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MEETING ON 

FHA OVERSIGHT OF LOAN ORIGINATORS 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JANUARY 9, 2009 


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" ! COMMITTEE PRINT 

111TH CONGRESS

1st Session 

COMMITTEE

2011

Print 111–C 

MEETING ON 

FHA OVERSIGHT OF LOAN ORIGINATORS 

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JANUARY 9, 2009 


Congress.#13
(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS MCCOTTER, Michigan 

KEVIN MCCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIC PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Meeting held on: 

January 9, 2009 ................................................................................................ 1 

Appendix: 

January 9, 2009 ................................................................................................ 59 

WITNESSES 

FRIDAY, JANUARY 9, 2009 

Courson, John A., President and Chief Executive Officer, Mortgage Bankers 

Association (MBA) ................................................................................................ 48 

Hanzimanolis, George, CRMS, Founder, Bankers First Mortgage Inc., and 

past President, National Association of Mortgage Brokers (NAMB) ............... 49 

Heist, James A., Assistant Inspector General for Audit, Office of Inspector 

General, U.S. Department of Housing and Urban Development ..................... 8 

Murray, Phillip, Deputy Assistant Secretary for Single Family Housing Programs, U.S. Department of Housing and Urban Development ........................ 6 

APPENDIX 

Prepared statements: 

Courson, John A. .............................................................................................. 60 

Hanzimanolis, George ...................................................................................... 67 

Heist, James A. ................................................................................................. 81 

Murray, Phillip ................................................................................................. 89 

(1) 

FHA OVERSIGHT OF LOAN ORIGINATORS 

Friday, January 9, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Ackerman, Meeks, Moore of Kansas, Hinojosa, Clay, McCarthy of 

New York, Baca, Lynch, Miller of North Carolina, Scott, Green, 

Cleaver, Bean, Hodes, Ellison, Klein, Wilson, Perlmutter, Donnelly, 

Foster, Speier, Minnick, Adler, Kilroy, Driehaus, Kosmas, Grayson, 

Himes, Peters, Maffei; Bachus, Castle, Manzullo, Capito, Hensarling, Neugebauer, Campbell, Posey, Lee, Paulsen, and Lance. 

The CHAIRMAN. This gathering will begin. As was noted last 

week, we are not yet formally constituted as a committee, but we 

do have the full complement of Members on both sides. So while 

we have not yet been formally constituted by a vote of the House 

as a committee, the membership is now complete. We are still operating somewhat informally. The ranking member informed me he 

has requests for 15 minutes of time, so we will do 15 and 15. I hope 

we can move very quickly. Members on the Democratic side who 

wish to say something should notify the staff. I will begin first of 

all by taking note of the disastrous job numbers we have today that 

is within the jurisdiction of this committee. The collapse of the 

leave-the-market alone with capital do it for us system is now stunning in its impact. 

We have lost over a million jobs in 2 months, really a very extraordinary negative impact that we have haven’t seen in a very 

long time and it makes it all the more important for us to do sensible interventions. I do want to announce that the committee will 

be releasing today the draft of a bill to impose conditions on anything that would—on any expenditure of the second $750 billion of 

the TARP. I am going to talk about that briefly. When we passed 

that bill, there were some who scoffed at what we said were safeguards. There were predictions that the entire $700 billion would 

be spent without any input. 

We put in there significant oversight, which has now begun to 

come forward, and more importantly, a requirement that after the 

first half was spent, there be a period of notification for Congress 

before the second half could be spent and the resolution disapproval. That has worked maybe even better than some people 

2 

had thought it might so that we have frozen the second $350 billion. 

It is now clear that the incoming Administration understands 

that. And by the way, we are beyond the point where the current 

Administration could spend it. There is a 15-day period after the 

triggering that would now get you into the Obama Administration. 

There will have to be very strict rules. Many of us have a great 

deal of confidence in the Obama Administration, but I am prepared 

here to draw on the wisdom of a previous Republican President, 

‘‘We will trust but verify.’’ The verification will be a bill that will 

be mandating attention to foreclosure to money being re-lent when 

it is given to the banks for other things. A draft of that will be released today. 

