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LEGISLATIVE PROPOSALS TO DETERMINE 

THE FUTURE ROLE OF FHA, RHS, 

AND GNMA IN THE SINGLE- AND 

MULTI-FAMILY MORTGAGE MARKETS 

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 

MAY 25, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–32 

( 

(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: 

May 25, 2011 ..................................................................................................... 1 

Appendix: 

May 25, 2011 ..................................................................................................... 43 

WITNESSES 

WEDNESDAY, MAY 25, 2011 

Alitz, Katherine M., Senior Vice President, Boston Capital, on behalf of the 

Council for Affordable and Rural Housing (CARH) .......................................... 6 

Berman, Michael D., CMB, Chairman, Mortgage Bankers Association (MBA) . 8 

Calabria, Mark A., Ph.D., Director of Financial Regulation Studies, Cato 

Institute, Washington, D.C. ................................................................................ 10 

Carey, Peter, President and CEO, Self-Help Enterprises, on behalf of the 

Housing Assistance Council (HAC) and the National Rural Housing Coalition (NRHC) .......................................................................................................... 12 

Chappelle, Brian, Partner, Potomac Partners LLC .............................................. 14 

Evans, Peter W., Partner, Moran & Company, on behalf of the National 

Multi Housing Council (NMHC) and the National Apartment Association 

(NAA) .................................................................................................................... 15 

Petrou, Basil N., Managing Partner, Federal Financial Analytics, Inc. ............. 17 

Phipps, Ron, Broker, Phipps Realty, and President, National Association of 

REALTORS® (NAR) ............................................................................................ 19 

Rutenberg, Barry, First Vice Chairman, National Association of Home Builders (NAHB) ........................................................................................................... 20 

APPENDIX 

Prepared statements: 

Alitz, Katherine M. ........................................................................................... 44 

Berman, Michael D. ......................................................................................... 50 

Calabria, Mark A. ............................................................................................. 63 

Carey, Peter ...................................................................................................... 72 

Chappelle, Brian ............................................................................................... 78 

Evans, Peter W. ................................................................................................ 99 

Petrou, Basil N. ................................................................................................ 114 

Phipps, Ron ....................................................................................................... 128 

Rutenberg, Barry .............................................................................................. 148 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of the National Council of State Housing Agencies 

(NCSHA) ........................................................................................................ 158 

Written statement of the National Housing Law Project ............................. 161 

Written statement of the Securities and Financial Markets Association 

(SIFMA) ......................................................................................................... 167 

(1) 

LEGISLATIVE PROPOSALS TO DETERMINE 

THE FUTURE ROLE OF FHA, RHS, 

AND GNMA IN THE SINGLE- AND 

MULTI-FAMILY MORTGAGE MARKETS 

Wednesday, May 25, 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 10 a.m., in room 

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

Members present: Representatives Biggert, Hurt, Miller of California, Capito, Garrett, McHenry, Duffy, Dold, Stivers; Gutierrez, 

Waters, Cleaver, Sherman, and Capuano. 

Also present: Representative Green. 

Chairwoman BIGGERT. This hearing of the Subcommittee on Insurance, Housing, and Community Opportunity will come to order. 

And I would like to welcome all the witnesses. Thank you for being 

here today. And I will recognize myself for my opening statement. 

Good morning and welcome. Today’s hearing will examine the 

legislative proposals to determine the future role of the Federal 

Housing Administration (FHA), the Rural Housing Service (RHS) 

and the Government National Mortgage Association (GNMA or 

Ginnie Mae) and the single- and multi-family mortgage markets. 

Our goal is to have a constructive dialogue about potential reforms 

to help shape a stronger framework for the future of housing finance. 

Together, I hope we can better determine what role, if any, the 

government should play in housing finance, or should the private 

sector be the sole financer of housing. Is there a hybrid role for a 

joint private/public sector partnership? I think these are critical 

questions that face lawmakers on both sides of the aisle. 

Today, we will examine legislative proposals that aim to stabilize 

the housing market, facilitate the return of private capital to housing finance, and reduce taxpayers’ liabilities. 

One thing that we have all learned in the wake of the financial 

crisis is that homeownership is not for everyone. It is also increasingly clear that buyers with a stronger financial stake in their 

homes are far less likely to enter foreclosure and walk away from 

their loans. 

2 

And finally, we have learned that the private market can’t function when it is crowded by the Federal Government. The proposals 

under discussion today aim to encompass these lessons learned by 

reducing the role of government and ultimately the taxpayer, in 

house financing, and facilitate the return of private capital. These 

are sensible changes that would ensure accountability and financial 

stability within the FHA program. 

The Administration has acknowledged that the modernization of 

FHA must go hand in hand with GSE reform. The goal of these reforms, as stated by the Administration, is to limit the government’s 

primary role to ‘‘robust oversight and consumer protection, targeted 

assistance for low- and moderate-income homeowners and renters, 

and carefully design support for market stability and credit crisis 

response.’’ 

With that, I would just like to say that the government’s role in housing finance is unsustainable. With a $14.3 trillion national 

debt, our country can ill-afford expansive government programs of 

any kind, especially when there is a private sector alternative. But 

the last thing we want to do is stop the recovery of the housing 

market. The reforms we embrace must, by every means possible, 

minimize disruptions to the recovery as we allow private capital to 

replace government capital. 

As always, it is critical that we achieve the right balance for taxpayers and home buyers. I look forward to working with my colleagues on both sides of the aisle to facilitate the private sector reentry, eliminate taxpayer risk, and promote a vibrant housing finance system that serves the best interest of all Americans. 

I welcome today’s witnesses. And with that, I recognize Ranking 

Member Gutierrez for his opening statement. 

Mr. GUTIERREZ. Thank you very much, Madam Chairwoman, and 

good morning. I want to thank our witnesses for being here today 

as we discuss the future of the Federal Housing Administration, 

the Rural Housing Service, and the Government National Mortgage 

Association. 

There is no doubt that our districts and our communities are still 

reeling from our country’s recent great recession. I think we can all 

agree that the housing market has not yet fully recovered. We need 

to continue working together to help American families who are literally still struggling to make ends meet and stay in their homes. 

I firmly believe that our government needs to continue playing 

the critical role of providing homeowners with the assistance and 

support they need during these tough economic times while the 

fragile housing market recovers. And I hope that is what we are 

discussing today. 

I want to thank Congresswoman Waters for reintroducing the 

FHA reform bill to improve the financial safety and soundness of 

the FHA mortgage insurance program. Let’s not forget it was less 

than a year ago that my colleagues on both sides of the aisle overwhelmingly supported this exact same bill in committee and also 

voted for final passage on the House Floor. I hope the spirit of cooperation and collaboration still continues as we consider Congresswoman Waters’ proposal. 

I would like to say that I look at the Republican counterproposal 

and it worries me a little bit, wanting to increase the downpayment 

3 

from 31⁄2 to 5 percent. Not long ago, we all had a different point 

of view, and I am not quite sure what change of heart has occurred, 

and that we might have some further discussion on that. 

FHA’s market share has certainly grown in recent years, and 

this growth is not because FHA loosened its underwriting standards, but because the private sector has been absent from the market. I understand that my Republican colleagues would like to give 

entry to the private sector, but I have said it before and I will say 

it again, there is no assurance that private investment will take 

FHA’s formidable place to assist qualified homeowners to purchase 

homes. 

Right now, assistance to homeowners and potential homebuyers 

is key to the recovery of our housing market. We need to continue 

supporting the FHA, the Rural Housing Service, and Ginnie Mae 

and do what they do best: find ways to improve so that we can better serve current and potential homeowners and help restore a robust housing market. 

I look forward to the testimony, and I thank the chairwoman for 

calling the hearing. 

Chairwoman BIGGERT. And I thank the ranking member for his 

comments. 

I think that is why we are here today to look at these potential 

drafts so that we can have a dialogue and really come up with the 

right process so that we can all find common ground there. I recognize Mr. Miller for 1 minute. 

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman. 

There is no question we need to bring private capital back into 

the marketplace. When this happens, the role of FHA will be reduced automatically. We have seen this historically, that FHA 

plays a countercylical partner role. But the worst thing we can do 

today to create a lack of stability in the marketplace is to reduce 

those loan limits in this marketplace. Some of the best loans they 

are making are in high-cost areas. Conforming and high-cost GSEs 

and FHA are providing 92 percent of all the liquidity in the marketplace. If the private sector dollar was there today to backfill 

that, that is an argument some could make. But it is not there. To 

say it is, you would have to show me where it is at, because it is 

not. And if you want to create more instability in the marketplace, 

start modifying the loan limits that we have downwardly, and it 

will have a tremendously negative impact. 

I am glad this is just a discussion draft. We need to be very, very 

cautious in what we are doing. If you want to hurt buyers and sellers, who are taxpayers in this country, you will start messing with 

the system we have today that is doing nothing but trying to stabilize a very distressed marketplace. If you don’t understand how 

distressed it is, talk to builders, REALTORS®, mortgage brokers, 

and bankers, and they will tell you how bad it is. Talk to the people out there in the marketplace who have lost tremendous 

amounts of equity in their home. And when you have a lesser 

amount of liquidity in the marketplace and fewer lenders willing 

to make loans and you want to sell a house, the value of your 

house is going to drop dramatically. 

So I am glad this is a discussion draft. We need to move very 

cautiously and very carefully. We have a tremendously impacted 

4 

marketplace. Let’s not do something knee-jerk that is going to 

make it more difficult. 

I yield back. Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. The gentlelady from California, Ms. 

Waters, is recognized for 2 minutes. 

Ms. WATERS. Thank you very much. Madam Chairwoman, I 

would like to thank you for holding this hearing on the future of 

FHA, the Rural Housing Service, and Ginnie Mae. FHA’s role has 

grown more significant in the years following the financial crisis of 

2008, providing a crucial backdrop in our mortgage market and ensuring continued access to safe and affordable products while the 

private market constricted. 

Of course, with this increased role, it is appropriate to increase 

oversight and scrutiny of FHA. That is why FHA was one of my 

top priorities when I chaired the Housing and Community Opportunity Subcommittee during the last Congress. 

In order to continue my work from the 111th Congress, yesterday 

I reintroduced the FHA Reform Act. Last year, I was able to work 

well with then-Ranking Member Capito on an FHA bill that overwhelmingly passed the House on a bipartisan basis. I hope that I 

can work with Chairwoman Biggert in a similar fashion in the 

112th Congress. 

I would like to note, however, a few concerns with the FHA discussion draft that we are considering at this hearing today. This 

discussion draft would increase downpayments, a move that was 

overwhelmingly rejected in committee markup last year on a bipartisan basis. The rationale for this rejection was because FHA data 

demonstrated that increasing downpayments across-the-board 

would do little to improve FHA’s reserves, while also restricting 

credit to qualified borrowers. I think that allowing FHA to manage 

risk in a flexible manner is the best way to continue to protect 

their reserves. 

Additionally, I strongly oppose the rapid reduction in FHA loan 

limits proposed in this bill, as I believe that decrease would have 

an absolutely chilling impact on our economic recovery. And unfortunately, because of the elimination of the nationwide loan limit 

floor, this impact would likely be felt the hardest in places where 

home prices are already low. 

Finally, I think there are major problems with moving rural 

housing programs to HUD. And I am very interested to hear the 

testimony from the rural advocates here today. 

So Madam Chairwoman, I think there are some areas for agreement. I hope we can work together in the coming months, but I remain very concerned about several of the provisions in this bill. 

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

Chairwoman BIGGERT. Thank you very much. And I am sure we 

can find some common ground. 

The gentlelady from West Virginia, Mrs. Capito, is recognized for 

1 minute. 

Mrs. CAPITO. Thank you. I would like to thank Chairwoman 

Biggert and the ranking member for having the hearing. I would 

like to thank the witnesses as well. 

As we have heard, we know this is of critical importance for us 

to restore our overall housing market, and I am particularly interVerDate Nov 24 2008 18:24 Aug 22, 2011 Jkt 066870 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\66870.TXT TERRIE
5 

ested in hearing about the proposals that are set forth in the draft 

legislation. 

As has been discussed many times previously, we worked on 

FHA reform last year, and got it all the way through the House 

on a bipartisan basis. We know that FHA will play an important 

role in the housing market by providing stability and liquidity. 

This has not been the case for the last several years, however. 

As mortgage defaults begin to mount when the Federal Government insured and guaranteed 9 out of every 10 new mortgages, 

FHA lost some of its financial footing. Capital reserves fell well 

below federally mandated levels and I think that has the possibility 

of putting our taxpayers at risk, which is what this hearing is 

about today. 

So I know fundamental reforms have already been moving forward, and I am pleased about that, but I believe we still have obstacles remaining where we can’t get the private market in, as 

Congressman Miller was talking about. 

I look forward to hearing from our witnesses on the advantages 

and disadvantages of the discussion draft. And I am also interested 

on the RHS, moving RHS out of the Department of Agriculture. 

And with that, I yield back the time I don’t have. 

Chairwoman BIGGERT. Thank you very much. 

The gentleman from New Jersey, Mr. Garrett, is recognized for 

1 minute. 

Mr. GARRETT. I thank the Chair for all your hard work, for your 

thoughtful work on this legislative draft that we have before us, because reforming the FHA is of critical importance and should be a 

top priority of this committee. And the draft before us, as indicated, 

has a number of good proposals in it that should add to the safety 

and soundness of the FHA, and also protect taxpayers in possible 

future losses. 

And one provision that I believe is in fact a positive is the downpayment increase from 31⁄2 to 5 percent. A lot of you know I sponsored legislation in the past Congress to do exactly that. I believe 

it is significant, but really just a modest step in the right direction 

to ensure borrowers have what we have been talking about, real 

skin in the game. LTV, loan to value ratio, is an important component. It is not the only one. But going to 5 percent is a far cry from 

what the QRM is talking about in that area of around 20 percent 

in their draft rules. 

Today, the FHA insures roughly 50 percent of new originations 

in the United States. This is really an astronomical number compared to pre-crisis stage, and as we begin to reduce the footprint 

of them, of FHA and the government more broadly, we have to get 

the private market back into the game. 

