point I do want to make. When I first did 90 and 95 

percent loans as a residential salesman in the 1960s and 1970s, 

you had dual underwriting. You had the principal underwriting by 

the lender that loaned 80 percent, or in some cases 75 percent, and 

then the 90 percent became a piggyback second mortgage, if you 

will, made by somebody like Mortgage Guaranty Insurance Corporation, or PMI, or somebody like that. So you had dual underwriting. You had the principal lender making the first loan of 75 

to 80 percent of value, did their underwriting, and then the PMI 

company came in, and in return for their guarantee and a fee they 

received, they underwrote the loan as well. In fact, initially there 

were even rate differentials on the piggyback loan over the principal loan. So you had double underwriting, or a redundant underwriting system. 

Secondly, the principal lender, their risk on the loan was 80 percent or 75 percent of the value of the house, not 90 or 95, because 

the insurance was on that amount above 75 or 80 percent. That 

worked really well until we got into the mid-2000s, when stated income, and Alt-A, and windshield appraisals, and zero downpayment, and all the other stuff came in, and Wall Street securitized 

or sold securities to raise the capital to make these loans to prinVerDate Nov 24 2008 11:40 Mar 05, 2012 Jkt 072598 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\72598.TXT TERRIE
8 

cipally people who really weren’t either prepared or qualified to 

make them, which is why I say, and this is— 

Mr. FRANK. But, Senator, the point is that mortgage insurance 

didn’t deter that then. Why would it deter it now? 

Senator ISAKSON. I am sorry? 

Mr. FRANK. The fact is that mortgage insurance did not deter 

that, because it did not deter the lenders from making the loans 

that they shouldn’t have made because they would be held harmless. 

Senator ISAKSON. First of all, in the QRM amendment which we 

placed in the Senate, it put in principles of underwriting that had 

to be met. 

Mr. FRANK. I agree with that. 

Senator ISAKSON. Hold on a second. What happened with the collapse of the mortgage market or the housing market was no underwriting at all. There was none whatsoever. And that is what took 

place. 

Mr. FRANK. I understand that. 

I don’t want to prolong this. I just want to make two points. First 

of all, I disagree that risk retention is as heavy a burden as many 

have argued it. If the ability to securitize with no risk retention is 

essential to the housing market, I have to wonder where people 

were living before the 1990s. Because, of course, securitization of 

mortgages is a very recent phenomenon of the 1990s. People used 

to not be able to securitize. They had 100 risk retention, and a 

pretty good housing market, as you indicated during that period 

when you were there. 

Second, with regard to mortgage insurance, this is my point, I 

understand these problems. My point is that mortgage insurance is 

not a sufficient deterrent because the lender is held harmless. 

And the final point I would make is this, and I think it is an odd 

argument for me to be having with some of my conservative 

friends. Yes, we wrote those standards in. Those standards are dependent on regulators enforcing them. Those standards are, of 

course, not self-executing. And I agree we want to have standards, 

and the regulators didn’t do enough. 

One of the things I think we agreed on bipartisanly was—and I 

know you would agree that many of the loans were being made by 

people who were outside of the regulatory structure because they 

were nonbanks. And if only banks had made the loans, we wouldn’t 

have been in as much trouble. So, we have extended a set of rules 

to nonbanks. 

The problem, though, is that I don’t want to rely wholly on the 

regulators. I think the thing about risk retention is it is a market 

incentive to the lender itself. So my concern is that I don’t think 

we should put too much on the lender. 

Finally, let me say this, and I agree, I agreed with legislation 

that was brought forward by the Majority to make it explicit that 

Fannie and Freddie would be covered by risk retention. And I had 

this argument back and forth. I am now ready to find ways to cover 

FHA. I do think that distinction is a problem. The downpayment 

issue can be dealt with. But, yes, I think it is a good argument. 

I am for a strong risk retention requirement, and probably including FHA. 

9 

Chairwoman BIGGERT. The gentleman’s time has expired. Would 

you like to respond? 

Senator ISAKSON. If I could, please. We have a lot of areas of 

agreement. And I want to acknowledge, first of all, your statement 

in July following my statement on the Senate Floor regarding the 

QRM rule as it was being circulated, because I think we both share 

some common feelings about that. Your reference to the savings 

and loans and their housing market did fine before securitization, 

as you probably will remember, it was the change of a Federal rule 

on S&Ls that caused the ultimate collapse of them and the housing 

market. When we took away their interest preference over banks 

in terms of what they could pay on deposits, it dried up all their 

money to make loans. So they basically went out of business. And 

then Freddie and Fannie really burgeoned because securitization 

became the way that capital was created to put into mortgages in 

America up until the time that we also dictated and got Freddie 

and Fannie more in the business of holding some of those in their 

portfolio, which gave a purchaser of those subprime securities that 

were then made on Wall Street, which ultimately contributed to 

the problem. 

So I fully agree with you that there are concerns, but I would tell 

you this: Quality underwriting makes good loans, and historically 

that has always been true. 

Mr. FRANK. Can you depend on the regulator to enforce those? 

My problem is I don’t want to depend entirely on the regulator. I 

want the lender to have more incentive than they would otherwise 

have to make those kind of loans. 

Senator ISAKSON. That is why we wrote those criteria in QRM, 

because we did think there should be a standard if risk retention 

was waived so you didn’t just make a loosey-goosey loan or a poorly 

underwritten loan. 

Mr. FRANK. Thank you. I will try to sneak out now. 

Chairwoman BIGGERT. The gentleman from Virginia. 

Mr. HURT. Thank you, Madam Chairwoman. 

Thank you, Senator, for speaking to us this afternoon. And I appreciate it in the context especially of sort of the backdrop of what 

I think that most people here in Washington would like to see, and 

that is a winding down of Fannie Mae and Freddie Mac, and also 

in the context of jobs. I would like to hear from you your thoughts 

on the big picture of how we entice the private sector into the secondary mortgage market. I think that is something that is obviously the big struggle that we are facing now for those of us who 

would like to see Fannie Mae and Freddie Mac diminished. 

And the second thing that I would like you to speak to, if you 

would, is as it relates to what you said about the jobs picture in 

your State of Georgia. How do we do it in a way that takes into 

account the fact that we don’t want to put any additional burdens 

on the home-building sector? We don’t want to put additional burdens, unnecessary burdens on the real estate sector. So how do we 

do this in an intelligent way and a careful way so as to wind those 

institutions down, but at the same time do it in a way that doesn’t 

prolong this stalled economic recovery? 

Senator ISAKSON. Let me thank you for the question. And both 

of those are right on point. 

10 

I am deeply disappointed about the failure of Freddie and 

Fannie, as everybody is. And the implied government sponsorship 

obviously became a government obligation and cost this country a 

great deal of money. I am going to have a conversation in a little 

bit with the head of HUD on this very subject in terms of opinions, 

discussions that we might have. 

There is a role for a Freddie or a Fannie, but it is much different 

than the role it has right now. FHA, Freddie, and Fannie are the 

housing market in terms of mortgages in this country principally 

right now, and an implied government sponsorship that is reduced 

over time or amortized over time probably is the best way to bridge 

from where we are to where we need to be. 

I have said publicly that if you took the Pool Re concept, which 

is a concept in Europe where you put a premium fee on each closing, say, 50 basis points or 100 basis points, and that goes into a 

walled-off sinking fund over 10 years’ bills to be the backdrop and 

collateral for the mortgages that are made where you become selfinsured rather than backed by the full faith and credit of the taxpayers probably would be the best way to go to ensure that you 

have liquidity for the purchase of those loans in this country. 

But there would probably be a role for a Freddie or Fannie-like 

institution. And, quite frankly, with regard to multi-family construction, which right now is the only construction in the United 

States, if it weren’t for Fannie Mae and Freddie Mac, there 

wouldn’t be any multi-family construction. So you are going to have 

to find a way to attract that capital in the marketplace, or you are 

not going to have enough liquidity in it to bring the housing market back, either multi-family or single-family. 

I think the one message that—again, I gave this speech in the 

Senate a few months ago, the unintended consequence of well-intended regulators. The big wet blanket that exists over housing 

construction, real estate development, and all the component parts 

are what—the next shoe dropping from a regulatory standpoint. 