We will have another one of these non-hearing-hearings on it on 

Tuesday. The bill will probably come to the Floor next week. Members will see it. We are not constituted so that we can have a formal markup yet, but we will have the bill out there. Members will 

see it. And we will be in conversations about it. And as I said, I 

think it will go to the Floor. The Bush Administration has not yet requested the second $350 

billion, so this might be academic. But we thought it was important 

to make it clear what our conditions would be so that if there is 

a request for the second $350 billion, even from the incoming Administration or whether the new one does want to have the ability 

to deploy it, they will know when it meets the House of Representatives requires for them to go forward. 

Finally, on today’s hearing, we hope if we are able to work out appropriate conditions to get the second $350 billion freed up. If 

that is the case, it will increase, we believe, the role of the FHA 

in dealing with this. We passed a bill, HOPE for Homeowners, 

which was part of it last year in which we tried to put the FHA 

in a position to help as a resource in diminishing foreclosures. And 

it turns out it was drafted so restrictively that it hasn’t been used. 

We were concerned about being excessively generous. 

I think we erred on the other side. We have been talking to a 

variety of groups, including the Chairman of the Federal Reserve 

and others, about making it more workable. Making that more 

workable will be something we hope will be done in the second half 

of the $350 billion. But it involves a greater role for the FHA. In 

an article in Business Week on December 31st of this past year and 

in The New York Times article on December 10th, both of which 

I ask—although we don’t really need unanimous consent. We 

should put them in the record. If anybody wants to put it in the 

record, it is open. We will do that. Saying that there is a danger 

of the FHA not being able sufficiently to screen the applications. 

We will be directing more people, including some people who have 

been in trouble to the FHA if the program works. 

It is essential therefore—we are not here to talk about that program. We are here to talk about the FHA because we want to make 

sure that whatever increased role the FHA has, it is able to deal 

with it, whether it has enough staff, whether it is doing its job 

right, that whole range of questions. So the focus today is on the 

allegations that have been published in respectable publications, 

Business Week and The New York Times, that there was too much 

3 

laxity in the FHA. We want to see if that is the case, and if so, 

more importantly, what we can do to make sure it doesn’t happen 

going forward. Because having an FHA that is available to work 

with low-income people is an essential part of having an alternative to the subprime mortgage schemes that got us in trouble. 

And clearly there were people who got subprime mortgages who 

should not have gotten mortgages. And there were other people 

who got bad subprime mortgages who if they were given appropriate mortgages would not be in trouble. That is in part the role 

of the FHA. So this hearing is about the capacity of the FHA going 

forward to be an entity we can rely on. And for that to be the case, 

we have to know what is behind these allegations, whether they 

were accurate, and more importantly, if they were—what is being 

done and what can be done to diminish them. The gentleman from 

Alabama. 

Mr. BACHUS. Thank you, Chairman Frank, for holding today’s 

hearingon the FHA’s insurance program and the procedures for 

monitoring lender and mortgage broker participation in the program and combating fraud. With the credit and foreclosure crisis, 

FHA has played an increasing role in assisting homeowners and is 

attempting to fill the void left by the contraction of the conventional market. Over the past year, FHA has seen its business as 

a share of home sales increase from 4 percent in 2006 to 21 percent 

in 2008. That 21 percent represents a new peak. The last peak was 

18 percent in 1990. FHA’s share of total mortgage volumes has 

gone from 2 percent in 2006 to 26 percent in 2008. And this new 

level has not been seen since prior to 1970. According to the Department of Housing and Urban Development, a steady flow of 

homeowners continue to use FHA to refinance out of subprime 

mortgages and FHA anticipates that it will likely insure over 1.6 

million mortgages in Fiscal Year 2009, representing close to $300 

billion. 

Recent media reports indicate that HUD’s Federal Housing Administration, FHA, significantly increased market share in 2008, 

raising concerns that the agency is ill-equipped to adequately oversee FHA-approved lenders and licensees, to employ appropriate 

technology and to manage human capital to protect the taxpayer 

from exposure to significant financial losses. The December 1, 

2008, article in Business Week that the chairman mentioned 

quoted Inside Mortgage Finance, a research and newsletter firm, 

and an estimate they gave that over the next 5 years, new loans 

backed by FHA insurance will fail and perhaps cost the taxpayers 

as much as $100 billion and as the chairman said, that is sort of 

the driving force behind this hearing, that report and others. 