And with that, I too yield back the time that I do not have. 

Chairwoman BIGGERT. I thank the gentleman. 

At this time, I ask unanimous consent that the gentleman from 

Texas, Mr. Green, a member of the full Financial Services Committee, be allowed to participate in the hearing. He is recognized 

for 1 minute. 

Mr. GREEN. Thank you very much. Madam Chairwoman, and 

thank you, Mr. Ranking Member, for allowing me the opportunity 

to speak for just a moment. 

6 

I am concerned about the increase of the downpayment from 3.5 

percent to 5 percent for many persons, not all, but many persons, 

who have never had a home; for many persons, not all, who have 

never had a home. The home itself is skin in the game. They finally 

get a place to call home. That is skin in the game. Keeping that 

home, for them, is keeping something that is a dream come true. 

That is skin in the game for them; for many people, not all. 

So my hope is that we will understand that there are plenty of 

people out there, good, hardworking American citizens, who can afford a monthly payment, who will consider the home skin in the 

game, who can’t afford a downpayment as high as we might move 

it to. 

Commissioner Stevens has indicated that this might cause as 

many as 300,000 fewer homes to get financed. So my hope is that 

we will strike a balance, that we will make sure that those who can 

afford rent that would be higher than a mortgage payment can get 

the mortgage payment and have skin in the game; namely, a place 

to call home. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. I thank the gentleman. 

I would now like to again welcome the witnesses. And, without 

objection, your written statements will be made a part of the 

record. You will each be recognized for a 5-minute summary of your 

testimony. 

Let me just introduce you all. First, we have Ms. Katherine Alitz, 

senior vice president, Boston Capital, on behalf of the Council for 

Affordable and Rural Housing. Next, is Mr. Michael D. Berman, 

chairman, Mortgage Bankers Association, followed by Dr. Mark A 

Calabria, director of financial regulation studies, Cato Institute, 

Washington, D.C. 

I don’t think we have ever had a panel this big. There are a lot 

of names here. 

Mr. Peter Carey, president and CEO, Self-Help Enterprises, on 

behalf of the Housing Assistance Council and the National Rural 

Housing Coalition; Mr. Brian Chappelle, partner, Potomac Partners; Mr. Peter W. Evans, partner, Moran and Company, on behalf 

of the National Multi Housing Council and the National Apartment 

Association; Mr. Basil Petrou, managing partner, Federal Financial 

Analytics, Inc.; Mr. Ron Phipps, broker, Phipps Realty, on behalf 

of the National Association of REALTORS®; and Mr. Barry 

Rutenberg, first vice chairman, National Association of Home 

Builders. 

Welcome, all of you. Now, we will recognize each of you for 5 

minutes. 

And we will start with Ms. Alitz. You may begin. 

STATEMENT OF KATHERINE M. ALITZ, SENIOR VICE PRESIDENT, BOSTON CAPITAL, ON BEHALF OF THE COUNCIL FOR 

AFFORDABLE AND RURAL HOUSING (CARH) 

Ms. ALITZ. Thank you, Madam Chairwoman. I am the president 

of the Council for Affordable and Rural Housing, and on behalf of 

myself and CARH, I want to thank the committee for the opportunity today to testify about the importance of Federal rural housVerDate Nov 24 2008 18:24 Aug 22, 2011 Jkt 066870 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\66870.TXT TERRIE
7 

ing programs, the need to support these programs, and to address 

the draft legislation. 

CARH members house hundreds of thousands of low-income, elderly, and disabled residents in rural America. CARH has sought 

to promote the development and preservation of affordable rural 

housing throughout its 30-year history as an association of for-profit companies, nonprofit companies, and public agencies that together build, own, manage, and invest in rural affordable housing. 

My comments will address the later portions of the draft legislation which concern rural housing. CARH is very much focused on 

saving from elimination the Section 538 Guaranteed Rural Rental 

Housing Program. Section 14 of the draft legislation proposes a feebased system to continue the 538 program. We hope the muchneeded 538 program provisions move forward with all due speed, 

as many development projects and the housing and jobs they create 

are waiting to proceed. 

CARH also appreciates the interest in streamlining Federal 

housing program administration. At the same time, the different 

housing agencies did not develop arbitrarily, but rather in response 

to different housing needs. Any consolidation of functions must address these different constituencies. 

CARH members continue to review the issue because there are 

pros and cons. The notion of moving some parts of rural development to HUD has been a topic of discussion in the past. However, 

the draft legislation circulated in advance of this hearing is the 

first serious legislative proposal we can recall regarding this issue. 

Before moving forward, we believe it merits further discussion 

among the housing industry and the affected authorizing and appropriating committees. It is important to ensure that whatever the 

context, certain programs continue and budget support remains for 

these programs. 

In rural America, the key rental housing programs have been 

and remain the rural development multi-family programs. The Administration’s Fiscal Year 2012 budget request is notable in that 

it eliminates the Section 538 programs, even though the 538 program is one of the most successful and low-cost programs currently 

used by rural development. CARH strongly supports maintaining a 

program level of $129 million. 

Further, we believe the 538 program can be rendered revenueneutral, or virtually so, by allowing for a fee to be charged. The 

Section 538 statute already provides USDA with the discretion to 

charge a fee, but appropriations language has prohibited rural development from charging fees. 

CARH strongly supports Section 14 of the draft legislation. By 

incorporating fees, this section would restore financial balance to 

the program, while saving Federal appropriations. 

The Section 521 Rental Assistance Program is a lifeline for extremely low-income rural residents. Section 521 is similar to HUD’s 

Section 8 program. The Administration’s Fiscal Year 2012 budget 

reduces rental assistance funding to $907 million. This is an 

unsustainable reduction which may result in the loss of housing for 

residents living in several hundred apartment complexes in rural 

America. 

8 

Rural development has openly discussed how it anticipates 

achieving this by reducing the number of our rental assistance recipients through foreclosure of certain targeted Section 515 loans, 

or by pressing for the payment of other 515 loans. 

To avoid the dislocation of residents, CARH urges full funding of 

rental assistance for Fiscal Year 2012 at the Fiscal Year 2010 level 

of $971 million. 

To the extent that Congress looks to pass rental assistance funding levels, we believe it is important to explain that rental assistance budgets have not increased in any real sense, although the 

budget amount has increased. For approximately the past 5 years, 

Congress has sought to convert rental assistance contracts from 

multi-year allocations to single-year allocations because this creates a short-term budget savings. 

Since Fiscal Year 2009, rental assistance contracts between rural 

development and property owners have been for 1-year terms. So, 

for example, if Congress decides to look back to Fiscal Year 2008 

funding levels without adjusting for these budget changes, it may 

unwittingly dislocate over 100,000 residents. 

Time constraints permit me from talking about every topic included in our written testimony, so I refer the committee to that 

testimony for more on the Section 515 program and the elimination 

of the MPR program in the Fiscal Year 2012 budget. 

We appreciate the committee’s efforts to balance the needs of 

rural America’s elderly, disabled, and working poor with our ongoing budget issues. The rural programs have been and remain our 

most efficient Federal housing, Federal rental housing programs, 

and are a resource that rural America cannot afford to lose. Thank 

you. 

[The prepared statement of Ms. Alitz can be found on page 44 

of the appendix.] 

Chairwoman BIGGERT. Thank you very much— 

Mr. Berman, you are recognized for 5 minutes. 

STATEMENT OF MICHAEL D. BERMAN, CMB, CHAIRMAN, 

MORTGAGE BANKERS ASSOCIATION (MBA) 

Mr. BERMAN. Thank you, Chairwoman Biggert. 

FHA is at an important crossroads today, and this hearing occurring in the midst of efforts to reshape our housing financial system 

is especially timely. A few years ago, a growing number of voices 

were asking whether there was still a need for FHA or if the private market could fully absorb its functions. 

MBA never wavered in its support for the critical mission FHA 

performs, and the last few years have underscored that point many 

times over. Today, FHA is performing its traditional countercylical 

role, increasing its market share from 3 to 30 percent, and providing necessary liquidity to our otherwise frozen housing finance 

sector. In doing so, it is ensuring access to safe mortgage products, 

helping homeowners to refinance into more affordable interest 

rates, and supporting the growing need for decent, affordable rental housing. 

We should all be grateful FHA is here today, and this subcommittee deserves recognition for the bipartisan focus it has put 

on FHA. Recent Congresses have made important changes to loan 

9 

limits, given FHA more flexibility to set insurance premiums, and 

eliminated the failed, seller-funded downpayment assistance program, and provided FHA with additional staffing and technology 

upgrades. Thanks to your efforts, FHA is not only serving an expanded segment of the market during this economic downturn, but 

doing so while remaining in the black, an amazing feat, considering 

the impacts the foreclosure crisis has had on other market participants. 

While MBA’s full recommendations are in our submitted statement, I would like to highlight the effect of two pending proposals 

on FHA. First, MBA members are deeply concerned with the proposed risk retention rule, its narrowly written competition for 

qualified residential mortgages and the ultimate effect it would 

have on FHA. The proposed QRM definition appears to conflict directly with the Obama Administration’s preference for shrinking 

FHA from its current role of financing nearly one-third of all mortgages. It is not at all clear whether regulators reflected on the relationship between the proposed QRM definition and FHA’s eligibility requirements in light of FHA’s exemption from risk retention. 

By making it even more difficult for private capital to reenter the 

housing finance market, the QRM rule would lead FHA to being 

flooded with even more, not fewer, loans. And while FHA has an 

important role to play, MBA firmly believes that it is not in the 

public interest for a government insurance program to dominate 

the market. One of our primary concerns about the proposed QRM 

rule is the overemphasis on downpayment as an indicator of a 

risky loan. 

Likewise, we have similar apprehension about the legislation to 

raise FHA’s minimum downpayment to 5 percent. We should not 

be placing such a high emphasis on just one factor in determining 

a loan product’s overall risk. While downpayment has an important 

impact on default, other factors, including full documentation of income and borrower credit, can mitigate this risk. In fact, it is 

FHA’s requirement for full documentation of all loans and its limited product options that helped insulate it from experiencing a 

more devastating default rate during the height of the housing crisis. 

MBA’s most recent national delinquency survey, which we just 

released last week, drives this point home. The data found that for 

the first quarter of 2011, the FHA delinquency rate is down a full 

percentage point relative to last year, and the foreclosure start rate 

is down about 50 basis points. Policymakers need to carefully 

weigh their desire to decrease risk by raising minimum 

downpayments versus the certain and dramatic negative impact 

such a change would have on the availability of loans to low- to 

moderate-income, first-time, and minority home buyers. 

I would also like to touch on the proposals to lower FHA loan 

limits. Intense focus has been placed on the narrow slice of loans 

at the high end of the spectrum. MBA understands that those maximum loan limits are likely to go down to $625,000 on October 1st, 

but we think it would also be a mistake, and a mistake to also 

lower the limits in low-cost areas where FHA does most of its business. The average new FHA loan is about $190,000. In places like 

Texas, Georgia, and North Carolina, reducing or eliminating FHA’s 

10 

floor of $271,000 would drastically deny access to credit for many 

otherwise qualified lower- and middle-income borrowers. We need 

to be very cautious in enacting these proposals, given the continued 

weak state of the housing market. 

Finally, as a multi-family lender, I would like to note that FHA’s 

statutory limits for multi-family housing are severely restricting 

the ability of rental property owners in urban markets to use FHA 

insurance programs. These limits can have an especially adverse 

effect on seniors, and should be addressed by Congress. 

Further, given the backlog of loans in the FHA multi-family 

arena, it is important that Congress encourage FHA to create operational efficiencies without political constraints. 

Madam Chairwoman, thank you for the opportunity to testify 

today. 

[The prepared statement of Mr. Berman can be found on page 50 

of the appendix.] 

Chairwoman BIGGERT. Thank you very much, Mr. Berman. 

And now, Mr. Calabria for 5 minutes. 

STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR OF FINANCIAL REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, D.C. 

Mr. CALABRIA. Since the end of 2007, FHA reserves have declined from $22 billion to currently around $3.5 billion. While of 

course some decline is to be expected, given the bursting of the 

housing bubble and the continued weakness in the labor market, 

further declines could easily erode the remaining reserves and require a direct appropriation to cover future claims. 

The potential for a bailout of FHA remains not a remote possibility. According to the 2010 Actuarial Review, the net present 

value of future cash flows from FHA’s current book of business is 

a negative $25.4 billion. The Actuarial Review projects a positive 

value for FHA on the basis of assuming that future business will 

generate revenue sufficient to cover embedded losses. In order for 

that assumption to turn out correct and to protect us from a bailout 

of FHA, credit quality of FHA lending standards must improve considerably. 

The estimated positive value of FHA’s single-family business is 

also predicated upon stability in house prices. The most recent actuarial review from which the current positive values derive also 

gives a 40 percent chance that the true value of the fund is negative. We are essentially at the point of tossing a coin to determine 

the value of FHA, whether it is negative or positive. 

To improve the stability of FHA, I think we need to take a number of recommendations. Prior to giving those recommendations, 

however, I think we should start from maybe what I think is the 

most important observation of the financial crisis, which is, if lenders, borrowers, investors and governments do not face the actual 

cost of their decisions, those decisions are likely to have negative 

consequences. 

For at least three reasons, FHA’s current premiums do not reflect its true cost. First among those is FHA’s administrative costs 

are not covered by premiums but are covered by direct appropriations. A program can hardly claim to pay for itself when a very 

11 

large portion of its costs are directly appropriated by the taxpayers. 

Going forward, I urge that premiums be structured in a way to 

cover FHA’s administrative costs. 

Since FHA’s premiums do not reflect any market risk, that risk 

is also not accounted for. CBO estimates that this admission distorts FHA’s true costs by billions annually. 

Just as Congress, this body, required TARP to reflect market 

risk, FHA should reflect market risk and should be estimated on 

a fair-value basis. 