I think we need to move as expeditiously as we can to take 

things like the QRM rule, get it straight so it works. If it accomplishes what the former chairman said in terms of insuring, you 

have better underwritten, better qualified loans, but we have some 

sense of predictability. I personally would guess, and I haven’t 

talked to them, but I think FHA would like a little relief from the 

pressure it is under right now as being the only act in town for a 

substantial number of the mortgages made in the United States. 

This is my opinion now that I am stating. Government’s role is to 

mitigate risk, but right now it looks like everybody’s job is to eliminate risk. And if you eliminate risk, you eliminate free enterprise 

and capital formation and all the things we need to come back in 

this country. 

So I think we need to measure the effect of regulations, be sure 

we have those regulations that are in place to protect the consumer 

and ensure a fair and a level playing field, but not so proscriptive 

as the proposed QRM rule that it actually drives capital away from 

the housing market at a time it has very little capital coming to 

it as it is. 

Chairwoman BIGGERT. Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you. 

11 

Chairwoman BIGGERT. You are recognized for 5 minutes. 

Mr. GUTIERREZ. Okay. So I want to thank you again, Senator, for 

your testimony. And I agree that the Qualified Residential Mortgage is important and will encourage a return of private capital, 

with quality underwriting, to the mortgage market. But the details 

matter. You said you think 5 percent downpayment is the right 

number for the QRM standard. Can you speak a little bit more 

about that and why 5 percent? 

Senator ISAKSON. I think it is the right minimum number. I don’t 

think any lower downpayment would be—I wouldn’t—given the experiences we have seen and the history I had in the industry, except for our veterans, who have earned every bit of their 100 percent loan guarantee that they have on a VA loan, I think skin in 

the game is very important. I know people tend to protect that 

which they have an investment in, and that initial cash downpayment is important. 

But I think 5 percent—all I can base it on is my experience of 

almost 30 years when we were doing 95 percent loans in the marketplace. It was an alternative to the FHA loan, which was a 3 or 

31⁄2 percent downpayment. And as long as the loan is underwritten 

to demonstrate the borrower can make the payments, has a credit 

rating that shows they are responsible, the house is appraised, and 

you have third-party verification of employment and ability to pay, 

and you have parameters on the ratio between monthly payment 

and gross monthly income, you can well underwrite a loan whose 

downpayment, whether 20 or 5 percent, wouldn’t be any different 

in terms of the quality of the loan. 

Mr. GUTIERREZ. I just needed to ask that one. I won’t use my 

whole 5 minutes. Thank you. 

Chairwoman BIGGERT. The gentleman yields back. 

The gentleman from New Jersey. Do you have any questions? 

Mr. GARRETT. Maybe not so much questions, but just a comment 

or two. I appreciate the comment from the gentleman from Massachusetts saying that he does not feel that we should be depending 

upon the regulators so much in this area. Would that be the case 

with regard to Dodd-Frank, which, as we know, is going to promulgate over 400 new regulations, where the regulators are going to 

have more authority than they ever had before? I think that was 

the entire intention of that piece of legislation; not to let the markets be the deciding factors, but the regulators. Could we peel that 

back? Maybe that is a direction we should be going. 

To your comment with regard to the wet blanket, I agree with 

you as far as it is in part the next shoe to drop that is out there 

as far as the market is concerned. It is also, you would probably 

agree with me—the wet blanket also is the fact that we have those 

400 regulations coming down the pike, and the small banks having 

to hire all of the new compliance officers in order to comply basically with it. That certainly is a wet blanket, I think you will agree, 

as well. 

But I do appreciate the Chair holding this important hearing 

today, because reforming FHA and Ginnie Mae is important to the 

overall fix to this problem. The fact that we are looking at over 90 

percent of the U.S. mortgage market being controlled or financed 

by the Federal Government is an unsustainable path that we are 

12 

on right now. With debt over $14 trillion, it is one that is simply 

not sustainable to add an additional $10 trillion of credit risk to 

the Federal Government’s balance sheet now. We must begin, I 

think you agree, to add private capital back into the mortgage market. 

Now, one small step that we can do in that regard will occur at 

the end of this month, and that is when conforming loan limits are 

set to drop from 729- down to 625-. I think this is an appropriate 

first step in beginning to transfer the housing risk off the taxpayers’ back and put it in the private sector. In the aftermath of 

that big debt discussion that we had last month, it is very clear the 

Federal Government currently has very limited resources in which 

to allocate to the broader public. I do not feel that subsidizing, and 

basically that is what we are doing here, almost million-dollar 

homes is the way to utilize those limited resources. 

If you look at the banks out there and the broader financial conditions that they are in, the banks are basically flush right now 

with deposits. And they have ample room on their balance sheets 

to take on an additional segment of the market without, I have 

heard this from experts, a drastic spike in rates. And so for someone to be able to afford that $750,000 house, how much do they 

need to make? They basically need to make a quarter of a million 

dollars a year to afford that. This is the same segment of the population that my colleagues on the other side of the aisle say are the 

rich and that should be paying more taxes. Maybe the solution is 

not to tax them even more and then subsidize them on one hand; 

it is simply allow those people to keep their own money and basically pay for their own house, without the subsidization of the taxpayer. 

I also don’t think FHA was ever intended to help these higherincome individuals to buy their homes. I believe FHA should only 

be used to help lower-income individuals and first-time buyers. I 

know housing conditions are still very fragile, as the Senator has 

indicated, and that is why I advocate for reforms to occur over time 

in a responsible and appropriate manner. But we really need to 

begin with these first steps because it will be harder otherwise to 

put the market back in order. 

With that, I yield back to the Chair, and I thank the Senator. 

Chairwoman BIGGERT. I thank the gentleman. 

And we thank you, Senator, for coming. I think that you really 

helped us with a lot of information. I appreciate your testimony. 

Senator ISAKSON. Thank you, Madam Chairwoman. I just leave 

you with one—if you remember one message from what I said, the 

deep collapse of the housing industry in America was principally a 

failure of underwriting, and that is what caused the collapse and 

led to all the subsequent things that took place. And that is where 

we ought to focus to ensure loans are qualified for the future. 

Chairwoman BIGGERT. Thank you so much for being here. 

Senator ISAKSON. Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Before we call up the next panel, I do 

want to mention something that is very important, and that is that 

Scott Olson is retiring on Friday, having served 20 years with the 

House of Representatives. The majority of Scott’s career has been 

with the Financial Services Committee, working on housing and 

13 

mortgage finance issues. So we thank Scott for his service to the 

U.S. Congress and to this committee. 

Mr. FRANK. Madam Chairwoman? 

Chairwoman BIGGERT. I would yield to the ranking member. 

Mr. FRANK. Madam Chairwoman, thank you first for your courtesy in sending someone to make sure I didn’t sneak out prematurely. I appreciate it, because I would have been very regretful 

if I hadn’t been able to participate. Thank you for your taking this 

initiative. 

The greatest bargain the American people get without question, 

in my judgment, consists of the people who work for us here. They 

can have different opinions about us, but on both sides of the aisle, 

in our personal offices and in the committee offices, the staff here 

work longer hours for less pay than almost all of them would make 

in other contexts. And they do it because of that kind of commitment. No one has exemplified that better than Scott Olson. He has 

become a source of information about housing policy in all aspects: 

legal; economic; and social. That has been an invaluable asset. His 

dedication to the public interest is extraordinary. And I will miss 

him, this Congress will miss him. He has every right, having 

worked as hard as he did, to move on. I know he will still be available. And after a suitable period of purdah mandated by the ethics 

rules, I look forward to drawing on his advice again. But I want 

to join you, Madam Chairwoman, and thank you for giving us the 

chance to thank an extraordinary public servant. 

Chairwoman BIGGERT. Thank you again. 

We will now hear from the second panel, if you would take your 

seats at the table. With that, if we have any more opening statements, I hope that they will be short. 

Mr. Hurt, do you have an opening statement? You are recognized 

for 1 minute. 

Mr. HURT. Just briefly. Thank you, Madam Chairwoman. 