According to the article, former Federal housing officials say 

FHA is ill-equipped to deal with the onslaught of new lenders seeking to participate in the program. The HUD IG, Ken Donohue, 

mentioned in the article and he was quoted as saying that FHA 

‘‘faces a tsunami in the form of subprime lenders that favor aggressive sales tactics and engage in fraud.’’ In that same article, Mr. 

Donohue noted that he is very concerned that fraudulent subprime 

lenders are reconstituting themselves and could potentially bring 

bad loans to the FHA portfolio, and that is what all of us want to 

4 

avoid and get assurances that there are procedures in place to stop 

that. 

The Business Week article further states, ‘‘FHA staffing has remained roughly level over the past 5 years at just under 1,000 employees. Even as the tsunami has been building that Donohue 

points out, the FHA unit that approves new lenders recertifies existing ones and oversees quality assurance has only five slots, two 

of those were vacant this fall according to HUD’s Web site.’’ 

And I continue to quote here: ‘‘Former housing officials say lender evaluations sometimes amount to little more than a brief phone 

call which helps explain why questionable—ex-subprime operations 

can reinvent themselves and gain approval,’’ and they close with 

another quote from the IG saying, ‘‘they are absolutely understaffed and they need a much better IT system in place. That is 

one of their great vulnerabilities.’’ 

This hearing, I hope, will give FHA an opportunity to address 

the concerns raised in Business Week and other articles. And explain what steps the agency is taking to ensure that the program 

is being run in a safe and sound manner. I hope today’s hearing 

can help provide the committee with some answers on how we can 

ensure that the FHA continues to operate in a safe and sound manner and help worthy borrowers achieve homeownership. Thank 

you. 

The CHAIRMAN. Let me go to a couple of others on this side. The 

gentleman from Delaware for 2 minutes. 

Mr. CASTLE. Thank you very much, Mr. Chairman. I share the 

concerns of both the opening statements by the chairman and the 

ranking member. I think we should be concerned. I have also read 

this Business Week article and a few others and I would concur 

that there may be some laxity in the circumstance. I do not know, 

for example, Mr. Murray, if the FHA has sufficient employees to 

carry out its responsibilities. But my greatest concern is that there 

is no doubt that for the last half dozen years, perhaps before this, 

we had a group of individuals, not everybody obviously, a lot of individuals particularly in the subprime areas and the Alt-A areas 

who had gotten involved in mortgage lending and perhaps didn’t 

have the background for that. Some got involved in it feloniously 

and intentionally. 

And if you read these stories—they may be highlights, but even 

if they are highlights, it is a problem. You have a lot of these same 

individuals being approved as approved lenders under FHA. And I 

don’t know what the vetting process is for the loan correspondents 

and firms that are granted the authority to act as direct loan endorsement agents. But my sense is that is something that needs to 

be watched very carefully. 

There is a huge shift right now as loans go to the FHA. And I 

don’t have a problem with that. And our obligation, your obligation, 

in my judgment, is to protect the borrowers as best we can and we 

are not doing that if indeed we have lenders out there who are able 

to violate the rules. And we are condoning that if we approve some 

of these lenders, particularly those with rather questionable backgrounds from before. And I just wonder if our enforcement mechanisms are sufficient. Those are the kinds of answers that I will be 

looking for today. How does the FHA involve itself in these situaVerDate Nov 24 2008 16:25 Jan 19, 2011 Jkt 063128 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\63128.TXT TERRIE
5 

tions, are these companies all endorsed by the FHA, are they able 

to advertise they have FHA backing therefore some sense of security to the borrowers out there that perhaps is unjustified. These 

are issues I think that we need to make sure that we are looking 

into to protect consumers from fraudulent practices. 

So I look forward to the testimony, and hopefully we will get answers that are satisfactory and start down a path of making sure 

that these problems are being addressed. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Texas, Mr. Green, for 3 

minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank you for your 

comments on the ‘‘trust and verify.’’ I absolutely concur with you. 