Lastly, FHA has a poor track record in estimating its own subsidies, even under the flawed framework of the Credit Reform Act. 

Over the last decade, FHA subsidy estimates were off by a net total 

of $44 billion, turning all of the supposed negative subsidies into 

actual subsidies over the last decade. These errors have always 

been biased in the direction of underestimating cost and must be 

addressed in order for both Congress and FHA to appropriately 

manage FHA’s risks. 

Going forward, I think we need to make a variety of changes. 

First and foremost, I believe we need to change the incentive of 

FHA-participating lenders. The incentive for diligent and thorough 

underwriting is in my opinion simply too weak under existing procedures. 

First of all, we should immediately reduce FHA’s coverage from 

100 percent of the loan to 80 percent of the loan. Any mortgage 

that goes 100 percent bad is likely to involve fraud or negligence. 

Private mortgage insurance rarely covers more than 30 percent of 

the value of the loan. Other Federal guarantee programs, such as 

those under SBA, function quite well without covering 100 percent 

of the risk. As the lender is in the best position to monitor risk, 

the lender should also be required to maintain a portion of that 

risk under FHA. FHA should also put back to the lender any loan 

that defaults within 6 months of origination. Mortgages that go 

sour so quickly also are likely to have involved fraud or negligence. 

FHA should also end the practice of letting the lender choose the 

appraisal. We should go back to the practice that was prior to the 

mid-1990s where you had an appraisal practice that ensured appraisal independence. Changing lender incentives, while vital, will 

not be sufficient, in my opinion, to reduce continued losses in FHA. 

Significant changes to borrower eligibility must be implemented. 

As I document in my written testimony, the worst losses in FHA, 

as well as mortgage lending in general, come from a combination 

of poor credit history and loan downpayment. You could manage either manageably, but you cannot combine the two without resulting in significant losses. To manage this risk, I recommend that 

FHA immediately require an all-cash downpayment of at least 5 

percent from all borrowers. 

We also know that high debt burdens can contribute to default. 

FHA should accordingly guarantee loans with only reasonable debtto-income ratios. It should tell us something that you can get a new 

FHA loan today and be immediately eligible for a modification 

under HAMP. Other programs, for instance, such as 31 percent is 

deemed a reasonable debt-to-income under HAMP, then it strikes 

me as a reasonable debt-to-income for FHA. 

12 

Borrower eligibility income should also be changed so that FHA 

mirrors the Rural Housing Service, and that borrowers with incomes at or below 115 percent with AMI are eligible for FHA guarantees. I would go as far as to say we should just simply scrap the 

whole loan limit framework and base FHA on income, as we do in 

the rural housing program. 

With that, I will wrap up my statements and look forward to 

questions. 

[The prepared statement of Dr. Calabria can be found on page 

63 of the appendix.] 

Chairwoman BIGGERT. Thank you very much, Mr. Calabria. I am 

trying to get these names. 

Mr. CALABRIA. You are doing quite well. 

Chairwoman BIGGERT. Thank you. 

Mr. Carey, you are recognized for 5 minutes. 

STATEMENT OF PETER CAREY, PRESIDENT AND CEO, SELFHELP ENTERPRISES, ON BEHALF OF THE HOUSING ASSISTANCE COUNCIL (HAC) AND THE NATIONAL RURAL HOUSING 

COALITION (NRHC) 

Mr. CAREY. Thank you, Chairwoman Biggert. I appreciate the opportunity to be here today to testify specifically on the proposed 

transfer of rural housing programs to HUD. I am Peter Carey, 

president of Self-Help Enterprises, a regional and nonprofit housing development organization serving California’s agricultural San 

Joaquin Valley. And I am representing the Housing Assistance 

Council and the National Rural Housing Coalition. 

The draft bill before the subcommittee would move the entire 

lock, stock, and barrel housing programs of Rural Housing Services 

to the Department of Housing and Urban Development with the intent of improving service delivery to rural America. Four decades 

of hands-on rural housing experience at the three organizations I 

represent are confident such a move would not improve the administration of rural housing programs, would not help accomplish the 

mission Congress established them to deliver, and would make it 

more difficult for USDA to deliver its comprehensive rural development programs effectively. 

There is no time to go into the details today, but suffice it to say 

that Rural Housing Services is a remarkably successful, long-term 

mortgage provider, both for rental housing and for homeownership 

in rural America. Most of RHS’ service goes to small communities, 

primarily communities under 10,000 in population. 

The Rural Housing Service is certainly not perfect, and USDA’s 

attention to housing could certainly be improved, but moving the 

rural housing programs from one department to another would not 

address those problems and would create significant additional 

challenges for service delivery. 

While there are concerns about USDA’s attention to housing, we 

have equally grave concerns that HUD’s structure is not set up to 

deliver Title 5 programs. HUD has limited experience in administering programs directed exclusively to rural areas. Most of 

HUD’s programs can be used in rural areas, because their lack of 

context are delivered through State agencies, and the HUD Department structure is primarily urban-based. And historically, statistics 

13 

show that home, CDBG, and FHA have spent a lower proportion 

of their funds in rural areas than the populations living there. 

HUD has never had a direct homeownership lending program 

like the Section 502 direct loan program and does not make direct 

loans to rental developers. HUD’s experience, frankly, is in delivering block grants, guarantees, rental subsidies, not mortgage 

loans. It works through local, State, and tribal governments; developers; banks; intermediaries; and public housing authorities. 

In short, while the loans and grants offered by the Title 5 rural 

housing programs are really retail items, HUD is a wholesaler, not 

a retailer. 

HUD’s office infrastructure is not well suited to rural delivery. 

In my own State of California, there are six metropolitan HUD offices, where USDA has 18 local offices. I can get to discuss programs with a rural development staff person within about 10 minutes. It is a 250-mile drive to San Francisco or Los Angeles to have 

the same conversation with HUD, and the same is true for rural 

borrowers and others. 

The difference is even more dramatic in States with fewer large 

urban centers. In Illinois, for instance, HUD has 2 offices, while 

Rural Development has 12 offices. 

The retail nature of Title 5 programs would require HUD to shift 

dramatically the way it does business. It is much more likely that 

the rural housing programs would be force-fit into the HUD delivery system. That would change the ability of those programs to 

reach rural communities. The dollar amount is not significant 

enough. It would represent about 5 percent of HUD’s budget, and 

would not be significant enough to change the way HUD could deliver those programs. 

At USDA, it is important to realize that housing programs are 

interwoven with other mission areas, rural community facilities, 

rural businesses and cooperatives, rural utilities. They represent 

all facets of rural development in California and other rural areas. 

Removing those programs would complicate USDA’s ability to deliver those rural development programs. And in many cases, those 

offices are co-located with Farm Service Administration, Soil Conversation, and others, creating a very comprehensive presence in 

rural America that is unmatched, even by State governments. 

The cost in money and human capital to make such a move is 

mind-boggling. Six hundred people and the attached infrastructure 

would be moved to HUD with, we believe, little to gain. 

There is no doubt that HRS can and should do better. There is 

also no doubt in our minds that HUD lacks the administrative system to deliver effective rural programs. Its programs, constituency, 

and interests lie elsewhere. 

Self-Help Enterprises, the Housing Assistance Council, and the 

National Rural Housing Coalition and hundreds of other rural 

housing organizations around the country would be happy to work 

with this committee and the subcommittee to identify less expensive, more effective ways to address RHS’ shortcomings and maximize its capabilities. Thank you. 

[The prepared statement of Mr. Carey can be found on page 72 

of the appendix.] 

Chairwoman BIGGERT. Thank you very much, Mr. Carey. 

14 

And Mr. Chappelle, you are recognized for 5 minutes. 

STATEMENT OF BRIAN CHAPPELLE, PARTNER, POTOMAC 

PARTNERS LLC 

Mr. CHAPPELLE. Thank you, Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee. I am Brian 

Chappelle. 

I would first like to review FHA’s key tenets and current performance. FHA, at its core, is an insurance program, and like any 

successful insurance program it needs to spread its risk. Just like 

an auto insurer could not be limited to drivers under the age of 25, 

FHA cannot be targeted only to high-risk borrowers. 

FHA has an even more daunting task, however, than your typical insurer. Its mission is to serve borrowers not adequately served 

by the private sector and still operate at no expense to the American taxpayer. As if those goals weren’t enough, FHA is asked to 

accomplish them without encroaching on the private sector. 

Finally, it was asked to increase its role in 2007 when others 

were running away from the market. 

So how is FHA doing? 

First and foremost, we are 4 years removed from the collapse of 

the housing market, and FHA hasn’t needed any taxpayer assistance. In fact, according to Secretary Donovan’s testimony last 

month, its cash reserves were at a historical high in 2009, and 

grew again in 2010. 

At the hearing, Secretary Donovan also said that they expect 

FHA to make substantially more money for the taxpayer this year 

than their actuary predicted. This means that FHA’s net worth, including expenses, should more than double in Fiscal Year 2011 to 

over $11 billion. 

In MBA’s latest delinquency survey, FHA was the only market 

segment that saw its total delinquency rate fall in the first quarter 

of 2011. It is now at the lowest level in 5 years. Its credit quality 

is the best in decades, as about 60 percent of its borrowers have 

credit scores higher than 680, and only 3 percent have credit scores 

below 620. 

Not surprisingly, the loans that FHA has insured in the last 21⁄2

years have very low rates of delinquency. A couple of statistics to 

underscore this point: The early default rates in the FHA program 

have declined 85 percent from 2007 to 2010. Of the 1.4 million 

loans that FHA made last year, only 5,000 of 1.4 million loans are 

currently in default. Clearly, fraud and poor underwriting are 

being rooted out of the FHA program. 

In the wake of the housing crisis, FHA has helped millions of 

families from all walks of life. Still, FHA has maintained its core 

role of helping the underserved. 

According to 2009 HMDA data, the government insured 65 percent of the loans made to low- and moderate-income families and 

75 percent of the loans made to minority home buyers. So how is 

FHA doing it? 

The Congress eliminated seller-funded downpayments in 2008. 

Without these loans, FHA would be over the 2 percent capital ratio 

today. 

15 

Secretary Donovan and his team moved quickly on a variety of 

fronts to ensure FHA’s long-term solvency, including strong enforcement actions that have reverberated throughout the industry. 

While it may not be popular to give lenders any credit in this 

process, it is a fact that starting in 2008, lenders implemented 

their own underwriting restrictions on top of FHA requirements. 

With these credit overlays, as they are called, lenders in effect are 

saying they are unwilling to originate certain loans that meet government criteria because of the contingent liability. Why would 

lenders do this when there is 100 percent government backing of 

these loans? 

Mortgage lenders have skin in the game and in the FHA program. They have financial risk, have enforcement risk, and probably most importantly, have reputation risk. Lenders are using 

credit overlays to manage these risks. 

Finally, I have comments on two of the proposals. I would support raising downpayments if it were necessary to protect the fund. 

However, the performance data does not support it and it would 

hurt the very people who need FHA the most. 

Regarding the reduction in the mortgage limits, I oppose this 

provision since it would jeopardize FHA’s financial strength. It has 

been a cornerstone of the FHA program that higher-balance loans 

perform better than lower-balance ones. This point has been made 

in every recent audit, including the Fiscal Year 2010 audit. 

In conclusion, any additional targeting in the FHA program will 

increase premiums to FHA borrowers and increase risk to the 

American taxpayer. 

Thank you, and I would be glad to answer any questions. 

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

78 of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Chappelle. 

Mr. Evans from Illinois, you are recognized for 5 minutes. 

STATEMENT OF PETER W. EVANS, PARTNER, MORAN & COMPANY, ON BEHALF OF THE NATIONAL MULTI HOUSING 

COUNCIL (NMHC) AND THE NATIONAL APARTMENT ASSOCIATION (NAA) 

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

Gutierrez, and members of the subcommittee. On behalf of this Nation’s 17 million households who call an apartment their home, 

thank you for the opportunity to testify on the role of FHA and 

Ginnie Mae in the multi-family industry. 

I am Peter Evans, a partner at Moran & Company. We specialize 

in developing, acquiring, and financing apartments, and we use 

FHA’s multi-family mortgage insurance programs to finance both 

conventional and affordable rental housing. I am testifying on behalf of the National Multi Housing Council and the National Apartment Association. NMHC and NAA work together to represent the 

full spectrum of the Nation’s apartment industry. 

Before I offer my comments on FHA and Ginnie Mae, I want to 

first give some perspective on the growing importance of rental 

housing in our society. 

The United States is truly on the cusp of a fundamental change 

in our housing dynamics. For demographic, financial, and lifestyle 

16 

reasons, rental demand is surging. In this decade, renters can 

make up half of all new households. I want to reiterate that point: 

Half of all new households, for a total of more than seven million 

new households. 

But supply is falling short of demand. We need to build 300,000 

units a year to meet demand, yet we will start fewer than half of 

that this year. That demand and our industry’s capacity to meet it 

is why today’s hearing on FHA is so important. 

FHA has always been an important capital provider for the industry, admirably filling a specific market. But during the financial 

crisis, it became one of the few remaining sources of liquidity for 

our industry. Demand for FHA financing has increased more than 

fivefold. Applications have increased from 2 billion to 10 billion, 

and HUD anticipates that demand will continue for the next couple 

of years. 

FHA has had a hard time keeping up with this demand, unfortunately. Loan processing times can now exceed 18 to 24 months, and 

many borrowers have no idea where in the pipeline their applications are. This has resulted in an enormous backlog that is preventing our industry from meeting the Nation’s growing demand 

for rental housing. We strongly support FHA’s efforts to maintain 

sound credit and underwriting policies, but the resulting bottleneck 

is jeopardizing the thousands of jobs created by the multi-family 

construction, not to mention the net revenues and profits the Agency’s multi-family program generates for the Federal Government. 

We offer the following recommendations to improve FHA’s ability 

to serve the multi-family marketplace, which includes some items 

that HUD and FHA have already identified: 

Follow the multi-family accelerated process guide to ensure loans 

are processed efficiently and adhere to the time lines within that 

guide: 

Seek a more efficient means to address credit concerns. For instance, FHA requires all loans over $15 million to be processed by 

a national loan committee instead of the field office. Instead of 

using a dollar limit, FHA should only require centralized review of 

the loans that exceed the program’s terms and requirements. 