Thank you for holding another important hearing in this subcommittee to discuss ways in which we can strengthen FHA, RHS, 

and Ginnie Mae. I appreciate your leadership on these issues and 

your commitment to responsible policies that will get the housing 

market back on the right track, which is vital to our economy in 

Virginia’s Fifth District, my district, and across the country. 

As the witness at our last hearing on the subject testified, we 

must take steps to encourage the private sector to return to the 

marketplace and reduce the risks to which taxpayers are currently 

exposed. The FHA’s role in the mortgage market has increased to 

the point that it is crowding out private investment. Excessive government intervention causes consumers to behave in ways that do 

not adhere to market principles. 

The reforms that Chairwoman Biggert proposes will take modest 

steps to promote the return of private capital to the housing market, while improving the effectiveness and efficiency of the housing 

programs that these agencies operate. With our Nation over $14.5 

trillion in debt, Fifth District Virginians want Congress to closely 

scrutinize government programs and policies that are putting taxpayers at risk and to implement commonsense reforms to remedy 

these problems. 

14 

Again, I want to thank the Chair for holding this hearing today. 

I look forward to the testimony of our distinguished witnesses. I 

thank you all for coming. I look forward to your perspectives on the 

discussion draft before the subcommittee today. 

I yield back my time. 

Chairwoman BIGGERT. Thank you. 

With that, I will introduce our second panel: Mrs. Carol Galante, 

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

Development; Ms. Tammye Trevino, Administrator, Housing and 

Community Facilities Programs, U.S. Department of Agriculture’s 

Rural Development Agency; and the Honorable Ted Tozer, President, Government National Mortgage Association. 

Thank you all for being here. Let me just say that, without objection, your written statements will be made a part of the record, and 

you will each be recognized for a 5-minute summary of your testimony. After that, we will have 5 minutes of questioning from our 

members. 

I recognize Mrs. Galante for 5 minutes. 

STATEMENT OF CAROL J. GALANTE, ACTING ASSISTANT SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Ms. GALANTE. Thank you, Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee. Thank you for inviting me here today. Having served as Deputy Assistant Secretary 

of Multifamily Programs at HUD for the last 2 years, and having 

recently been named Acting FHA Commissioner, I am pleased to 

have this opportunity to testify. As my predecessor Bob Ryan becomes Senior Advisor for Housing Finance, I, as Acting Commissioner, look forward to continuing the progress we have made 

under Secretary Donovan to strengthen the FHA for the future. 

As you know, FHA has provided a critically important source of 

mortgage credit during this economic recovery, particularly for underserved communities. And I will build upon a strong foundation 

of reforms initiated by the Administration and continue the three 

fundamental priorities we have focused on since President Obama 

took office: first, stabilizing the housing market and assisting 

homeowners at risk of foreclosure; second, protecting FHA’s fiscal 

health and strengthening risk management; and third, ensuring responsible access to credit and liquidity as we work with Congress 

to bring back private capital to the market and build a 21st Century housing finance system. 

But, of course, the job is not over, and our housing market and 

economy remain fragile. That is why I am pleased to share my 

views today on the draft legislation. And I want to commend the 

subcommittee for three provisions in particular. The first is the 

proposal to increase access to credit by supporting small lending institutions such as community banks that participate in FHA’s programs, but are not able to close FHA loans in their own names. 

Second, we are pleased that the legislation would extend FHA’s 

ability to hold all lenders to the same enforcement standard for 

loans that were improperly originated or in which fraud or misrepresentation were involved. FHA’s current indemnification auVerDate Nov 24 2008 11:40 Mar 05, 2012 Jkt 072598 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\72598.TXT TERRIE
15 

thority covers those lenders responsible for 70 percent of FHA’s 

loan volume, but the time has come to hold all underwriters to the 

same standards, and, with this legislation, we will. 

And last, the legislation provides explicit authority to terminate 

lenders for poor performance in specific geographies or on a nationwide basis. Such flexibility will ensure that we can protect FHA 

from lenders whose poor performance put the taxpayers at risk. 

I would, however, like to call your attention to several provisions 

that the Administration looks forward to working with you to refine. The first is the proposal to create separate capital reserve accounts for the General and Special Risk Insurance Funds through 

which we provide financing for the FHA multifamily and health 

care loan guarantee programs, among others. Even though we 

agree that FHA must manage risk to these portfolios with the 

same focus and urgency as we treat the single-family fund, FHA 

is concerned that the creation of new capital reserve requirements, 

as detailed in the discussion draft, would be unworkable because 

they would apply the current requirements of the MMI Fund to 

funds that have a very different risk characteristic and structure, 

and contain a mix of existing and legacy programs. And so we look 

forward to working with the subcommittee to determine an alternative means to increase transparency and appropriately manage 

the risks associated with the GI/SRI Funds. 

In addition, we are particularly concerned about the legislation’s 

proposal to increase the minimum downpayment for all FHA borrowers to 5 percent. If this had been required during the past year, 

345,000 families would have been shut out of the opportunity to become homeowners. Our experience during this crisis has shown 

that the combination of downpayment and FICO score is a far better predictor of loan performance than either of these components 

alone. We believe it is essential to retain the flexibility to respond 

to the market and loan performance conditions with a variety of 

tools rather than being locked into a specific downpayment structure. 

And last, while my colleague with USDA will specifically address 

the rural components of the draft, let me say that we are already 

working very closely in aligning the agency’s rental programs 

through a White House Rental Policy Working Group that includes 

HUD, USDA, and Treasury. And having initiated a similar conversation on the single family side as well, we believe it makes 

sense to continue focusing for now on those efforts rather than contemplating any more extensive reordering of the various Federal 

agencies’ roles in these programs as outlined in the legislation. 

I look forward to working with the subcommittee to refine this 

legislation and to address a number of other significant issues important to the Department, one of which is the methodology used 

in the bill to determine loan limits, which warrants further discussion and analysis given that it appears it could dramatically lower 

FHA loan limits in some places. I look forward to working with you 

to ensure that FHA continues to fulfill its mission of supporting 

our housing market and economic recovery, while minimizing risk 

to the taxpayer, as we have done throughout Secretary Donovan’s 

tenure. 

Thank you, and I look forward to your questions. 

16 

[The prepared statement of Assistant Secretary Galante can be 

found on page 34 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Ms. Trevino, you are recognized for 5 minutes. 

STATEMENT OF TAMMYE H. TREVINO, RURAL HOUSING SERVICES ADMINISTRATOR, RURAL HOUSING SERVICE, U.S. DEPARTMENT OF AGRICULTURE 

Ms. TREVINO. Thank you, Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommittee. It is my privilege to 

be with you today to discuss USDA’s role in supporting America’s 

continuing need for safe, affordable housing. For over 60 years, the 

Rural Housing Service, part of the Department of Agriculture’s 

Rural Development Mission Area, along with Rural Utilities Service and the Rural Business and Cooperative Service, has been 

working to help rural America thrive by supporting the housing 

needs of these communities. 

Rural Development is a collaborative agency. Our programs build 

upon one another, ultimately creating efficiencies for the taxpayer 

and for the communities that we serve. As part of the Rural Development Mission Area, Rural Housing Service provides single-family 

homeownership programs, multifamily housing programs, housing 

loans and grants for repair and rehabilitation, and community programs. All are integrated into a more holistic approach of rural 

community and economic development. 

We have exceptional staff and a network of 47 State offices and 

500 area offices across the rural landscape, working closely with 

dedicated partners in the for-profit, nonprofit, and private sector. 

Our field staff deliver programs for all three agencies in the mission area. By being located in rural communities, we are able to 

cultivate important relationships with lenders, REALTORS®, community-based organizations, redevelopment authorities, and others. 

Our efficiency is noted in the strategic centralization of a significant portion of core operations, while leveraging the community 

knowledge of our field structure across all programs. For example, 

staff delivering Rural Housing Service’s Community Facilities Program to eligible municipalities, tribes, and nonprofit organizations 

also work with these same partners on the Rural Utilities Service’s 

water and waste programs. The importance of our local staffers 

cannot be overemphasized. They know the needs of their neighbors 

and their rural communities and provide critical support, both effectively and efficiently. 