I would like to, if I may, repeat some of what has been said, because there are times when things are so important that they bear 

repeating. It is important for us to note that FHA does not lend 

money directly. FHA is sort of like having your uncle co-sign for 

you and work with you to the extent that your uncle has co-signed 

a note. In this case, the co-signer is Uncle Sam because FHA is a 

part of the Federal Government. I think that it is exceedingly important that we make all efforts possible to assure people that 

those lenders who are now coming into FHA will not bring with 

them the same habits that they had when they were dealing in the 

subprime market, many of them doing business in less than an 

honorable fashion. 

I do not want to paint everyone with the same brush. There were 

many persons who were honorable and who were doing credible 

business and doing an outstanding job. But we do note that we are 

in the circumstance that we are in because there were many who 

were not and because we had many who were not and because we 

have so many who are now moving into FHA, it is anticipated 

that—actually FHA has grown from 16,000 to 36,000 brokers according to this Business Week article, the number of approved 

lenders and broker, approved to participate in FHA grew from 

16,000 to—in 2007 to 36,000 today. That is a lot and I think that 

it is appropriate for us to take all productive, constructive measures to make sure that we do not allow what has created a problem 

to continue to be a problem. I thank you, Mr. Chairman, and I 

yield back the balance of my time. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling, for 

2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. As we know, FHA 

is one of the few government agencies that is entirely fee based and 

does not receive taxpayer subsidies. As we are looking at the single 

largest deficit in our Nation’s history since World War II, $7 trillion to $8 trillion of taxpayer exposure through sundry bailout 

plans and a promised stimulus plan that may top out at over a trillion dollars. I, for one, want to ensure that FHA remains a feebased institution. With the onslaught of loan demand, though, I 

think it is entirely appropriate that we examine whether or not 

FHA has the budget, the resources, and the expertise to handle the 

challenge. A significant part of the challenge will be presented by 

a multitude of fraudulent players who may try to qualify as FHA 

loan originators and borrowers. 

6 

We know it just wasn’t lax underwriting standards that brought 

us to where we find ourselves; it was out-and-out fraud. According 

to FSN, mortgage fraud is up 1,400 percent in this decade alone. 

And for every predatory lender—and there were many—there were 

also many predatory borrowers. And tragically, a lot of this fraud 

went undetected, and when detected, usually went unprosecuted. It 

is also a reminder for those who advocate more regulation; it is not 

always a matter of more regulation. Quite often the solution is enforcing the regulations that we already have on the books. As the 

ranking member indicated, FHA, by some expert estimates, may be 

looking at $100 billion in losses over the next 5 years. This simply 

cannot be allowed to happen. 

As important as it is for this committee to examine loan originators, it is also even more important that we look at loan criteria. 

No greater correlation between default and the lack of significant 

downpayment and I hope, Mr. Chairman, that this committee will 

look at increasing the downpayment requirement in lowering the 

conforming loans. With that, I appreciate you holding this hearing 

and I yield back the balance of my time. 

The CHAIRMAN. All members who have requested time who have 

spoken who are here, so we will now turn to our witnesses. We 

have and we appreciate his attending, Mr. Phillip Murray, who is 

the Deputy Assistant Secretary for Single Family Housing Programs at HUD, and James Heist, who is the Assistant Inspector 

General for Audit, office of inspector general of the Department of 

Housing and Urban Development. Mr. Murray, we will begin with 

you. 

STATEMENT OF PHILLIP MURRAY, DEPUTY ASSISTANT SECRETARY FOR SINGLE FAMILY HOUSING PROGRAMS, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. MURRAY. Thank you, and good morning. Chairman Frank, 

Ranking Member Bachus, and members of the committee, I appear 

before you today on behalf of the Federal Housing Administration. 

My name is Phillip Murray, and I am the Deputy Assistant Secretary for Single Family Housing at FHA. I am responsible for 

managing all the single family business for FHA, and I have been 

at HUD for 29 years, with the past 17 at FHA. Let me begin by 

saying that prior to my current position, I was the Director of the 

Office of Lender Activities and Program Compliance responsible for 

administering the various risk management activities of FHA-approved lenders, which included sanctioning lenders and other related parties who failed to comply with HUD and FHA requirements. 