FHA should also establish a special underwriting team for large 

atypical loans, expediting the process of more standard transactions. 

Provide greater oversight over market assessment data information. Better manage multi-family resources with no additional costs 

such as exempting high-performing offices from having the national 

loan committee review certain types of transactions that present 

little risk to the taxpayer. 

The committee has asked us to comment on its discussion draft 

of FHA reform legislation. While the bill is primarily focused on 

single-family and rural housing, there are two very important 

multi-family issues that we would like to address. We would urge 

you to add a provision to the bill raising the FHA loan limits for 

high-rise elevator properties, because the current limits are too low 

to allow FHA financing to be used in urban areas where affordable 

and work force housing shortages are often most severe. Last year 

the House passed bipartisan legislation to do just that. 

17 

We also appreciate the committee’s efforts to improve the longterm viability of the FHA multi-family programs by implementing 

a risk-based capital reserve. We oppose, however, increasing the 

mortgage insurance premium for lower-risk loan programs to subsidize higher-risk FHA insurance activities. Raising multi-family 

premiums to subsidize losses in other programs could have a 

chilling effect on rental housing production. 

And finally, I would like to address suggestions that FHA replace 

or take over Fannie Mae and Freddie Mac’s multi-family programs. 

We strongly oppose such efforts. As we have noted, FHA is unprepared to assume a larger role. In addition to the capacity issues 

identified, it is important to understand that FHA serves a specific 

niche within the market. It is simply not capable of providing a full 

range of unique and complex loans required by the apartment sector. 

NMHC and NAA look forward to working with you on reforming 

our housing financial system in a way that ensures a robust and 

uninterrupted supply of capital is available to ensure our Nation’s 

work force housing needs are met. 

Thank you again for the opportunity to testify. 

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

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Evans. 

And, Mr. Petrou, you are recognized for 5 minutes. 

STATEMENT OF BASIL N. PETROU, MANAGING PARTNER, 

FEDERAL FINANCIAL ANALYTICS, INC. 

Mr. PETROU. Thank you, Madam Chairwoman. I commend the 

subcommittee for its attention to the important question of FHA 

and Ginnie Mae reform, but this legislation must be seen in the 

larger context of both ensuring the return of private capital to the 

U.S. mortgage finance system and balancing reform of FHA and 

Ginnie Mae with the reform of the GSEs. 

I want to second the concern that has been raised this morning 

with the qualified residential mortgage definition as it is being proposed by the banking agency. Because the law exempts FHA, and 

the proposed rule would impose stringent risk retention requirements on all mortgages with downpayments of less than 20 percent, low downpayment lending will flow to FHA, unnecessarily increasing taxpayer risk. 

Congress and the Administration are correct in focusing on winding down the GSEs in concert with changes to the FHA so that the 

U.S. residential mortgage secondary market does not become the 

sole province of entities backed directly or indirectly by the taxpayer. 

The draft legislation considered today is a vital first step towards 

a newly rebalanced policy in mortgage finance. Key provisions in 

it that I support include: 

First, the increase in the minimum borrower downpayment to 5 

percent which, when combined with a prohibition against the financing of closing costs, will increase the skin in the game contributed by borrowers. In a world of unstable house prices, beginning 

ownership with the bare minimum 31⁄2 percent equity interest in 

a house means that the borrower is vulnerable to even relatively 

18 

slight house price reductions. If house prices fall, first-time buyers 

will see their equity wiped out very quickly. This is highly problematic for borrowers, their communities, and the solvency of the U.S. 

mortgage finance system. 

Second, the revised approach to setting area loan limit amounts 

and, in particular, elimination of the FHA national loan limit floor. 

Home prices have fallen across most of the country in the past few 

years. And the current FHA national loan limit floor is at least 60 

percent higher than the national median existing house price. This 

undermines FHA’s missions of targeting low- and moderate-income 

borrowers, permitting the United States to back borrowers with the 

highest incomes in their local areas. 

Third, the establishment of minimum FHA mortgage insurance 

premiums is essential to rebuilding the solvency of the FHA, and 

thus to reducing taxpayer risk. 

Finally, I support improvements in the powers of the FHA to terminate or discipline lenders and to require indemnification from 

them. As long as FHA continues its current structure of direct endorsement lending and 100 percent Federal guarantee, the MMI 

fund will be faced with a misalignment of incentives for FHA lenders. The measures proposed in this legislation will help protect the 

U.S. taxpayer. 

I would like to suggest to the committee additional legislative 

changes which would allow FHA to initiate pilot programs to test 

the best way to alter its future activities to serve borrowers while 

protecting taxpayers. 

First, instead of targeting house prices, the FHA should be allowed to target borrower income as it relates to the median family 

income in an area. This approach would limit gaming of the FHA 

loan limits in future years as median family income fluctuates far 

less than median house price over time. 

Second, FHA should insure less than 100 percent of the loan 

amount. The MMI fund would be far healthier over time if lenders 

were required to have more skin in the game. The current VA program is an example where less than 100 percent coverage is currently implemented with Ginnie Mae. Congress could have FHA insure 30 percent of a loan amount in areas where there is already 

a high homeownership rate and where borrower incomes are sufficient to meet housing needs. But where homeownership is low and 

house prices are uncertain, FHA could insure 85 percent of the 

loan amount to provide lenders with an incentive to advance funding. 

Finally, FHA should experiment with risk-sharing programs with 

private capital. For example, FHA has the authority to enter into 

a risk-share pilot program with private insurers, but this authority 

should be amended to allow risk-sharing where the private insurer 

takes a first-loss position and the FHA assumes a second-loss one. 

This approach would significantly reduce taxpayer risk due to the 

direct risk absorption provided by private capital and through the 

benefit of an independent second underwriting of the loan. 

I want to commend the subcommittee for this important reform 

bill. Thank you. 

[The prepared statement of Mr. Petrou can be found on page 114 

of the appendix.] 

19 

Chairwoman BIGGERT. Thank you. 

Mr. Phipps, you are recognized for 5 minutes. 

STATEMENT OF RON PHIPPS, BROKER, PHIPPS REALTY, AND 

PRESIDENT, NATIONAL ASSOCIATION OF REALTORS® (NAR) 

Mr. PHIPPS. Good morning, Madam Chairwoman, Ranking Member Gutierrez, and members of the subcommittee. My name is Ron 

Phipps, and I am the 2011 President of the National Association 

of REALTORS®. I am also an active part of a four-generation, family-owned residential real estate business in Rhode Island, and I 

am proud to testify today on behalf of the 1 million REALTORS®, the 75 million Americans who own homes, and the 310 million 

Americans who require shelter. Thank you for the opportunity to 

present our views on the importance of FHA. 

There is a common misconception that exists that FHA was intended only to benefit low-income borrowers who could not afford 

large downpayments on a new home. The truth is that FHA was 

intended to provide safe, affordable mortgage financing to all 

Americans in all markets, high- and low-cost. To that end, FHA 

has been a critical part of the Nation’s economic recovery, especially in the last few years when the private lenders have left. The 

program has outperformed all expectations in providing safe, affordable mortgage financing to home buyers in all markets during 

these economic conditions. 

The fact that FHA has successfully operated for 77 years as a 

self-sufficient entity, without expense to American taxpayers, 

speaks to the value of the program and its management. 

During the past year, the FHA has taken a number of steps to 

mitigate risks that have resulted in greater improvements in the 

loan performance package in the MMIF. These include increasing 

mortgage insurance premiums, raising downpayments on riskier 

borrowers, and increasing lender enforcement. So while there has 

been much made of the fact that the FHA audit showed capital reserves falling below 2 percent, the fact is that FHA loans are outperforming the private market. Loans originated in Fiscal Year 

2010 are the highest-quality FHA book of business has ever had. 

The current average credit score for FHA borrowers is up to 703. 

FHA’s seriously delinquent rate continues to decline, and the FHA 

foreclosure rate is lower than the rate for prime conventional loans. 

In fact, FHA’s recent audit shows that if FHA makes no changes 

in the way that they do business today, the reserves will go back 

above the 2 percent threshold in the next several years. 

What we need now, what we really need now is for markets to 

heal, to self-correct, and to stabilize. The more you manipulate the 

markets, the more you magnify the problems. 

Specifically, we strongly oppose the proposal to further increase 

FHA downpayments. Increasing FHA downpayments would not 

add a penny to FHA reserves. The housing prices demonstrated 

that the key to reducing foreclosures and defaults is underwriting, 

not downpayments. And this is evidenced by the fact that FHA 

loans and VA loans have lower foreclosure ratios than prime conventional mortgages. 

We also strongly oppose provisions to decrease loan limits. Instead, we urge support for H.R. 1754, the bill introduced by RepVerDate Nov 24 2008 18:24 Aug 22, 2011 Jkt 066870 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\66870.TXT TERRIE
20 

resentatives Miller and Sherman, to make the current limits for 

FHA and GSEs permanent. 

Decreasing the loan limits would impact 3,049 counties in every 

State in the Nation and reduce the availability of mortgage loans 

for millions of home buyers. The decline would have a dramatic impact on the housing recovery and, we think, would halt it. In my 

own market area, the change would go from 475 to 241, almost in 

half. 

That said, we strongly support the provisions of the discussion 

draft that provide FHA with increased tools for oversight and enforcement. We believe that FHA has shown tremendous strength in 

the current crisis. Due to solid underwriting requirements and responsible lending practices, FHA has avoided the brunt of defaults 

and foreclosures facing the private mortgage lending industry. 

To be clear: one, we oppose any increase to the downpayment; 

and two, we oppose any reduction in the loan limits. What our 

economy needs is less government interference and more market 

activity. Thank you. 

[The prepared statement of Mr. Phipps can be found on page 128 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Phipps. Mr. Rutenberg, 

you are recognized for 5 minutes. 

STATEMENT OF BARRY RUTENBERG, FIRST VICE CHAIRMAN, 

NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB) 

Mr. RUTENBERG. Chairwoman Biggert, Ranking Member Gutierrez, and members of the subcommittee, thank you for the opportunity to testify. My name is Barry Rutenberg, and I am a home 

builder from Gainesville, Florida, as well as first vice chairman of 

the board for the National Association of Home Builders. NAHB 

represents over 160,000 members, many of whom rely on HUD programs and FHA to help provide decent, safe, and affordable housing to many of our fellow citizens. We commend the subcommittee 

for working to reform FHA, Ginnie Mae, and Rural Housing, yet 

we urge reform to be approached with caution. 

Changes to these programs cannot be separated from reform of 

the complex housing finance system, including future reforms to 

Fannie Mae and Freddie Mac. The Federal Government, through 

FHA and Fannie and Freddie, currently accounts for nearly all the 

credit volume to home buyers and rental properties. Even with 

this, fewer mortgage products are being offered and loans are underwritten on much more stringent terms adversely affecting home 

builders and buyers alike. As changes to the housing finance system are discussed, NAHB believes that it is crucial that there be 

a permanent Federal backstop to ensure a reliable and adequate 

flow of affordable housing credit. NAHB has been very supportive 

of FHA’s changes to ensure that the mutual mortgage insurance 

fund is sustainable. 

We understand FHA has a disproportionate share of the mortgage market, and current levels are neither desirable nor sustainable. The subcommittee has proposed changes, including: increasing the downpayment to 5 percent; prohibition on financing certain 

closing costs; potentially higher mortgage insurance premiums; and 

lowering mortgage limits. 

21 

NAHB believes these changes will restrict access to FHA credit 

and we have strong concerns about the impact of the proposed reforms on FHA’s ability to maintain its critical mission of supporting home buyers during a tenuous juncture in the economy. 

NAHB believes that increasing the downpayment from 3.5 percent 

to 5 percent will create a substantial burden for home buyers, especially younger buyers and those with strong credit profiles but not 

enough available funds to make the increased downpayment. 

Not often considered is the impact on homeowners looking to 

move up who cannot do so because of the reduced number of qualified buyers. NAHB appreciates the continued focus on strengthening the FHA’s risk management practices. However, we are concerned that removing the ceiling on the annual MIP presently at 

1.5 percent to result in a higher annual MIP. Increasing insurance 

premiums puts additional financial strains on home buyers who potentially could be buying excess housing inventory. NAHB has concerns for the proposal which would calculate the FHA loan limit 

based on 125 percent of median home price by county with no floor 

and a ceiling equal to that established in 2008 under HERA. 

Eliminating the floor for FHA loans would reduce the loan limits 

for significant parts of the country, including large numbers of 

first-time buyers without a key source of mortgage financing. In my 

hometown in Alachua County, Florida, we would go from $270,000 

to $190,000, a drop of 30 percent. 

NAHB supports making permanent the current loan limits for 

FHA and GSEs and strongly supports H.R. 1754, the Preserving 

Equal Access to Mortgage Finance Programs Act, introduced by 

Representatives Gary Miller and Brad Sherman. 

Turning to multi-family, there are a few alternative sources of financing for multi-family rental housing. FHA, Fannie Mae, and 

Freddie Mac have provided the vast majority of financing for multifamily rental housing during this economic crisis and will continue 

to do so for the foreseeable future. The discussion bill proposes to 

establish capital ratios for the GI/SRI funds. 

While NAHB applauds the strengthening of FHA’s risk management practices, we strongly urge the subcommittee to conduct an 

in-depth study to determine the appropriate levels and timeframe 

in which to implement them. With regards to rural housing, we are 

also opposed to the proposed transfer of the rural housing programs at HUD. NAHB believes that the rural housing programs 

are uniquely structured to address low- and moderate-income persons in rural areas. NAHB fears that it will be more difficult for 

persons living in rural areas to obtain an affordable mortgage and 

considerably more difficult to finance small properties in rural 

areas. We appreciate the key role FHA has played in keeping our 

housing market liquid, stable, and affordable. Looking at ways to 

improve the housing market is not an easy task. NAHB has some 

serious concerns on how to move forward, but we would like to continue working with you as you progress. Thank you for your time 

and this opportunity to testify. 