In the wake of natural disasters, Rural Development programs 

have worked in concert to build communities from the ground up. 

No other department in the Federal family offers rural communities the range of financial services available from USDA Rural 

Development and staff nearby to provide the technical assistance. 

Utilizing a total budget authority of $1.03 billion, RHS leveraged 

a program level of approximately $26.3 billion in loans, loan guarantees, grants, and technical assistance in Fiscal Year 2010. Our 

programs are provided through the Housing Act in combination 

with the Consolidated Farm and Rural Development Act, or the 

ConAct. 

17 

Rural Housing Service is a big part of Rural Development’s overall success in effective program operations. Delinquencies for Rural 

Development are less than 2 percent of our outstanding loan portfolio of over $150 billion. Despite doubling our borrowers’ numbers 

over the last 2 years, RHS’s direct and guaranteed loan portfolios 

continue to perform well, thanks in large part to our state-of-theart call center, the Centralized Servicing Center in St. Louis, Missouri. In the interest of saving time, information about delinquencies and accomplishment in the RHS programs have been provided in written form. 

While RHS and HUD share an important commitment to meet 

the housing needs of rural America, we believe that our mission 

and the delivery of our programs are different and distinctive. 

Rural Housing, through Rural Development, has the flexibility to 

respond to changing needs across the rural landscape and lead 

other public-sector and private-sector for-profit and nonprofit partners to invest strategically in rural people and rural places, particularly those who are traditionally underserved by conventional 

financial models, and at times where the private sector is unable 

to step in. 

Rural communities have a unique set of challenges, and Rural 

Development is well suited to address these. As policymakers, we 

will look to the future of the Federal role in housing, but it is important that this discussion address the needs that are inherently 

rural. Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee, while we appreciate Congress’ intent to 

identify duplication of services across the Federal Government, we 

do not support the draft proposal in its current form. 

Thank you for the opportunity to be here, and I look forward to 

answering questions. 

[The prepared statement of Administrator Trevino can be found 

on page 70 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Tozer, you are recognized for 5 minutes. 

STATEMENT OF THEODORE ‘‘TED’’ TOZER, PRESIDENT, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE 

MAE) 

Mr. TOZER. Thank you, Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommittee. 

Chairwoman BIGGERT. I don’t think you have your microphone 

on. 

Mr. TOZER. Is that better? 

Chairwoman BIGGERT. Yes. 

Mr. TOZER. Chairwoman Biggert, Ranking Member Gutierrez, 

and members of the subcommittee, thank you for the opportunity 

to appear before you today. 

I have been in the housing finance industry for more than 30 

years, most recently serving as senior vice president of capital markets for National City Mortgage Company, where I managed loan 

pricing, sales, delivery, and pipeline risk management, and where 

I developed a deep appreciation for Ginnie Mae— 

Chairwoman BIGGERT. Could you just pull the microphone a little bit closer? Thank you. 

18 

Mr. TOZER. Okay. To appreciate Ginnie Mae as a lender. Now, 

as Ginnie Mae’s President, my appreciation has only increased. 

As you know, we remain embroiled in the worst housing crisis 

since the Great Depression. In response, Congress and the Administration have launched a number of efforts to stabilize our economy. Even though not every initiative was as successful as we 

might have hoped, as a whole these efforts have made a positive 

difference. Ginnie Mae has played its part, making it possible for 

lenders to continue to lend mortgages. As providing an outlet for 

the sale of government-insured products, we helped stem the tide 

of economic upheaval and have been an essential element of the 

Nation’s recovery efforts. In fact, during the financial crisis Ginnie 

Mae has provided more than $1.2 trillion in capital for mortgages, 

which has financed more than 4.4 million single-family homes and 

nearly half a million multi-family units. 

We have weathered this crisis without requesting any support 

from the U.S. taxpayer. Indeed, our financial condition is strong. 

From 2008 through 2010, during these tough economic times, we 

have actually generated a net profit for the U.S. Treasury of over 

$2 billion, and we expect to earn nearly a billion dollars more this 

fiscal year. And we also hold right now $14 billion in retained earnings on our balance sheet. 

Such strong financial performance is evidence that Ginnie Mae 

is an excellent example of smart and efficient government. For 

more than 40 years, the corporation has served as a principal financing arm for the government mortgage products, ensuring that 

money flows into the domestic housing market. 

In 1970, our corporation pioneered the MBS, mortgage-backed securities. We created the first mortgage-backed security and spearheaded the development of the TBA market. As you know, the TBA 

market, forward trading of MBS, allows borrowers to lock in interest rates on their mortgage before they actually close their loan. 

These markets create substantial liquidity that gives lenders consistent access to capital. Effectively recycling capital allows lenders 

to finance 30-year fixed-rate mortgages at reasonable rates for 

their borrowers. 

Through our organization, the U.S. Government attracts private 

capital into the U.S. housing market and finances government-insured products without raising the national debt, while minimizing 

taxpayer exposure. In fact, Ginnie Mae, in contrast to many other 

MBS entities, earned a profit each year during the housing downturn. In Fiscal Year 2011, it is expected to be our best year ever, 

as mentioned before, making approximately a billion dollars. 

This performance can be attributed to our business model. The 

corporation does not buy or sell securities or loans for investments. 

Our conservative approach to management rests on our solid, inherently risk-adverse business model, the foundation of which is a 

simple pass-through security backed by government-insured loans 

issued by private lenders. Our program is designed so that the capital of the lenders who issue Ginnie Mae securities is available to 

assume losses before Ginnie Mae or the taxpayers are exposed to 

loss. Having lenders act as issuers of the securities has the added 

benefit of ensuring the lenders actually have skin in the game. 

This provides an incentive for lenders to originate well-performing 

19 

loans. The extra layer of capital is critical to mitigating taxpayer 

risk. 

As the market fluctuates, and lenders face increased risk, we 

have made several changes to strengthen our risk-management 

practices. These include increasing net worth requirements, and establishing capital and liquid asset requirements for all issues 

across all of our business lines. The liquid asset requirements are 

especially important to ensure our counterparties have the ability 

to meet their payment obligations. 

As we continue our programmatic adjustments, and as Congress 

deliberates ways to reform housing finance to better suit the current conditions, it is critical we get this right. The proposed QRM 

regulation recognizes that risk retention is an important part of 

creating a sustainable housing finance system. Issuers and originators must have an incentive to make sustainable loans. Without it, 

we risk another crisis. Our challenge is to craft a balanced approach that protects borrowers and allows a robust flow of capital. 

I appreciate this opportunity to share comments on the initial 

discussion draft which are contained in my written testimony. I 

wanted to note that the legislation includes a provision that gives 

the CFO of Ginnie Mae the ability to offer independent views on 

matters concerning Ginnie Mae. While we understand the committee’s desire to maintain a close review of our financial condition, we 

respectfully believe this provision is not necessary. We are a relatively small agency. My staff and I are directly responsible to inquiries from Congress and from this committee, and HUD Office of 

the Inspector General provides independent oversight. 

To the extent the committee believes additional oversight may be 

necessary, I would recommend that the focus be placed on the role 

of the agency’s chief risk officer, because the major risks to Ginnie 

Mae center on the capacity of its issuers to meet their obligations 

to investors and the deterioration of their value-to-servicing portfolio. Thus, potential problems at Ginnie Mae are likely to be identified through our risk-management practices and issue-monitoring 

activities long before it impacts our financial condition. 

Chairwoman Biggert and Ranking Member Gutierrez, our housing finance market remains fragile. Congressional action, Administration effort, and government programs would help to address the 

economic and housing upheaval, provide needed liquidity, and help 

keep the market from complete collapse. 

While Ginnie Mae has been a stabilizing force in the housing 

market, the Administration believes a meaningful reform is needed 

so private investors can return, and I hope my testimony today has 

contributed to greater understanding of Ginnie Mae and the value 

it contributes to our housing finance system. I am committed to 

strengthening this unique organization so that it continues to make 

a sound contribution, and I welcome the opportunity to work with 

Congress on this effort. I look forward to answering any questions 

you might have. Thank you. 

[The prepared statement of Mr. Tozer can be found on page 59 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

We will now turn to questions from members, and I will yield 

myself 5 minutes. 