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

148 of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Rutenberg. 

22 

We will now turn to questions from members. And I will recognize members for 5 minutes each to ask their questions, and we 

will try to keep to that. I will yield myself 5 minutes for questions. 

Mr. Phipps, in a FOX News article that was published yesterday, 

it says that, ‘‘The National Association of REALTORS®,’’ citing 

Obama Administration estimates from last year, said that, ‘‘if the 

required payment rose to 5 percent, more than 300,000 creditworthy buyers would be locked out.’’ Do you know how that figure 

was determined? 

Mr. PHIPPS. I believe actually that is from the FHA, and I can 

verify that and provide that in a written statement. Madam Chairwoman, one other thing that I think needs to be brought to the 

conversation is when you are a buyer, you have to come up with 

more than 3.5 percent. And I think what has been lost in the conversation is that there is an insurance premium with FHA and 

there are other closing costs. So that, in terms of the hard money 

the buyer has to come up with, often it is from 7 percent to 10 percent, even though the downpayment is only 3.5 percent. So I want 

to make sure that piece is introduced. We will provide the documentation as to the source of the 300,000. 

Chairwoman BIGGERT. The problem with the 300,000 was, how 

was it determined? I know that it was the Administration, but I 

wondered if they explained to you how they reached that number? 

Mr. PHIPPS. Go ahead, Brian. 

Mr. CHAPPELLE. It was in testimony last March, FHA Commissioner Dave Stevens had it in testimony last March that talked 

about the 40 percent decline in borrowers and 300,000. 

Chairwoman BIGGERT. I do have the testimony. Thank you. I just 

wondered if any of you had asked him how that was determined? 

Mr. Calabria? 

Mr. CALABRIA. I haven’t asked him. But if you look at the overall 

distribution of FHA’s business in 2009, then his assumption must 

be that everybody who paid in that range simply cannot. So his assumption is based on that, you would never have any more money 

to put in as a downpayment. So Commissioner Stevens’ assumption 

is simply that everything above 95 percent goes away, which I 

think is a pretty strong assumption. 

Chairwoman BIGGERT. Okay. Thank you. I guess then that there 

was no definite on that. It was assumptions. 

This year, the same Administration has proposed a QRM rule 

that would require borrowers to have a 20 percent downpayment. 

Can anyone comment on the discrepancies between the Administration’s opposition to a 5 percent downpayment last year and his 

proposal for a 20 percent downpayment this year? Does anybody 

have any comments on that? Mr. Berman? 

Mr. BERMAN. Chairwoman Biggert, it would appear that the 

right hand and the left hand aren’t taking a holistic view of the impact on the market. Clearly a 20 percent downpayment, as suggested in the current QRM, would have a dramatic impact on 

bringing private capital back into the sector, which is something 

that clearly the Obama Administration and I think all of us feel 

is necessary. So we would hope that the entire QRM proposal 

would be reconsidered. 

23 

Chairwoman BIGGERT. Okay. Then instead of increasing the 

downpayment for FHA, let’s look at the alternatives. Decreasing 

the downpayment. Would a zero downpayment stoke the housing 

market? Would that get it going more? And if Congress approved 

such a change and FHA implemented that change, what would 

happen to the FHA fund? Would taxpayers be at greater risk and 

need to bail out FHA? Would anybody care to comment on that? 

Let’s try Mr. Petrou. 

Mr. PETROU. I think that what is important to think is not just 

the downpayment isolated, but also interconnected with the 

amount of insurance coverage on the loan. So that, for example, the 

VA program has a zero downpayment, but they only cover, at most, 

50 percent insurance coverage on the loan and the insurance coverage falls as the loan amount goes up. And so most VA loans are 

looking at 25 percent insurance coverage. When you have a restructured system that looks at all of the factors in underwriting, you 

can, in fact, make a zero downpayment program and have the underwriter basically look at the loan from the perspective of what 

his own risk is going to be. And that, I think, is the key. Just picking one little part out and saying, let’s change this and not look at 

everything else ends up with a problem. 

Chairwoman BIGGERT. Okay. Mr. Calabria, I think you had, in 

your testimony, talked about the loan performance in correlation 

with the downpayment. 

Mr. CALABRIA. That is absolutely a very important part. Let me 

say, for starters, and go back to the QRM. I think the QRM is probably beyond repair and Congress should seriously consider just repealing it outright. It is probably beyond fixing, in my opinion. An 

important thing to keep in mind about a downpayment is it is one 

of many factors. And if you change the other factors, what concerns 

me when I suggest we need to raise the downpayment is I hear 

zero discussion of changing the other factors, such as credit score. 

If you give people with a very bad credit a very low downpayment 

loan, you will see a high default. 

If we want to move FHA towards setting higher minimum credit 

scores, then you wouldn’t have to worry about the downpayment. 

So again, it is the pieces moving together. And if you are not mentioning the other pieces, you need to focus on the downpayment. If 

you are going to change the other pieces, then you don’t have to 

change the downpayment. 

Chairwoman BIGGERT. Thank you. My time has expired. It goes 

very fast. The gentlelady from California, Ms. Waters, is recognized 

for 5 minutes. 

Ms. WATERS. Thank you very much, Madam Chairwoman. I have 

identified some of my concerns when you gave me the opportunity 

to have an opening statement. And I would like to follow up on 

some of that. First, let me ask Mr. Calabria, I see that you have 

a tremendous background in public policy. You have worked here 

on the Hill. You have worked at HUD. You have done research. 

Have you ever been involved directly, like boots on the ground, 

with real estate sales or anything like that? 

Mr. CALABRIA. I will start with— 

Ms. WATERS. No, no, no, no. You don’t have to go back to all that. 

We have read it already. 

24 

Mr. CALABRIA. I was going to start with my own experiences buying a home and also in addition to the policy experience that is listed there, I spent a tremendous amount of time with constituents, 

as I know many of us have in trying to make— 

Ms. WATERS. I am going to cut you off because I don’t want to 

take up my time with the history. We all buy homes. I am looking 

for real hands-on experience. Let me go to the REALTORS®. Mr. 

Phipps, are you heading an association because you have some experience or background in public policy or doing—as an analyst or 

a consultant? Or have you been on the ground talking to people 

and writing loans and mortgages? 

Mr. PHIPPS. Yes. Yesterday morning, I was showing clients 

houses. 

Ms. WATERS. Okay. Then you are the one I want to talk to. Can 

you react to the claim in Mr. Petrou’s testimony that increasing 

downpayment requirements will not adversely affect first-time or 

low- and moderate-income home buyers? I want to get a better understanding of this downpayment debate. 

Mr. PHIPPS. Our experience would suggest that is just simply not 

true. In my own personal experience, I work with a significant 

number of buyers who do not have 20 percent down. Most recently, 

the couple that I was working with yesterday did not have 20 percent down. They will have enough for 5 to 7 percent. They are 

looked at and preapproved on a very comprehensive basis. And one 

of the things that we have learned from the experience of 5 years 

ago is how to look at holistic approvals. We think it is too rigorous 

now. But if you increase the amount down, you really take a lot 

of people who should be able to buy who will be responsible, sustainable homeowners out of the marketplace. And that amplifies 

the problem for value. You are not absorbing the inventory then. 

Ms. WATERS. So would you be referring to, for example, a young 

couple, both working, renting property, pay their bills on time and 

are saving some portion of their income—as much as they possibly 

can with average salaries—who want to get into a home and perhaps can get, like you said, 3 to 5 percent down. But 20 percent, 

10 percent would be a real reach for them. 

Mr. PHIPPS. It is real. It really is real. Last year, I worked with 

a couple. He was a Narragansett police officer, and she was a 

schoolteacher. If they needed more than 3.5 percent down, they 

would not have been able to buy the home. And they bought in 

Apponaug, they bought in Warwick. That is real. 

Ms. WATERS. These are not deadbeats, are they? 

Mr. PHIPPS. No. A police officer and a schoolteacher. When we 

come here, what is very frustrating is there is a lack of appreciation—we are talking individual families. And the families really, 

their skin in the game truly is ownership. They know that long 

term, it is important for them to be homeowners. But if it takes 

the average family 14 years to come up with 20 percent, you postpone their ability to own for a long time. Plus, it doesn’t make a 

lot of sense. And we think the facts—and we can provide you with 

lots of documents—but please remember that each statistic is a 

family, a family who wants to own and understands the value of 

homeownership. 

25 

Ms. WATERS. These are people that you see in your business and 

the REALTORS® interact with and they know who we are talking 

about and what we are trying to do and the average American that 

we are trying to assist in the American Dream, is that right? 

Mr. PHIPPS. Yes, ma’am. In all 50 States, in every town and city 

in this country. 

Ms. WATERS. I yield back the balance of my time. 

Chairwoman BIGGERT. Thank you, Ms. Waters. Mr. Hurt, you 

are recognized for 5 minutes. 

Mr. HURT. Thank you. And I thank each of you for your testimony this morning on a very important subject. I guess I kind of 

come at this subject with a couple of things in mind. Number one 

is, obviously, we want to I think in this country encourage responsible homeownership everywhere wherever we can. But I think also 

we have to remember that these programs and with the backstop 

offered by the government, these things propose a risk to the taxpayer. And I think that we see examples of that, that we are not 

dealing with in other bills. I also think philosophically that, to the 

extent that the free market can address the issues and address 

these issues on its own without government intervention, I think 

that that is what we should work toward. 

So I was interested to hear Mr. Phipps talking about wanting 

more market activity, which I think we would all agree with. We 

want to see more market activity. But also talking about less government intrusion. I guess for my part philosophically, I think that 

a government backstop encourages behavior that perhaps could not 

be sustained if the system was totally within the private sector. 

And I guess my question—I would love to hear from Mr. Phipps 

and Mr. Rutenberg whether or not you believe it is legitimate to 

want to have the private sector come more into the mortgage market or not because it seems to me that by increasing the 

downpayments very modestly and by reducing the loan limits modestly, while it may have an immediate effect in the long term, it 

would encourage the private sector to come in. 

So I would like to just hear you say—do you think that the private sector should come into this market more and FHA has too 

much? Or do you think we should just leave it the way it is? And 

if we do take these actions, increasing the downpayment—this is 

the second part of the question—if we do take these actions, will 

the private sector come in? And if maybe Mr. Phipps and Mr. 

Rutenberg can address that individually. Thank you. 

Mr. PHIPPS. The short answer is, we would like to see more private activity in general. We think the reliance on FHA is probably 

unnecessarily large. But they are filling a void that the private sector has not stepped into. As a practical matter, when you talk to 

the GSEs and you look at the fact that their credit scores have 

gone from 720 now to 760, there is a good portion of the market 

that should be able to have access to the market that do not. That 

is a major problem. 

Our fear, our genuine fear is that when you look at the limited 

amount of private activity in the marketplace right now that there 

is no entity to step in and fill that. And this industry relies on the 

flow of capital. So for the immediate present, we need what we 

have in place and more so that transactions can happen. But we 

26 

don’t see anybody else ready to step into the market and fill the 

void that we need across-the-board. 

Mr. HURT. But if you support the idea that the private sector 

should come in, then let me ask you this: How would you do it? 

We have to make that decision. I know you are not sitting up here. 

We are sitting up here. But how do you do that if you support that 

philosophically? 

Mr. PHIPPS. The short answer is, and your comment about interference, we would like the system that FHA has in place right now 

to stay in place. The improvements for enforcements, etc., are fine. 

On the GSE piece, ultimately we believe we need a government 

guarantee. At the end of the day, we believe that is what we need 

and we need that. And then you can have more flow and reliable 

floor. We really believe, at the end of the day, you will need a government guarantee. 

Mr. HURT. Thank you. Mr. Rutenberg, if you don’t mind? 

Mr. RUTENBERG. I am a home builder. I talk with clients. I 

haven’t talked to one since about 9:40 this morning. The market is 

healing. It is taking a while. It has taken longer than we would 

want. I think that when we talk about one thing at a time, what 

we miss is how interactive all the pieces are to our buyers. When 

we sell a house, we no longer tell them they are going to have a 

mortgage application. We now tell them they are going to have a 

mortgage inquisition. The amount of data, the amount of the depth 

that has been gone into is setting a base for a much healthier future. You can look at the numbers that many people on this panel 

have talked about, how things are improving. 

It has not improved enough yet to where a lot of private money 

is coming in. The major lenders are still straightening out some of 

the things that have happened in the past. They have not yet quite 

seen their profit potential. But as the market comes back, they will 

come back and they will participate more. It won’t be exactly as 

you probably would want it without you having to motivate them. 

There is so much potential that is out there that they will come 

back. But they have lost so much money over time that their eagerness is not there yet. And they will put their toe in and they will 

gradually come back. We don’t think that we should have Fannie 

and Freddie and the FHA at the current levels. But at the moment, 

if you did not keep them here where they are, we would see further 

problems in financing. You would see further declines in the house 

prices that would further erode consumer confidence. You can play 

the economics out of in your head. 

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

gentleman from California is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. To hear the philosophical comments 

from the Cato Institute, from the gentleman from Illinois, I would 

remind you that whatever the philosophy is for some perfect world 

or where we might want to be 20 years from now, right now, the 

patient has suffered a heart attack and is on the gurney. And even 

if you believe fervently in exercise, usually a triathlon should take 

place more than a few weeks after the heart attack. This bill gives 

us a chance to experience a double-dip recession. The best way to 

have a double-dip recession is to see another dip in housing prices. 

27 

I particularly would like to focus attention on those areas where 

you have high-cost housing. And this bill would take the FHA from 

$729,000 down to $537,000 in Los Angeles County. Mr. Phipps, 

what effect would that have on home prices, not only of the homes 

that sell for $800,000. But if they drop by a couple hundred thousand dollars, what is going to happen to the home that traditionally sells for a couple hundred thousand dollars less than that? 

Mr. PHIPPS. The short answer, Congressman, is the entire market is linked. So as the upper bracket gets pressure on prices, 

downward pressure because financing becomes harder, it has a ripple effect in both directions. So the bottom line is you are going to 

see a huge loss of equity. And candidly, what is frustrating about 

the proposal is it is done by county rather than metropolitan area. 

So it de facto becomes a redlining. You are going to have certain 

counties that are much more negatively impacted because you are 

not allowing for the whole presence of the metropolitan area. So it 

has a huge negative impact on value. 

Mr. SHERMAN. And it is that county rather than the metropolitan area that would be responsible for the drop to about $537,000 in 

L.A. County, really a $200,000 drop. A recent report showed that 

three banks are closing half the mortgages. And now this bill would 

cause an awful lot more mortgages to have to be held in part or 

in full by—in the portfolios of banks rather than sold as securities. 

That means the banks that would benefit with those would be the 

lowest cost to funds and those are the banks that are too-big-to-fail 

and enjoy an implicit Federal guarantee. 

What impact does it have on the market to have 3 banks controlling 56 percent of the market? And what impact would it have for 

those loans over, say, $537,000 where you might see 70 or 80 percent in the control of these 3 banks? 

Mr. PHIPPS. There is less competition. So that, in fact, the cost 

of the money would be more expensive. You will have fewer options. When I started in the business 30 years ago, the top 5 lenders represented less than 25 percent of the market. We have such 

a concentration now that it is unlikely—you can’t shop the mortgage the way you used to. And the underwriting criteria universally is the same. So there are real constraints as to what you 

would have available. 

Mr. SHERMAN. I would also point out, you understand the pain 

from the home buyers’ perspective. In this room, the greatest pain 

was when we had to consider the TARP bill. Some voted one way, 

some voted the other. But if these institutions are able to add to 

their portfolios 56 percent—huge percentages of mortgages in addition to their other assets, they become really, really too-big-to-fail. 

And so you may see pain here as well as with your customers. And 

they also become concentrated in real estate. If you want to respond? 

Mr. PHIPPS. Congressman, if I may make one other point. One 

of the challenges right now, if you are self-employed, if you are a 

1099 person, your ability to get financing is extremely difficult because the large lenders really prefer people with W–2s. So there is 

a huge piece of the market that is having trouble being placed. It 

would actually be in the market right now. And that is indicative 

of the lack of flexibility and competition. 

28 

Mr. SHERMAN. As an old tax collector, I would say I would only 

want those with the 1099 income, reporting all that income. And 

I am sure that is the kind of person you had in mind. 

Including a recently announced increase, FHA increased premiums 3 times last year. How does this affect home buyers? 

Mr. PHIPPS. It has actually reduced the number of people who 

are able to finance and the people who are being approved now are 

much more creditworthy. It just seems to me, we are trying to fix 

a problem again that we have already addressed. If we let the market absorb the changes that are in place now, that is better for us. 

Mr. SHERMAN. Thank you. 

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

gentlelady from West Virginia, Mrs. Capito, is recognized for 5 

minutes. 

Mrs. CAPITO. Thank you, Madam Chairwoman. I thank all of 

you. I want to talk about two things, I hope I have time for them. 

First of all, I want to talk about USDA Rural Housing Service proposal to move it within HUD. The folks—I believe it was Ms. Alitz 

and Mr. Carey talked a lot about this. We are looking for efficiencies in government obviously and we have the $14 trillion debt 

that we all know about. There was a report that came out maybe 

a month or 6 weeks ago—and I can’t remember exactly what is the 

title of it—but it talked about duplicative housing programs across 

all the different government agencies. And certainly, I represent a 

very rural area. You know when I hear loan limits of—our housing 

price is probably $120,000. So it just boggles my mind that 

$700,000 to move down to $500,000 is going to be so painful because in my area, that is somebody living on the hill, big. 

So I want to know, you have both said that you think this is not 

a good idea because you think it would dilute the ability to reach 

the population that this program is designed for, which are the 

very low-income rural areas. Do you think if the expertise was 

transferred from USDA into—I am talking about staffing and infrastructure—into HUD within the umbrella there, I am looking for 

efficiencies here. Do you still think that if it was not done precisely 

and carefully that HUD couldn’t retool into this market and be just 

as effective as the USDA has been? 

Ms. ALITZ. We actually said that we think there are pros and 

cons to the plan. We just don’t know enough about it right now. 

And we have to, I think, take a stronger look at it. That is one of 

the cons. We think if the whole thing was transferred to HUD, it 

would be shoved in a back room somewhere and it wouldn’t get the 

attention that it deserves. And currently, what I hear from most 

of my membership is those that deal with rural development on a 

daily basis, they have a pretty good line of communications and 

they have good relationships and they are afraid of losing those. 

But we do think that there are some pros to looking at moving to 

HUD. And those are mostly related to funding. We have had problems with the current Administration’s budget and we wonder 

about the USDA’s commitment to its rural housing portfolio. 

Mrs. CAPITO. Right. We had the issue in April where we had to 

keep moving. 

Ms. ALITZ. Right. So we think that their funding sources—this 

portfolio really needs to be conserved because it is aging. Most of 

29 

it is over 20 years old. We think for funding purposes we may be 

better off at HUD. 

Mrs. CAPITO. Mr. Carey? 

Mr. CAREY. I think the important element of the USDA delivery 

system is the infrastructure that is in rural communities. They 

have a presence. They are community members. Sort of like community bankers, like we used to have. So they are there. And their 

delivery system typically collocates and combines farm service programs, soil conservation, wastewater and water assistance, community facilities funding and homeownership and rental housing. 

And my first experience was in Buffalo Creek rural housing. 

When a borrower for USDA loan wants to apply for a loan, they 

go to the local office and they are dealing with local people. And 

if you take the housing out of that system, you will still have that 

same system there but nothing to replace it from HUD because 

HUD—if a homeowner in a local community in Farmersville, California, wants to borrow from HUD, if HUD was direct lending, they 

would go to San Francisco, not the same as going to somewhere 10 

miles away. 

Mrs. CAPITO. The other way—and I only have a minute left—is 

on the QRM. I have heard from several folks who think it needs 

to be thrown out, retooled. It is going to be ineffective. It seems to 

me what I am hearing baseline—and correct me if I am wrong— 

is that this creation of the QRM is just going to bloat FHA even 

more. I see a lot of nodding heads. Does somebody want to comment on that? I will go with Mr. Berman and then Mr. Rutenberg. 

Mr. BERMAN. Sure. So if the concept is that we are trying to 

bring private capital back into the market—and I think we all 

agree on that—and yet we are going to put these significant constraints on private capital, we are going to have— 

Mrs. CAPITO. Have adverse effects. 

Mr. BERMAN. Exactly. An adverse effect. 

Mrs. CAPITO. Mr. Rutenberg? 

Mr. RUTENBERG. The QRMs are probably flawed. Hopefully, they 

will not go in as they are. But if it does go in, it will put a lot more 

pressure on FHA to do more lending, no question. 

Mrs. CAPITO. Thank you. 

Chairwoman BIGGERT. The gentlelady’s time has expired. The 

gentleman from Massachusetts, Mr. Capuano. 

Mr. CAPUANO. Thank you. Madam Chairwoman, I don’t know 

where to start. I just have a couple of questions. Mr. Phipps, did 

I hear you say you are from Rhode Island? 

Mr. PHIPPS. Yes, Congressman. 

Mr. CAPUANO. Have you done any work in the greater Boston 

area? 

Mr. PHIPPS. I am licensed in Massachusetts and Vermont. 

Mr. CAPUANO. Great. I represent, Boston, Somerville, Cambridge, 

and Chelsea. Do you know any place in my district where I can get 

a reasonable house for less than $500,000? 

Mr. PHIPPS. The short answer is, it is challenging. 

Mr. CAPUANO. It is challenging? 

Mr. PHIPPS. With a good REALTOR®, yes, I think that you can. 

But $500,000 is— 

30 

Mr. CAPUANO. A really good REALTOR®. The reason I am 

amazed is when you say increasing a downpayment from 3.5 to 5 

percent, that doesn’t sound like much. That sounds reasonable. But 

when you put it down on a $500,000 home, that is $7,500 in cash. 

Which I know that there is probably nobody here at this table who 

has a problem coming up with $7,500 in cash, but a lot of my constituents do. And that means that they will never own a home. Has 

anybody had any discussions yet about maybe a sliding scale? I understand that more people can afford certain things. That is fair. 

Have there been any proposals for a sliding scale downpayment? 

Mr. PHIPPS. Not that I know of. 

Mr. CAPUANO. Does anyone else know of any proposals? 

Mr. CHAPPELLE. FHA used to have a sliding scale historically. 

Mr. CAPUANO. Yes, I know. 

Mr. CHAPPELLE. They switched in 1998, I think, to make it simpler so people could understand what the downpayment was so it 

would be a flat percentage of all loan amounts. 

Mr. CAPUANO. You do realize that most people who go in to get 

an affordable mortgage don’t understand much. They just want to 

get a mortgage. And if you tell them what they are going to put 

down, they are going to say, yes, I can afford it, or no, I can’t. 

Mr. CHAPPELLE. The only thing I would add, Congressman, is 

that the performance of the FHA Fund today demonstrates that 

low downpayment loans perform very well. So I don’t think there 

is a need from a statistical performance perspective. 

Mr. CAPUANO. I am fine with having no need. I am painfully trying to be reasonable which is tough for me, but I am trying. 

Mr. CALABRIA. If I could comment, FHA actually does have a little bit of a sliding scale now in that if you are below a certain credit score they require you to do the 10 percent. So there is a sliding 

scale in mind. And I think if you are going to base it that way, 

again, we know it is the interaction between the credit score—as 

Ms. Waters said, people paying their bills on time versus downpayment. So you could do a sliding scale on credit and FHA has actually proposed— 

Mr. CAPUANO. Bringing up FICO scores is a whole different issue 

which is another little bit of a problem. Conceptually, I don’t disagree. But we have to get FICO scores right first. 

I guess the other question—I want to just thank the Majority 

staffer who wrote the little memo for today because they made my 

point. Prior to the creation of the FHA, home mortgages did not exceed 50 percent of the home value and did not extend past the 5th 

year. The rates were about the same rates as we have today, give 

or take 5 or 7 percent. But 5 or 7 percent over 5 years versus 30 

years, does anybody have any clue how much that is? Because I do. 

I think the official answer is, way too much money for anybody to 

afford which is why people didn’t have homes. 

I guess I am sitting here today—there is no argument that—look, 

the private market has a role to play in this. But somebody needs 

to tell me why right now we are having a hard time getting people 

into homeownership when the home builders are building nothing, 

for all intents and purposes, because there are no buyers out there. 

We can’t move this part of the market around. Why in the world 

would we want to, overnight, simply just shut down one of the few 

31 

escape valves we have had, other than for some holy sacred cow 

that we want to light candles at? 

Mr. CALABRIA. Since I sort of feel this coming my way, I guess 

I will— 

Mr. CAPUANO. It is not personal. 

Mr. CALABRIA. Exactly. I don’t take it that way. First of all, I 

think certainly myself—I know that it has been clear—that any 

sort of transition should be over time. For instance, I don’t propose 

getting rid of Freddie or Fannie tomorrow. I think it needs a 5- or 

6-year period. I see these changes that have been proposed in FHA 

as quite modest. 

Mr. CAPUANO. So you want to do them all together? 

Mr. CALABRIA. Absolutely. 

Mr. CAPUANO. That is fine. You just made my point. So you think 

it is okay to go back to—or you think somehow the miraculous 

market that didn’t exist before Fannie and Freddie will somehow 

exist now. The goodness and the graciousness of the private market 

will get rid of those 5-year mortgages. 

Mr. CALABRIA. I think if you go back and you actually look at the 

data on homeownership rates—I would be happy to come in and 

show you some time— 

Mr. CAPUANO. Oh, please do. 

Mr. CALABRIA. —in the 1950s and 1960s, when Freddie and 

Fannie’s market share was essentially zero, homeownership—look 

at the data. 

Mr. CAPUANO. I have looked at the data. Take a look at the 

homeownership rates prior to the 1930s. 

Mr. CALABRIA. The homeownership rates prior to the 1930s was 

about 45 percent. Homeownership was not limited to the wealthy 

prior to the New Deal. 

Mr. CAPUANO. And you think that is a good idea? 

Mr. CALABRIA. I think that you would have it any other way. You 

have had income growth. You had a lot of other reasons— 

Mr. CAPUANO. It is okay to think it is a good idea. I just seriously 

disagree with you. 

Mr. CALABRIA. First of all, I think it is absolutely the wrong idea 

to target the homeownership rate as a matter of policy. I think that 

is one of the reasons we are in the mess we are today. I think 

homeownership rates would be upper 50s, low 60s if we had no 

Federal support. And I am absolutely convinced of that and I think 

there is significant data to support that. So it is not simply some 

sort of philosophical choice. 

Mr. CAPUANO. See, here is where we have a basic philosophical 

difference. When my ancestors came over, they didn’t come over 

with a satchel full of cash. 

Mr. CALABRIA. Neither did mine. Mine came from nothing. 

Mr. CAPUANO. I appreciate that. And guess what got them into 

the middle class, homeownership. 

Mr. CALABRIA. You know what got mine into the middle class? 

Working. 

Mr. CAPUANO. Oh, that is good for you. Because my family never 

worked. We were on the dole. That is very good. 

Chairwoman BIGGERT. The gentleman’s time has expired, fortunately. 

32 

Mr. CAPUANO. Does anybody want to yield? 

Chairwoman BIGGERT. And I would say to the gentleman that 

you missed the beginning of this. 

Mr. CAPUANO. Oh, no. I watched it on TV. 

Chairwoman BIGGERT. We have several drafts that we are looking at, and to have this kind of dialogue so that we can really do 

no harm. 

Ms. WATERS. Madam Chairwoman, since we have so few members on this other side, can I make a unanimous consent request 

to give the gentleman 1 more minute? 