20 

Mrs. Galante, the Administration estimates from last year, you 

said that if the required payment rose to 5 percent, then 300,000- 

plus homebuyers would be locked out. Do you know how that figure 

was determined? 

Ms. GALANTE. Yes. This was based on homebuyers that we financed last year, and, if they had to provide a higher downpayment, how many of them would not have qualified. 

Chairwoman BIGGERT. Was this a study that was done of all 

homebuyers or— 

Ms. GALANTE. No. Thank you for letting me clarify this. This was 

just of borrowers who were FHA borrowers. We looked at the particular characteristics of those buyers this past year and did a 

quick analysis of how many of them would not have qualified if 

they would have had to pay a 5 percent downpayment. 

Chairwoman BIGGERT. Okay. Could you submit that data or the 

study so that we could have GAO look at that for further review? 

Ms. GALANTE. Sure, we can provide that information to you. 

Chairwoman BIGGERT. Thank you. 

This was kind of what I was asking the Senator about the QRM. 

First of all, how would the higher downpayment requirements in 

the QRM impact FHA? 

Ms. GALANTE. Yes. Thank you for the question. 

This is obviously a challenging topic at this point in time, and 

I want to say that where we are, just to be clear where we are in 

the process, is that absolutely no decisions have been made about 

what the downpayment requirements will be. There was a published rule for comment, and the comments were due August 1st, 

and many, many comments were received. 

Chairwoman BIGGERT. But let us say it was decided that the 

downpayment should be 20 percent. How would that affect FHA? 

Ms. GALANTE. Again, it is difficult to predict how this rule, if it 

were put into effect, would affect FHA. I do want to say, again, it 

was a rule around risk retention for financial institutions making 

loans that will be sold to investors and ensuring that those lenders 

had some skin in the game with respect to risk retention. And so 

it is a very different apples and oranges with FHA. 

Chairwoman BIGGERT. Okay. Do you have any estimate, any 

guess how it would affect; would there be more borrowers, or would 

there be less or would it be the same? 

Ms. GALANTE. Again, I really do not have any particular estimate 

on that that I could provide you. 

Chairwoman BIGGERT. Okay. Then, Ms. Trevino, some of the concerns raised in the FHA and RHS discussion draft deal with the 

preservation of institutional knowledge currently in place at the 

RHS. Should that be moved to HUD? I know you don’t want that 

to go through, but let us assume that it did, or are you using that 

in your working group where you said that these agencies are 

working together? 

Ms. TREVINO. Chairwoman Biggert, thank you for that question. 

I believe that we currently work together very well. I believe it 

would be very premature to propose this type of move. Currently, 

Rural Housing Service addresses the needs of rural America very 

efficiently. We believe that those are the concerns of the country 

21 

right now, and that is the efficiency of our programs and the costeffectiveness of our programs. 

Chairwoman BIGGERT. You have the working group. Was that 

just formed recently? 

Ms. TREVINO. Yes, ma’am. 

Chairwoman BIGGERT. And why was that formed? 

Ms. TREVINO. The one on single family or the rental policy? The 

whole idea is to work in synergy with the other housing programs 

across the Federal Government. We do not believe at Rural Housing Service that horizontal integration of housing programs across 

the Federal Government are always the answer. We believe that 

when the consumers are as complex as our rural consumers, that 

horizontal integration is just one way to look at it, and there are 

better ways to look at how we provide services. 

I would like to give you an example: in the private sector, I think 

you have all heard of the company Apple and iTunes. They are one 

of the best companies in the world at being able to predict environmental dynamics and being able to determine what their customers 

require, and we believe that at Rural Development, we do that. 

Apple could have done what all their competitors do, and they 

could have gone out there and created a great computer. They 

could have had a great operating system. They could have done a 

software that allowed them to— 

Chairwoman BIGGERT. Okay. And I agree that is a great company that has done a lot. So what do you see or predict for housing 

services? 

Ms. TREVINO. We believe that you would upset the synergy that 

currently exists. We don’t believe that in an area like rural America that is as complex as it is, that having this type of integration 

is the answer. 

Chairwoman BIGGERT. Okay. Thank you. My time has expired. 

The gentleman from Illinois. 

Mr. GUTIERREZ. Thank you. 

Mrs. Galante, you mentioned that a 5 percent downpayment requirement on FHA loans would have prevented 345,000 families 

from buying homes had it been in place this past year. You are 31⁄2

now, proposed 5 percent. Can you give us more detail on the impact this proposal might have on the broader housing market? Are 

there any indications, any, that the private market is ready to pick 

up the slack? 

Ms. GALANTE. Yes. Thank you for the question. 

Again, this is a traditional—I want to say traditional role for the 

FHA, to provide financing opportunities for low- and moderate-income buyers, and we have been providing this type of financing 

with 3 percent or 31⁄2 percent downpayments, I think, since 1953. 

So this is a core constituency of the FHA, core customer of the 

FHA, and they would clearly be impacted if we went to a flat 

across-the-board 5 percent minimum downpayment. 

And I do want to also stress that what we are asking for is just 

that it not be an absolute minimum standard requirement. We do 

have flexibility today, and we use that flexibility to look at the combination—as I said in my testimony—of FICO score and downpayment, and that is a much better predictor, and as a result of that, 

we have required higher downpayments for those with very low 

22 

FICO scores. So it is not that we can’t provide that flexibility and 

think that we should. 

Mr. GUTIERREZ. How has business been recently over at the 

FHA? 

Ms. GALANTE. To some other questions that were asked of the 

earlier panelists, I would say this: We obviously rose to a peak in 

the market where we were 30 percent or more of mortgage financing. 

Mr. GUTIERREZ. What were you in the last 12 months? 

Ms. GALANTE. I was just going to say, but over the last 12 

months, we actually have come back down to, I think, around 17 

percent of the market. So we are still fairly robust, but we have 

started to scale back under the current scenarios and under the 

current rules and conditions. 

Mr. GUTIERREZ. How much has the FHA cost the Federal Government during—the American taxpayer during the last 10 years? 

Ms. GALANTE. Again, the FHA is self-sustaining, and is—we 

charge— 

Mr. GUTIERREZ. I wanted to see if there was a difference, because 

every time I come to one of these meetings, I put a bet, and I always win it, that Fannie Mae and Freddie Mac are going to get 

mentioned at least half a dozen times. So I am well on the way, 

and by saying that, I might have messed up my bet, but I won’t, 

because they can’t help themselves. Fannie Mae and Freddie Mac 

will be mentioned again and again. 

So unlike Freddie and Fannie, you don’t lose any money? 

Ms. GALANTE. That is correct. We have a robust— 

Mr. GUTIERREZ. And recently you have had up to 30 percent of 

all the mortgages that are being issued in America? 

Ms. GALANTE. That is correct. Again, we— 

Mr. GUTIERREZ. And if we raised it to 5 percent, 345,000 families 

would not have gotten a loan from your agency? 

Ms. GALANTE. Again, if you use those—that as a predictor from 

last year’s borrowers, you use that as a predictor, yes. 

Mr. GUTIERREZ. And I know that Senator Isakson said that it 

was critically important to the economy that we get construction 

started once again. First we have to obviously be able to sell 

homes. People have to be able to get mortgages. 

Let me ask you one other question. How about rentals? How are 

we doing on—because there are a lot of people who can’t own a 

home, but they—how are we doing with developing so that people 

will create rental units for people to— 

Ms. GALANTE. Yes. Actually, the FHA multifamily and health 

care programs have grown significantly in this past few years, 

partly because there hasn’t been capital in the private market 

available for those facilities as well, and so we have been producing 

over 100,000 units a year with the financing that FHA has been 

able to provide. 

Mr. GUTIERREZ. Last question. I have 19 seconds, and I promised 

I wouldn’t go over. So you are about 17 percent today? 

Ms. GALANTE. That is correct. 

Mr. GUTIERREZ. What were you 5 years ago? 

Ms. GALANTE. I don’t know that exactly. 

Mr. GUTIERREZ. What historically have you been? 

23 

Ms. GALANTE. Historically, before this crisis, it was 2 or 3 percent, I think. 