Chairwoman BIGGERT. Must I? The gentleman is recognized for 

1 more minute. 

Mr. CAPUANO. Thank you, Madam Chairwoman. 

Mr. GARRETT. If the panel gets another 30 seconds to respond. 

Mr. CAPUANO. I would love this. 

It is amazing to me that your family was the only one who 

worked in all of America, that none of us did. See, the difference 

between people who think that homeownership should be left to the 

private market and people like me who think the government has 

a role to play to ensure that the middle class can afford homes because nobody else has ever done it in the history of the world except when government got involved, that is the only time it has 

ever happened. The reason I think that is because people like me 

would never have gotten into the middle class. We would still be 

driving trucks for vegetable farms that don’t exist anymore. And I 

know that is fine. That would have served your purposes just fine. 

But most of my constituents would never have owned a home. And 

I personally think that is what has made America great. That is 

how my kids went to college, remortgaging the house. 

Now I know that many people in the financial services world 

don’t have to do that. Many people, most people do. And that is 

why I came today. I am not opposed to trying to narrow some of 

these things down. Nobody wants bad mortgages given out to bad 

people or people who can’t afford it. That is ridiculous. It kills the 

whole system. But to sit here and pretend or argue— 

Chairwoman BIGGERT. The gentleman’s time has expired. 

Mr. CALABRIA. The panel’s time perhaps? 

Mr. GARRETT. I seek unanimous consent to give 30 seconds to 

Mr. Calabria to respond. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. CALABRIA. I very much appreciate the point. I think if you 

go back, and again, you look at the historical data when people actually had equity in their homes—for instance, in 1980, the typical 

equity in a home was 70 percent. So the question is whether debt 

creates homeownership. If we want to subsidize homeownership, 

why don’t we subsidize home equity rather than home debt? Getting people leveraged over their head is, in my opinion, not a way 

to create the middle class. And again, the middle class has to pay 

taxes too. 

There is another side of this. Do you want to know what my experience is? My experience as a taxpayer is, and I think a lot of 

people out there, the more you pay in taxes, the less you actually 

have to spend towards your mortgage, toward the other necessities 

of life. So all of these pieces fit together. And I think it is important 

33 

ultimately to ask at the end of the day, do we get much for the 

money that we spend in our mortgage finance system? I think the 

answer is absolutely not. I think the bill in front of us contains 

very minor changes that do not gut the system to any extent of the 

imagination. 

Chairwoman BIGGERT. Thank you. The gentleman’s time has expired. The gentleman from New Jersey, Mr. Garrett, is recognized 

for 5 minutes. 

Mr. GARRETT. Let’s just try this from another tact. 

So is there anybody on the panel who does not believe that there 

is risk in the marketplace today? No. Does anybody believe that we 

should be pricing for that risk in the marketplace today? We all 

agree that we should be pricing for that risk. Does anybody disagree that we, as far as the accounting methodology that the FHA 

uses, that accounting should be transparent and show that pricing 

risk as well? Does anybody disagree with that? You disagree with 

that. We should not show that. Yes? 

Mr. CHAPPELLE. Are you referring to the CBO study on fair value 

accounting? 

Mr. GARRETT. Sure. 

Mr. CHAPPELLE. The only trouble with fair value accounting, as 

I see it, Congressman, is that the value is an estimate. It is a projection. And the projection that the CBO used was based on Fannie 

and Freddie’s fees and the private mortgage insurance fees. So you 

are comparing government, which is hard to compare because you 

can’t find something comparable. 

Mr. GARRETT. So what fees are used right now? Only FHA. GSEs 

doesn’t do this, right? The FHA uses the valuation of what, treasuries as basically accounting. 

Mr. CHAPPELLE. Right. 

Mr. GARRETT. Does anyone on the panel believe that the current 

pricing of treasuries is what we are going to see 3 years from now, 

10 years or 15 years? Or are we going to stay at these historically 

low levels? So everyone agrees that the treasuries are going to go 

up. Does anyone believe that they might go up significantly? A lot 

of nodding heads. So is it fair, then, that we are using that as the 

basis for the valuation? 

No. Okay. So if that is not the correct valuation for valuing, then 

perhaps the CBO score is. So do you use fair value? Or some variation of a fair value accounting. 

Mr. CHAPPELLE. If I could answer, Congressman. The concern I 

have with the fair value is it is based off of Fannie, Freddie, and 

MI fees. The MI fees are comparable to FHA fees. If the Fannie 

and Freddie fees were not so high, the private mortgage insurance 

business would be back in business today. But because of those fees 

that Fannie and Freddie charge, which they are set because they 

are trying to—I understand why they set them where they set 

them—but they are trying to preserve capital for the taxpayer 

which is an altruistic reason. But the upshot is, it is making the 

private sector less competitive. The point is, FHA has raised its 

fees 4 times in the last 3 years. They have raised them 60 percent. 

They have gone up to the highest fees in FHA’s history. 

Mr. GARRETT. So what you are saying is that the CBO score evaluation is wrong? 

34 

Mr. CHAPPELLE. No, it is not wrong. Excuse me, Congressman. 

It is not wrong. It is just that by using Fannie/Freddie data, FHA 

is doing fine. I wouldn’t say FHA is charging too little. I would say 

Freddie and Fannie are charging too much. 

Mr. GARRETT. It looked like you had a comment. 

Mr. CALABRIA. I will make a couple of quick points. Along fair 

value, absolutely when you were transferring risk from the private 

sector to the government, there is market risk involved. This is not 

charged. So if the government is giving something to the private 

sector, that should be priced appropriately. We did that in the 

TARP. And I think it makes sense in this context. And I want to 

reiterate a point I made in my written testimony. FHA does not 

charge to cover its administrative expenses. I don’t know what 

business, if it didn’t pay its employees, would actually claim to be 

profitable. 

Mr. GARRETT. So we are in agreement that we need more transparency. We are in agreement on the panel that the current methodology, which is using Treasury rates for discounting, is showing 

at—because of the law as having no cost to the government for the 

risk-based in there. And it seemed to be correct. So we should be 

on agreement then on this panel, then, that we need to move away 

for proper accounting methodology from what we are currently 

using to something else. Perhaps not to the CBO score methodology 

for that reason, but to some—although I don’t know what else we 

should be going by here in this committee and on the Budget Committee because that is what we go by in this House. And if the panel’s recommendation is we go askew from that, but we should move 

away from what we have right now to include risk assessment. Do 

I see any objection? I don’t. I only have 55 seconds left. Let me just 

change a topic there. Default rates. Quickly, can someone just tell 

me what the current default rate is now at FHA? 

Mr. CHAPPELLE. The total default rate, their 90-day delinquency 

is about 8.7 percent. That is the total portfolio. 

Mr. GARRETT. So it is around 9 percent. Okay. Do we have a target where we want to be on our default rate, FHA? 

Mr. CHAPPELLE. It is a balancing act, Congressman, between the 

premiums charged and the number of defaults and claims. 

Mr. GARRETT. That is a good question. Do premiums currently 

adequately cover the default rate? 

Mr. CHAPPELLE. Yes. Because that is what the actuarial review 

determines. 

Mr. GARRETT. Wait, how can you say that when just a minute 

ago, you all agreed that the current valuation was not correct because it is based on treasuries, not assuming any market rate. And 

that is how you came up with around a $4.4 billion savings. You 

would actually have a $3.2 billion cost under the CBO score. So you 

really can’t say that the premiums are— 

Mr. CHAPPELLE. Congressman, the determination that its shortfall is $3 billion is predicated on the fact of the fees Fannie, 

Freddie, and the MIs are charging. 

Mr. GARRETT. But you all already agreed that the current methodology is not adequate, so we need to go away from the current 

methodology based upon the Treasury rates, basically no discount 

rate involved there. So if you all agreed on that, then you really 

35 

can’t say that the premiums are currently are based correctly because you— 

Mr. CHAPPELLE. Congressman, I am no expert on accounting. 

Chairwoman BIGGERT. The gentleman’s time has expired. I can’t 

get a word in edgewise, you talk so fast. 

The gentleman from Ohio, Mr. Stivers, is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Madam Chairwoman. The first question 

I want to ask the panel is just about the current status of the 

multi-family market. Can anybody give me kind of an update of the 

role of private capital in the multi-family market today and how 

much private capital is engaged in the multi-family market today 

and how this asset class have performed through the crisis? Mr. 

Berman? 

Mr. BERMAN. Congressman, the multi-family market is one of the 

few areas where liquidity has started to return. Having said that, 

last year, between Fannie, Freddie, and FHA, it still represented 

at over 80 percent, close to 90 percent market share. We have seen 

private capital come back into the sector over the last 6 months. 

But it is really a tale of two worlds. Most of that capital has come 

in at the luxury end of the market, and then what I call the gateway cities. If you go to secondary markets or even primary markets 

that don’t happen to be Los Angeles, New York, San Francisco, 

Boston, or Washington, the capital has not been anywhere near as 

available as it was, and there is a heavy reliance on FHA, Freddie, 

and Fannie still for all the other markets. 

Mr. STIVERS. Great. Thank you. Somebody earlier was talking a 

little bit about—I think it may have been Mr. Calabria. The current FHA downpayment, obviously, it varies depending on your 

credit score. I think if your credit score is below 580, you have to 

pay 10 percent down. 

Mr. CALABRIA. That is correct. 

Mr. STIVERS. I am trying to remember off the top of my head 

that number. But in the discussion draft, I believe we raised the 

minimum downpayment to 5 percent regardless of your credit 

score. And it kind of brings me to the similarity of the QRM too. 

They have all these stand-alone factors in the QRM, but they don’t 

look at the interplay. They kind of look at as, each of them as hurdles. But they just see if you clear them. And if you clear, for example, the credit score much higher than where the hurdle is, or if 

you clear the payment ratios higher than where the minimum is, 

you get no credit for that. I guess my comment is to the discussion 

draft. Should we look at a way to provide a sliding scale so that 

if your coverage ratio of payment, ability to make your payment 

and your credit score is higher that we consider sliding the downpayment. 

Mr. CALABRIA. I think absolutely. Let me preface with, I am very 

uncomfortable with thinking of putting the phrase ‘‘FICO’’ in the 

statute. There are problems with it. But beyond that, having some 

interaction between the credit history, debt to income and downpayment, how all those fit together, you should be able to trade off. 

And again, I favor a 5 percent because quite simply, I don’t think 

FHA has done a very good job about that trade-off in the past and 

36 

I think that trade-off is often difficult to get statute. But if you can 

do that, then again, you lessen the hit. 

Mr. STIVERS. I guess my point is, government doesn’t do a very 

good job of pricing risk. But if we could allow that trade-off—and 

underwriters do it every day, and I see some other folks want to 

make comments. And we will just go down the line until we have 

time out because this is really what I would like to spend most of 

my time on. Mr. Chappelle and then Mr. Petrou and then if anybody down at the end wants to comment. 

Mr. CHAPPELLE. Thank you, Congressman. What you have described is basically what underwriting is. If you are going to put 

more requirements in the statute to shoehorn what is allowed and 

what isn’t allowed, it will just create more complexity, more hurdles, more everything. A good underwriter can make that decision. 

And then you can evaluate the performance of the lender. And 

FHA has a database that is public that lets people see how each 

company is performing. And that is why a lot of them appeared in 

the papers recently for poor performance. So I think there are 

enough sticks and carrots and sticks to do it without having to put 

things in the statute about underwriting requirements because otherwise you are never going to get a loan approved. 

Mr. STIVERS. And one of you called for the actual ultimate credit 

officer who approved the loans for the database to go that far down. 

Was that your testimony? 

Mr. CHAPPELLE. It was the loan originator. 

Mr. STIVERS. The loan originator. So that the loan originator, by 

individual, you could actually track whose loans were performing 

and whose weren’t. I think that is a great idea. Does that require 

a congressional change or can they do it through a rule? 

Mr. CHAPPELLE. They could do it regulatorily. 

Mr. STIVERS. That is a great idea. I would like to keep moving 

down. 

Mr. PETROU. I would like to note that historically, FHA actually 

did have a sliding scale downpayment. If you go back to the glory 

days of the 1970s, as you increase the borrowed amount, the percentage of the loan that was required to be put down increased. So 

by the time you got to the top of the FHA limit back in the 1970s, 

you ended up with having well above a 5 percent minimum downpayment. FHA, as a 3 percent downpayment program, did not exist 

in the 1970s. 

Mr. STIVERS. I am out of time. But how do we do this without 

giving so much discretion that essentially we have nothing anymore? 

Mr. PETROU. I think that the key here is to mix downpayment 

with coverage level. I don’t think FHA should be insuring 100 percent of every loan that it buys. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

Mr. STIVERS. Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. The gentleman from Wisconsin, Mr. 

Duffy, is recognized for 5 minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. I will yield my 

time to Mr. Garrett. 

Mr. GARRETT. I thank the gentleman. And just to close on the 

other point, I look forward to working with the Chair on the last 

37 

point that we were discussing, if we can address a way to find out 

how we can have better transparency and accuracy in the accounting to move from where we are right now to go in a direction 

maybe not as far as what CBO, is but whatever that correct assessment is. So I look forward to going in that direction. 

Secondly, to Mr. Evans a question, your testimony goes on to say 

that HUD anticipates that demand for FHA multi-family has increased more than fivefold, and the estimates point to a high demand for these programs for the next several years. Can you say 

how FHA meets this increased demand without sacrificing credit 

requirements and underwriting that would further expose it to taxpayers? 

Mr. EVANS. I am sorry. I missed the question. 

Mr. GARRETT. The last part of it, how can FHA meet these increased demands for multi-family without sacrificing credit requirements and underwriting that would further expose all of us to the 

taxpayers? How can you do that and to meet the demand for multifamily housing increases? Because we are hearing that is where it 

is working out there. 

Mr. EVANS. Exactly. And we are fully behind credit policy. What 

we are concerned about is really the process. And some of the 

things that have been implemented, they have taken control out of 

the local offices and centralized it. One of the points that I brought 

up in my testimony was that if you have a loan that is over $15 

million, the home office has to approve this loan. So giving more 

authority to the local offices would speed up the process. Also giving more reliance to the multi-family accelerated processing guide, 

which was implemented in order to speed up the process, a lot of 

these guidelines’ timeframes are no longer adhered to, where you 

have maximum review periods, 60 days for a 223(f) loan and 90 

days for a 221(d)(4) loan, those time frames have been thrown 

away. So people really don’t know where they are at in their application process. Giving more authority to the map lenders and giving more authority to the local offices. 

Mr. GARRETT. I appreciate that. Let me just switch gears to 

something that the Administration had said on another note. Back 

when the Administration rolled out their GSE proposals, one thing 

they said—and I think we all agree on this—is that we have to do 

something with regard to GSEs to make sure that some segment 

goes back to the private market and that the huge amount that is 

over the GSEs goes down, and the huge amount that is over the 

FHA goes down as well. We are all in agreement on that point. The 

rub comes though with Dodd-Frank legislation. And what does that 

do? That goes into the whole issue of risk retention, right, which 

is one issue. But in the risk retention issue, what does it do? It 

gives an exemption, right, to the GSEs and to FHA. 

So some of the people who have sat at this panel say, when you 

do that, what happens? Basically by giving the exemption over here 

to GSEs and FHA, you are going to create a disincentive in the private market. Why? Because if you still have the risk retention over 

in the private sector, they have to do what? They have to hold capital on their books. And that is a disincentive—not only disincentive, it is a higher cost for them. So where do the loans go? When 

they are coming to you to get a loan, or people who are going 

38 

through real estate, going through you to get loans, where do they 

go? They don’t go there because it is more expensive. They are 

going to continue to flow into the FHA, into the GSEs. That is the 

argument. Is there any basis to that argument? 

Mr. CHAPPELLE. Congressman, I think from reading the Administration’s White Paper, they make it pretty clear. They want to raise 

the FHA and GSE requirements so that the private sector is competitive. I personally don’t agree with that. But that is what the 

White Paper says. 

Mr. GARRETT. But not in this area. Not on the risk retention 

area. On the risk retention area, they make an exemption and they 

make it different. 

Mr. CHAPPELLE. They make an exemption in the short term. But 

it is pretty clear from reading the White Paper, they say, establish 

a timeline for raising fees, increasing downpayments, and lowering 

maximum mortgage amounts. So they are on the same page. 

Mr. GARRETT. That is interesting. So your reading of that is, create this exemption for today while you have this deal problem. And 

then maybe phase out that risk retention? 

Mr. CHAPPELLE. Right. 

Mr. GARRETT. Okay. That is your understanding. 

Mr. CALABRIA. While I rarely find myself in defense of the Administration— 

Mr. GARRETT. We will mark this down. 

Mr. CALABRIA. —in terms of the QRM, I think they are largely 

following the direction that Congress has given them, which is why 

I believe you ultimately need to either impose those same restrictions on FHA or Congress needs to outright repeal the QRM. This 

will drive business in the FHA and the GSEs, which certainly conflicts with the White Paper. 

Chairwoman BIGGERT. The gentleman’s time has expired. 

Mr. GARRETT. Thanks, everybody. 

Chairwoman BIGGERT. The gentleman from Illinois, Mr. Dold, is 

recognized for 5 minutes. 

Mr. DOLD. Thank you, Madam Chairwoman. I appreciate that. 

And thank you all for taking your time to be with us today. I certainly appreciate that. 

Mr. Calabria, if I can just continue with you just for a minute. 

Are there policies or regulations in place currently that are hindering the return of private capital into the mortgage market? 

Mr. CALABRIA. I think there are a tremendous number of things 

that are hindering a return in the private. Obviously, the QRM I 

think is keeping capital out of the market. I think we need to get 

some resolution to the foreclosure crisis. Right now, it is not clear. 

Let me put it this way: I don’t know anybody who would rationally 

want to invest their money in the mortgage market. Would you 

want mortgage money now, given the risk that is inherent in it? 

So I do think we need to get a set set of rules on servicing, on 

foreclosures, and on what the deal is going to be going forward. 

Even if you buy GSE debt today, you have no guarantee that essentially you are going to get paid. So there is a tremendous amount 

of uncertainty. And I think we need to start removing that uncertainty sooner rather than later. 

39 

Mr. DOLD. Okay. What do you envision as the proper role of private capital in a functioning market for mortgage lending? 

Mr. CALABRIA. I think, ultimately, the principle we should follow 

is those who get the upside take the potential for the downside. 

And the biggest underlying problem in our mortgage market I 

think is the mortgage industry essentially—with all due respect to 

my friends in the mortgage industry—get to gamble on the upside 

and the taxpayer takes the downside. I think that risk needs to be 

aligned in a way so that, again, you take the upside risk, you take 

the downside risk. 

Mr. DOLD. I recognize taking the downside risk. Should there be 

any safety net in any way, shape or form? Do you think it should 

just be a strict up or down? 

Mr. CALABRIA. I would rather have a strict up or down. I do 

think we need to recognize something that absolutely seems there 

is no chance of changing in my mind, which is the Federal Reserve 

has set a precedent of buying $1 trillion-plus in mortgage-backed 

securities in a crisis. They seem like they are going to do that next 

time as well, so you already have a catastrophic backstop in place 

that nobody seems to be talking about getting rid of, and we should 

recognize that as part of the debate. 

Mr. DOLD. Yes, sir, Mr. Berman? 

Mr. BERMAN. Thank you, Congressman. With respect to the upside/downside discussion, I think we need to step back from this. 

Clearly—and as Mr. Calabria pointed out—there is a lack of confidence in the market, and a lack of confidence in the market is a 

very broad-based concern. Doing anything that would constrain the 

ability today to deliver financing to potential homeowners, firsttime home buyers and so on, changing the downpayment limits, 

making it more difficult for people to get FHA financing, I think 

would be something that would be ill-advised given the fragility. In 

other words, if we want to bring private capital back to the market, 

the first thing we have to do is get confidence. We can’t legislate 

confidence. What we need to do is create a base to re-establish 

homeownership, to make sure that FHA, Fannie, and Freddie can 

continue to deliver what they have been delivering. 

As the economy stabilizes and grows and as homeownership and 

home values stabilize, private capital will come in. It will come 

back. FHA had, as has been discussed, a 3 percent market share 

not that many years ago. Those same kinds of structures can exist. 

So the key is to not do anything that would have the unintended 

consequences of upsetting, re-establishing a base today. 

Mr. DOLD. Let me just jump down because I know you have had 

an opportunity. Yes, sir? 

Mr. CHAPPELLE. The trouble in the market today is it is widespread. It is not just the government gobbling up the private sector. The government is not doing enough loans either. Combined, 

Fannie, Freddie, and FHA only did 1.9 million purchase loans last 

year. And we don’t have enough private sector involvement because 

of that, because all FHA has done—FHA’s volume right now is running behind, from a purchase market activity, below what it did in 

2000. So it is not like FHA is exploding anymore. Because of the 

changes the Administration made, raising the premium, their busiVerDate Nov 24 2008 18:24 Aug 22, 2011 Jkt 066870 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\66870.TXT TERRIE
40 

ness is falling back, too. But we are just not doing enough loans 

of any kind, much less whether it is private or public. 

Mr. DOLD. If I may just follow up on that comment, why is the 

private sector not loaning as much? You say they are not loaning 

as much right now. Why is that? I have heard from others who are 

saying that the regulators are coming in preventing that, or preventing a more robust loaning environment. Can you tell me your 

thoughts in terms of that? 

Mr. CHAPPELLE. To me, the market has been predominantly a 

government market for the last—since the Great Depression, because it was portfolio lending by banks which have deposit insurance, so it has always been a government-based market. 

What is happening today is lenders, in addition to the rules that 

are out there, lenders are establishing their own rules on government loans because they are afraid of the risks. So we are getting 

a glimpse of a private mortgage market today because lenders are 

even establishing their own rules when they theoretically have 100 

percent government insurance. 

Mr. DOLD. I appreciate that. 

I know, I just have one last question if I may, Madam Chairwoman. And back to you, Mr. Berman. 

You and other stakeholders have raised the importance of reforming the GSEs in concert with changes— 

Chairwoman BIGGERT. I am sorry, Mr. Dold. Your time has expired. You can submit that in writing, and I am sure they will be 

happy to answer you. 

The gentleman from North Carolina, Mr. McHenry, is recognized 

for 5 minutes. 

Mr. MCHENRY. I thank the Chair. Mr. Calabria, it looked like 

you wanted to respond to that previous question. 

Mr. CALABRIA. Yes, there were a number of pieces of that. And 

I would say foremost, FHA is not capacity-constrained. If there was 

more demand for the product, people would be able to meet more 

of it. What I am getting at is the ultimate driver here is that buyers are sitting on the sidelines because they are massively uncertain about what is going to happen next in the housing market. 

And part of my concern that we have had very low downpayments 

in FHA over the last couple of years is, it is fair to say that probably 30, 40 percent of the FHA book of business in 2008, 2009 is 

underwater today. And if we see continued declines in prices, I 

think it is reasonable that we will see at a national level another 

5 percent, 6 percent decline in prices. So a tremendous amount of 

FHA going business, we are creating essentially foreclosures of tomorrow, and that is what greatly concerns me. 

I want to follow up on Michael’s point about yes, I think as we 

go forward, FHA’s business will decline once the market starts to 

heal. But the way that that is going to decline is for a prime borrower—the price of an FHA is simply not that attractive. And I am 

concerned that the decline will become in the better-quality borrowers and will go back to an FHA that looks like 2005 where predominantly 60 percent of the business for FHA in 2005 were 

subprime borrowers. And I fear we are going to get back to that 

world unless we start making changes today. 

41 

Mr. MCHENRY. To a greater point here, on the QRM. As I see it, 

without a role for private mortgage insurance, you are basically 

forcing this market to maintain a more government-dominated role. 

Mr. CALABRIA. That is absolutely the case. 

Mr. MCHENRY. And I would open it up to the panel, but you can 

kick it off, Mr. Calabria, and anyone else who would like to comment. I am very concerned that without private mortgage insurance being a part of the QRM, that we are going to crowd people 

out. 

Mr. CHAPPELLE. Absolutely, Congressman. I agree with you. And 

the point I would make is we are seeing how low downpayment 

loans can perform well today. I know some of us disagree on this 

panel, but the FHA performance has been very good since loans 

originated in 2008 onward are doing remarkably well. I think private mortgage insurance could do equally well, if not better. So I 

think hopefully, when we can see the performance of the FHA 

loans, the private mortgage insurance industry should be able to do 

the same things FHA does. 

Mr. MCHENRY. Mr. Rutenberg? And then we will come to you, 

Mr. Petrou, next. 

Mr. RUTENBERG. The QRMs, if they come into effect as they are 

now, have unintended consequences that are going to skew the 

market terribly. There is not only the 20 percent. They have the 

PITI at 28 percent, total loan at 36 percent. If you missed any credit card payment in the last 2 years, you are not eligible. We have 

to have a different way of doing it. 

Members of the Senate who were involved in this tell me that 

what we have now is not exactly what they thought they were 

going to get. And I hope that it is seriously looked at it, and it 

evolves or does not come forward as it is. 

Mr. MCHENRY. So too much rigidity and more prescriptive than 

it should be, without any sort of level of— 

Mr. RUTENBERG. I have seen estimates that 50 to 60 percent of 

the people who qualified for a mortgage last year could not qualify 

under QRM in that type of market. 

Mr. MCHENRY. Mr. Petrou? 

Mr. PETROU. I agree the QRM is a real problem. I do think that 

private mortgage insurance on loans with downpayments below 20 

percent should definitely be part of any kind of QRM. I think the 

private mortgage insurance will come back, but it doesn’t have to 

wait for the FHA or anything else. The problem they have at this 

stage is the loan level fees that Fannie Mae and Freddie Mac are 

charging over and above the private mortgage insurance premiums, 

which in essence push people into the FHA as a consequence of 

that. I think, really, as I indicated in my testimony, these are 

many multiple moving parts that have to be thought and worked 

together. 

And I commend the committee for doing this bill because it is 

very critical that FHA be changed along with the GSEs so that 

when the final product is put together, we have a new view of what 

the role of government in the market is, and people will understand that, as opposed to little spot changes which can be very destructive. 

Mr. MCHENRY. Mr. Berman? 

42 

Mr. BERMAN. Thank you, Congressman. The concept of responsible lending and risk, skin in the game by lenders is certainly one 

that has merit. But having said that, I think that for us to not take 

into account the private mortgage insurance as having skin in the 

game who have that overlay of underwriting is a mistake. I think 

that we should clearly view them as being part of the equation, and 

the overly prescriptive QRM approach clearly does not give the 

kind of credence that we have to the multiple factors that go into 

a responsible underwriting of a loan. 

Mr. MCHENRY. Thank you. 

Chairwoman BIGGERT. The gentleman yields back. I would ask 

unanimous consent that the following letters and written testimony 

be inserted into the written hearing record: May 24, 2011, the National Council of State Housing Agencies letter; May 25, 2011, the 

National Housing Law Project statement for the record; and May 

25, 2011, the Securities Industry and Financial Markets Association statement. 

And I would like to thank the members and the witnesses for 

starting the dialogue on potential reforms to help shape a stronger 

framework for the future of housing finance. We have had a robust 

discussion today, with not too many sparks. So I will anticipate 

that we will have additional subcommittee hearings on reform proposals. 

With that, the Chair notes that some members may have additional questions for this panel which they may wish to submit in 

writing. The hearing record will remain open for 30 days for members to submit written questions to these witnesses, and to place 

their responses in the record. 

I would also encourage any of you who really didn’t have—it was 

too late to really include more about the proposals in your statements. If you wish to submit further testimony, we would be very 

happy to receive that. I think it has been very helpful so far and 

we are going to continue to work on this. So appreciate your being 

here. 

And with that, this hearing is adjourned. 

[Whereupon, at 12:09 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

May 25, 2011 

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