Mr. GUTIERREZ. So you went from 2 or 3 percent to up to over 

30, and you are back down to 17 percent? 

Ms. GALANTE. That is correct. 

Mr. GUTIERREZ. All right. We need to keep you working. Thank 

you. 

Chairwoman BIGGERT. The gentleman yields back. 

The gentleman from Virginia is recognized. 

Mr. HURT. Thank you, Madam Chairwoman. 

And building on, following up on his question actually, do you believe that your market share—and maybe could you just talk about 

this in the context of a couple of things. Do you believe the market 

share that you all currently occupy is larger than what FHA was 

designed to handle? And can you talk about that market share in 

the context of, certainly, I think, of an opinion of a majority on this 

committee who believes that we want to see more private capital 

in the system, not less, and is the market share that you occupy 

crowding out private capital? Can you just talk on that subject generally? 

Ms. GALANTE. Yes, thank you. That is a very important question, 

and I would say this: We have been on record before, and I will 

go on record again, that we certainly do not believe that the FHA 

should be 30, 40 percent of the market. That we do want the private capital to come back into the market is one of the reasons that 

in the White Paper on the future of housing finance we supported 

the expiration of the higher mortgage loan limits for the Economic 

Recovery Act. And so we are—we think that is a first step in stepping back FHA’s role in the market, and we think that is an important thing to do. 

What the right percentage is of a sustainable FHA for the future, 

what is the exact percentage it should be? It certainly ought to be 

at less than 30 percent. We use in our modeling—I think we could 

be sustainable if it were 10, 15 percent of the market, but we are 

not looking to stay up higher than those numbers. 

Mr. HURT. But did you say that before 2008 it was less than 5 

percent? 

Ms. GALANTE. Yes, I believe that is correct. 

Mr. HURT. Do you believe that is—can you explain why that is 

too little? 

Ms. GALANTE. I am not saying that it is too little. I am just saying we can expand and contract as we are needed. We are there 

to provide a countercyclical approach in the marketplace, so it is 

not that it is not okay if it is down at 2 or 3 percent. It is that 

we can handle probably on a sustainable basis something higher 

than that when it is necessary. 

Mr. HURT. Okay. And in this second question I would like to hear 

from each of you because of your expertise in this area. It has been 

observed, it has been opined that we are not really going to see a 

true housing recovery in this country until we hit the bottom. I 

would love to hear each of you speak to the question as to whether 

or not we have hit that bottom and why or why not. 

Ms. GALANTE. Sure. Thank you again for the question. 

24 

This is one of those moments where I guess I wish I were an 

economist, and I am not. I don’t know whether we have hit the bottom. I think we see some very mixed signals. We have seen some 

house pricing increases in the past 3 months. We think that is a 

positive sign. So I think we are still in a fragile place, but we do 

think things are slowly improving. 

Mr. HURT. Thank you. 

Ms. TREVINO. I have to say that in rural America things seem 

to lag, and you are going to see things happen in rural America 

anywhere from 6 months to 2 years later. So, we may not have 

seen the worst of what the economy is going to do, and yet again 

we are seeing some good numbers coming up. And so we are very 

encouraged that we are going—that it is kind of an up-and-down 

cycle. 

We believe that in rural America it is a little different than in 

urban America. Folks who lose their homes there are going to be 

because of family circumstances, such as divorce or a complete loss 

of jobs. And so we are not seeing as much of the housing market 

effect in rural America that we saw in urban America, but, again, 

they do tend to lag, so I couldn’t tell you. 

Mr. HURT. Thank you. 

Mr. TOZER. Basically from my perspective, we may be closer to 

the bottom than we may think. The reason I think so is that I have 

heard from numerous money managers. Being in the position at 

Ginnie Mae, I talk to a lot of the major money managers around 

the country, and they really are looking now at potentially buying 

blocks of real estate. I always look because my background is in 

capital markets. Whenever you start seeing smart money coming 

in, it looks like you are maybe getting close to the bottom. Again, 

I am saying ‘‘close’’ because I don’t think we have hit bottom, but 

we are probably getting close, knowing that a lot of the money 

managers are looking very seriously at buying real estate, and you 

see it in the REALTOR® numbers. I think last month approximately 30 percent of all the transactions were cash, which indicates to me it is probably being bought by people who are buying 

the property as an investment. So that leads me to believe that 

maybe there is some glimmer of hope that we may be getting closer 

to the bottom than maybe we think, but who knows? Wall Street 

has been wrong before. 

Mr. HURT. Yes, thanks. 

Chairwoman BIGGERT. Thank you. 

I would ask particularly Ms. Trevino and Mr. Tozer, if you are 

seeing evidence of that or have the numbers for how close or what 

is happening in the market, I would really like you to submit that. 

Thank you. 

Mr. Cleaver, you are recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. Let me begin 

maybe with Mr. Tozer. Would you say that the fact that FHA loans 

increased from 2 to 3 percent up to 30 percent represents some 

kind of either increase in fraud or loosey-goosey requirements or 

underwriting standards? 

Mr. TOZER. No. My feeling is, again, when FHA hit the 30 percent market share was a point that private capital had been really 

shook up from the perspective of the problems and a lot of other 

25 

aspects, private labor markets and so forth, to the point where people were reluctant to invest in loans that were not guaranteed by 

the U.S. Government, and so because of that, Ginnie Mae picked 

up a large market share. But I don’t think people were drawn to 

the FHA program because of the underwriting standards. It is 

more the fact of lack of private capital because of the amount of 

losses taken in the private-label market. 

Mr. CLEAVER. If we raised the downpayment requirements to 31⁄2

to 5 percent, do we have any empirical evidence that the private 

sector will pick it up? 

Mr. TOZER. In today’s market right now, it is probably somewhat 

limited as far as the availability because of the healing factor that 

is going on right now in the private sector, but I really can’t speak 

to the magnitude. There is interest. The private sector always finds 

a price for things, but the question is, I think it is probably limited 

as far as the availability today just because of the healing process 

that the private sector is going through right now. 

Mr. CLEAVER. I am going to shamelessly say that my cousin, who 

actually lives in Congresswoman Waters’ district, is president-elect 

of the California REALTORS® Association. I was out there a week 

ago and had a chance to talk to him about real estate and how 

houses are being sold in California. His concern was that if we 

raise the downpayment requirement, that it is going to hurt the industry, and the industry is already in a depression. Do any of you 

see that differently? 

Mr. TOZER. Again, I really can’t speak to it, because, again, my 

responsibility is kind of the capital markets side, but to understand 

how it plays out and what you are seeing at the primary market, 

I really don’t have the expertise to talk about it from that perspective, to understand what the impact would be. 

Ms. GALANTE. So, again, I would just say that for some borrowers 

the ability to have the 31⁄2 percent downpayment and not being 

locked in to having to put down 5 percent is a huge difference in 

terms of their ability to qualify. And FHA needs to look closely at 

the underwriting of every borrower, and if, again, their credit score 

is too low, then you may want to require a higher downpayment. 

But that combination is, again, just a much better predictor of a 

person’s success, and so we really feel strongly that we don’t want 

to be just locked in to it must be 5 percent and above, and, again, 

historically FHA has been serving that underserved borrower, and 

we want to be able to continue to do that when circumstances allow 

for it. 

Mr. CLEAVER. But we could exclude, by raising the downpayment, individuals who could, in fact, afford with standard underwriting procedures homes, but could not come up with a downpayment, particularly in a recession? 

Ms. GALANTE. That is correct, yes. 

Mr. CLEAVER. Ms. Trevino, do you agree with that? 

Ms. TREVINO. Yes, Congressman, thank you, and I do agree with 

what has been said. In rural America, we are not going to see the 

type of private-sector involvement in terms of making rural loans, 

and therefore the ability for us to continue a no-down-payment program that we have is essential. Rural Americans make on the average $10,000 less than their urban counterparts, and very seldom 

26 

can afford that downpayment, so we would have a huge loss of 

homeowners or new homeowners in the future if we required that. 

Mr. CLEAVER. Thank you. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

The gentleman from New Jersey is recognized for 5 minutes. 

Mr. GARRETT. I thank the Chair, and I will begin where the 

Chair was asking Ms. Galante, with regard to the numbers that 

you said, that if we raised from 31⁄2 to 5 percent, you said it was 

300 what? 

Ms. GALANTE. Three hundred forty-five thousand. Again, estimate based on if those were the same borrowers that we would be 

approaching going forward. 

Mr. GARRETT. Sure. And so when you say it is an estimate, in 

reality, did you actually scrub the numbers? If I was one of those 

categories in that list, did you scrub my asset list to see whether 

or not I actually had the additional funds to go to pay that extra 

money? 

Ms. GALANTE. So, again, thank you. 

I do want to be clear. This is not a long-term, longitudinal, robust study. This was an estimate based on a scan of— 

Mr. GARRETT. But it is not—let us be clear, it is a statistical 

analysis of how many people had the 3.5 who applied for that, and 

how many would be at the 5 percent; not really going back and saying, of the ones you looked at, do you, Scott Garrett, have—if I was 

going to buy a half-a-million-dollar house, 31⁄2 to 5 percent, I would need another $7,500 roughly, right, to go to that? You didn’t go in 

and say, Mr. Garrett, do you have all the additional $7,500, or can 

you secure that someplace else, so you could come up with that 

number, or did you do that? 

Ms. GALANTE. We did not. And, again, I would be happy to provide you the level of work that went into that estimate. 

Mr. GARRETT. So in reality you don’t know, and because—and 

just using that scenario, hypothetically, for somebody to go from 

31⁄2 to 5 percent, $7,500, having just gone through this with my 

own house, that is the cost of a new furnace, for example. For that 

individual you really want to make sure that individual has not 

only the wherewithal to pay the mortgage each month on that halfa-million-dollar house that he is buying, but also the upkeep of the 

house. He should be able to afford all the other things. So he 

should be able to afford that extra $7,500 if next week, tonight, you 

find out that your furnace goes, your hot water heater goes and 

that sort of thing. 

So that is all part of the equation. So we really don’t have the 

data to say how many people lost out, would lose out, if we go from 

31⁄2 to 5 percent. 

Ms. GALANTE. Again, it is a rough estimate. We did look at the 

reported assets that were in the loan file at the time the loans were 

made. We do do full underwriting, so we do have full information 

on these borrowers. 

Mr. GARRETT. One of your statements was, ‘‘we were trying to 

serve the underserved borrower.’’ One of my questions is, who is 

that? Is the underserved borrower the person who is trying to buy 

a million-dollar house really? Because if you are borrowing 

27 

$750,000, you may be buying then a million-dollar house. Is that 

really what the intention or the purpose of the FHA is to provide 

that person? Because as I said in my opening statement, that person is making a quarter of a million dollars. Do you really see that 

as your role? 

Ms. GALANTE. This is an important issue, and we have been 

clear, again, in the White Paper that we support lowering the limits back to the traditional FHA formula for setting loan limits. 

Mr. GARRETT. So what would that be? 

Ms. GALANTE. It varies by regional jurisdiction, and I just will 

say this: The reform bill before us would take that methodology 

that we use right now, which is based on a median income for a 

county in a standard, in an MSA, so in a region, and drill it down 

even further to just county by county. 

Mr. GARRETT. You heard the opposition to that. 

Ms. GALANTE. Right, and we do have some concern with the impact of that. But just going back to where it has traditionally been, 

125 percent of the median for the area, will be a step back for FHA 

in the marketplace. 

Mr. GARRETT. Let me ask you a question we dealt with over in 

the Budget Committee. CBO, the Congressional Budget Office 

scores Fannie and Freddie—yes, I will bring them up today—by including market risk when they evaluate them, when they score 

them. Do you believe that we should be scoring market risk also 

with FHA? And, if so, how do we accomplish that? Is that something you can do by yourself, or is that something that you should 

encourage Congress or the Administration to do? 

Ms. GALANTE. This is a very interesting question. I actually did 

look at the CBO study, and I would say this: The concept of fair 

value accounting is really based if you are looking at liquidating a 

company and how you account for that company. So FHA is controlled, as you know, by the Federal Credit Reform Act and accounting standards for that. We do look at and are continuing to 

improve our models for looking at underlying economic risks, so 

what is happening, what are the trend lines in the marketplace, 

what is happening with house prices. So when we do our actuarial 

studies of what kind of losses we might take, we are every year 

getting more and more sophisticated about how we do that statistical— 

Mr. GARRETT. So you will get market risk in there? 

Ms. GALANTE. So we will get economic factor risks. And when 

you say market risks, the Federal accounting rules, we don’t apply, 

for example, what it would cost if we were borrowing private capital because we are not, in fact, borrowing private capital. So it 

really doesn’t make sense, in our view, to take it to that extent. We 

do agree that it is important from an actuarial basis to be understanding market and economic risks that are happening in the 

marketplace. 

Mr. GARRETT. I yield back. I see my time is over. Thank you. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

The gentleman from California, Mr. Sherman, is recognized for 

5 minutes. 

Mr. SHERMAN. Picking up on the questioning of the gentleman 

from New Jersey, he has experience in many things, but not buying 

28 

a home in the Los Angeles area, and I think that there is only— 

I am aware of one bipartisan piece of legislation that Congress 

could take in the next month or two that would help avoid a double-dip recession, and that is legislation to maintain the qualifying 

loan limit. If we don’t keep the $729,750 in the Los Angeles area, 

there will be a precipitous decline in the value of all properties as 

those properties where you need a 729 loan all of a sudden drop 

by $100,000, and the homes a few miles away that are more modestly priced will, in turn, drop by $100,000. And whether that 

means a double-dip recession only in 10 major areas in this country, or whether it means a double-dip recession for the entire country is an economic experiment that I don’t want to carry out on the 

American people. 

If we see a decline in effective demand for housing, that is to say 

not just new families who want a home, but families who can qualify, we are going to see a precipitous decline in the price of housing, 

the value of housing again. 

Ms. Galante, all my questions are for you. You are the winner. 

Ms. GALANTE. Thank you. 

Mr. SHERMAN. There was a time when the private sector could 

provide loans in excess of the conforming loan limit without the involvement of Fannie, Freddie, Ginnie Mae, and FHA. Our financial 

system is broken right now. It remains broken. Is there any current evidence that the marketplace is prepared to service loans 

above the conforming loan limit? And I don’t mean—Malibu homes 

will do just fine. If you need $20 million to buy a home in Malibu, 

you probably own a bank, but the loans in that 417- to 625-, 625- 

to 729-, is there any evidence that the private market is right now 

able to step in with reasonable rates and reasonable terms? 

Ms. GALANTE. I appreciate the question. And let me just say, we 

obviously are in a difficult time, and making these judgments about 

where the market is going, where the housing market is going, and 

whether private-sector capital will come back in at specific places 

is difficult to make. Again, our judgment has been that for the 

FHA, at this point in time, the step back from the higher limits to 

what they traditionally have been is something that can be done 

without major impact. 

Mr. SHERMAN. Are you speaking also as to qualifying loan limits 

for Fannie and Freddie, or is your focus just on the FHA? 

Ms. GALANTE. My focus is just on the FHA. 

Mr. SHERMAN. Okay. I would like to move on. Ignoring the 10 

high-cost areas in the country, is the Administration concerned 

that lowering the formula from 125 to 115 is going to make home 

ownership unavailable and hurt the housing market? 

Ms. GALANTE. Are you talking about the formula in the FHA reform bill? 

Mr. SHERMAN. Yes. 

Ms. GALANTE. We are concerned that the elimination of the national floor and going to a county-by-county assessment in particular could have a major impact on how low the formula would 

drive the maximum FHA loan limits down considerably in a number of places. 

Mr. SHERMAN. The whole purpose of the 5 percent retention was 

to make sure that the private sector had skin in the game. These 

29 

are private-sector experts, not just people buying a mortgage pool. 

And now that private-sector expertise with skin in the game could 

be the originator, probably could also be the private mortgage insurer. 

The proposed QRM rule would exempt FHA-insured loans from 

the risk retention requirements, but it would not exempt loans insured by private mortgage insurance. Private mortgage insurance 

is private capital and is an alternative to the FHA. Unlike the 

FHA, private mortgage insurers place private capital in the first 

loss position rather than the taxpayer. Shouldn’t the Federal housing policy ensure that private mortgage insurance, which relieves 

the taxpayer of risk, is not disfavored compared to government alternatives in the QRM rules? 

Ms. GALANTE. Let me just say that the QRM is still under advisement with an interagency— 

Mr. SHERMAN. That is why I asked the question, to make sure 

that those writing those rules get your input on this important 

question. 

Ms. GALANTE. Yes. Thank you, and we will—I know we are taking all of those comments under advisement. 

Mr. SHERMAN. They want to hear from you. Do you have an answer to my question? 

Ms. GALANTE. Because we are in that rulemaking progress, process number 1 and number 2, I should just be clear that I am not 

the main point person for HUD on the QRM. Mr. Ryan is leading 

that effort. And, again, we are one voice of a number of voices as 

part of that rulemaking process. 

Mr. SHERMAN. Thank you. I will also have some questions for the 

record. Thank you very much. 

Chairwoman BIGGERT. Perhaps Mr. Ryan could respond for the 

record? 

Ms. GALANTE. Thank you. 

Chairwoman BIGGERT. The gentlelady from California is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Madam Chairwoman. We 

have returned to work, and you got right on it with one of the most 

important issues of our time, what is going to happen in this housing market, and in particular what is going to happen with FHA, 

and, of course, what is going to happen in the whole discussion 

about loan modifications, and how are we going to make sure that 

FHA is financed in ways that it can carry out its mandate, etc. 

I suppose I could ask a thousand questions, but I am really interested in hearing from any of you who would like to volunteer, what 

do you know about the rumors about the Administration’s ideas 

about what to do with the housing market relative to homeowners 

who are underwater, who can’t get loan modifications, who find 

themselves languishing in kind of a no-person’s-land here with the 

banks appearing to—and the servicers, rather, not moving very aggressively on loan modifications. At the same time, no principal 

write-downs taking place, no real refinance program. Can you help 

me? What do you know about any of this? It is unfortunately bogging this country down with a crisis that seems to have no end. 

What can you share with us, Mrs. Galante? What do you know 

about any of this? 

30 

Ms. GALANTE. Yes. Let me just say this: You are absolutely correct. There are a number of programs for loan modification and 

other opportunities for homeowners who are in crisis. FHA, for example, just recently extended our forbearance agreements for people who are unemployed from 4 months to 12 months to help those 

in that difficult situation. 

So there are a number of things that we are doing, and there are 

people being helped, but we are also concerned that we want to be 

looking at every opportunity to do more. We have a short refi program which is specifically for underwater homeowners. It has, 

again, not been utilized as much as we would like. So we will continue to look for opportunities to improve the loss-mitigation efforts 

and to help homeowners retain their homes, and we are actively 

working on those concepts. 

Ms. WATERS. Where do you stand with the discussion by attorneys general, the Attorney General of New York in particular, who 

would like to sue these institutions that have evidently been involved in less than honorable tactics, and where does that put 

FHA? Do you have FHA-financed insurance properties that you 

consider have been a victim of these practices? 

Ms. GALANTE. Thank you for a very important question. FHA 

and HUD, as you may know, have been actively involved in conversations with the major servicers on ensuring that they follow— 

FHA actually has standard loss-mitigation procedures that are required of servicers, and when they are not following them, we have 

actions that we can take against those lenders. And we are in active conversations, as you might know, with the attorneys general 

across the United States on some of these issues, and some of that 

work comes from some initial work that FHA did in bringing forth 

some of the situations that we found in our reviews of these lenders. So I am not in a position to talk any more about those conversations at this point, but we hope to be able to do that soon. 

Ms. WATERS. Thank you very much, Madam Chairwoman. I yield 

back. 

Chairwoman BIGGERT. Thank you. 

The gentlelady yields back. 

The gentleman from Texas. Thank you for being with us, Mr. 

Hinojosa. You are recognized for 5 minutes. 

Mr. HINOJOSA. Chairwoman Biggert, I want to thank you for 

holding this hearing today and for permitting me to participate in 

the hearing. I commend all that you and Ranking Member Gutierrez are doing to help improve the housing situation in our United 

States. 

On July the 18th, I introduced H.R. 2573, the Rural Health Care 

Capital Access Act of 2011. The bill would provide critical-access 

hospitals the opportunity to apply for cost-efficient financing to expand, update, and renovate their aging facilities. 

Senator Herb Kohl of Wisconsin introduced a companion measure in the Senate, S. 1431. The amendment allowing critical-access 

hospitals to qualify for the Section 242 insurance program expired 

July 31st. Both pieces of legislation would permit these critically 

important hospitals to qualify for the Department of Housing and 

Urban Development Section 242 Mortgage Insurance Program, so 

if Congress were to fail to pass either bill and again extend the DeVerDate Nov 24 2008 11:40 Mar 05, 2012 Jkt 072598 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\72598.TXT TERRIE
31 

partment of Housing and Urban Development Section 242 Mortgage Insurance Program, no additional critical-access hospitals 

would be eligible for HUD’s mortgage insurance program. 

Secretary Galante, would you explain on page 11 of your written 

testimony, for everyone’s benefit, what critical-access hospitals are, 

and tell us their purpose, tell us how they benefit communities, 

and lastly the number of them that have benefited from HUD’s 

Section 242 Hospitals Mortgage Insurance Program. 

Ms. GALANTE. Yes. Thank you very much for the question. 

So critical-access hospitals are hospitals in rural communities 

that are permitted under HHS rules for Medicare reimbursements 

to operate facilities that have services and get paid for those services that traditional hospitals would be capped at the amount that 

they could receive. And the reason for that, as an example, they 

could provide extended care to an elderly—frail, elderly person 

where normally the Medicare would require that person to be 

moved. Since there isn’t an easy place to move that person, these 

critical-access hospitals can get higher reimbursements on an ongoing basis, and that is the piece of—the exemption to allow that to 

happen is what expired on July 31st. So it is important that those 

hospitals be able to have that income to qualify for financing under 

our 242 FHA program. 

So these, again, are providing very critical services in very rural 

communities, and the FHA is financing the rehabilitation or perhaps a new wing, that type of thing, of those hospitals. And I do 

want to be clear. Again, like other FHA programs, these financings 

do not cost the taxpayer money. They are self-financing, essentially, with the fees that are charged for these hospitals, but it enables them to do these important renovations, provides jobs in the 

community, significant community benefits from that perspective 

as well. And I believe we have insured about 26 of those hospitals 

over the past number of years, and there are a number in the 

wings that would appreciate this ongoing opportunity. 

Mr. HINOJOSA. Thank you for answering my questions. I represent deep south Texas all the way to central Texas, and much of 

my district is rural; 125 communities and three-fourths of the geographic area is rural. So this is something very important. And as 

you well know, Texas is suffering right now, having lost about 

1,400 homes in the last 3 days to fires in central Texas up around 

Bastrop County and the surrounding area. And so the questions I 

am asking are very important to rural America, and we need the 

Administration to help us so that these two bills that I mentioned 

both in the House and the Senate can pass and be available for 

those counties that need your help. 

Madam Chairwoman, I wish to acknowledge Ms. Tammye 

Trevino for all she has done and continues to do to improve housing conditions, to provide funding for USDA rural housing programs. My area has benefited a great deal, and we want to thank 

you for what you have done. 

Ms. TREVINO. Thank you, Congressman. I appreciate the comment. 

Mr. HINOJOSA. Madam Chairwoman, with that, I yield back. 

Chairwoman BIGGERT. The gentleman yields back, and without 

objection, I ask unanimous consent that the following statements 

32 

be submitted for the record: a statement from the Mortgage Bankers Association dated September 8th, 2011; a statement from the 

National Low Income Housing Coalition dated September 8th, 

2011; and a statement from the Community Associations Institute 

dated September 8th, 2011. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

And with that, I would like to thank the witnesses for being 

here. I really appreciate it, and I think it will be very helpful as 

we go forward considering FHA and the draft legislation. And with 

that, I thank you again, and this hearing is adjourned. 

[Whereupon, at 4 p.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

September 8, 2011 

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