As HUD’s former top cop, I personally take issue with recent 

press accounts suggesting that FHA is vulnerable to the same type 

of unsavory business practices as we have seen in the subprime 

market. These stories misrepresent a well respected Federal program that has provided untold benefits to millions of Americans, as 

well as the efforts of hundreds of HUD employees who administer 

it. FHA-insured loans are neither high cost nor high risk to home 

buyers; rather, FHA is a vehicle for borrowers to access prime rate 

loans. FHA has never, never allowed the loose underwriting or expensive loan terms that were characteristic of subprime lending. 

7 

FHA borrowers must provide evidence of income and employment 

to validate their capacity to make their mortgage payments and 

FHA products never carry teaser rates or prepayment penalties. 

Turning now to the specific topic of today’s meeting, the Department’s efforts to protect FHA insurance funds and serve the public 

are best demonstrated by the thoroughness of its approval and 

monitoring standards. 

Lenders applying for participation in FHA insurance programs 

are subject to rigorous initial approval requirements. FHA scrutinizes lenders based on: one, the company’s financial capacity and 

resources; two, the possession of appropriate State licensing; three, 

the eligibility of the company, its principals and officers to participate in government programs; and four, the company’s quality control plans and compliance procedures. 

Additionally, lenders must renew their approval annually to ensure ongoing adherence to FHA lender approval requirements. 

Lenders that fail to meet these renewed requirements are terminated and thus cannot originate FHA loans. Please note that despite the extensive pressures to do so, FHA has not and will not 

lessen its stance. Newly approved lenders must meet eligibility requirements and programmatic requirements and are held to the 

same standards as existing lenders. FHA is constantly monitoring 

low-level compliance, lender performance, and portfolio performance through a variety of risk management tools. 

In addition to the rigorous approval standards FHA imposes, the 

agency has nationwide quality assurance divisions. That comprehensively monitors lenders performance and compliance through 

remote and onsite monitoring reviews as well as through electronic 

surveillance. Furthermore, FHA conducts an annual actuarial review, and it also maintains credit subsidy models that annually review FHA’s book of business for risk factors to identify any necessary forward adjustments. As a matter of fact, it was these procedures that identified the unacceptable and high default rates when 

loans close with seller downpayment funding. FHA’s last two audits have been clean, with no material weaknesses identified. And 

FHA is no longer on GAO’s troubled agency watchlist. FHA is 

proud of these accomplishments. 

While I can assure you that FHA is fully committed to continuing aggressive oversight of its program, I must restate FHA’s 

long-standing need for additional resources to further bolster the 

agency’s monitoring and oversight capacities. A critical area is information technology. We need to replace the 35 legacy systems 

FHA uses in its operations. In spite of the fact that these systems 

are based on technology and computer programming languages 

that are decades old, FHA has made these systems work. But this 

cannot continue and the IT infrastructure at FHA needs to be replaced now. 

Finally, I want to address a topic pertinent to today’s discussion 

of FHA’s continued strength and vitality, the proposed ‘‘cram-down’’ 

bill. FHA and Ginnie Mae do not have the legal authority to reimburse servicers for the cram-down amounts not received from borrowers but paid through to investors. This could create a powerful 

disincentive from doing business with FHA and Ginnie Mae, while 

costing taxpayers additional dollars. FHA urges careful considerVerDate Nov 24 2008 16:25 Jan 19, 2011 Jkt 063128 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\63128.TXT TERRIE
8 

ation as Congress contemplates this matter so we can continue to 

help more Americans realize the benefits of prime rate FHA-insured mortgages. Again, I want to thank you for the opportunity 

to explain FHA’s comprehensive lender oversight and monitoring 

efforts. I would be happy to answer any questions. Thank you. 

[The prepared statement of Mr. Murray can be found on page 89 

of the appendix.] 

Ms. WATERS. [presiding]. Thank you very much. Mr. James, is 

that ‘‘Heist’’ or ‘‘Heist?’’ 

Mr. HEIST. ‘‘Heist.’’ 

Ms. WATERS. ‘‘Heist.’’ 

STATEMENT OF JAMES A. HEIST, ASSISTANT INSPECTOR GENERAL FOR AUDIT, OFFICE OF INSPECTOR GENERAL, UNITED 

STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. HEIST. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for inviting me to testify 

today. I very much appreciate the opportunity to testify on behalf 

of the Inspector General on the important issue of FHA oversight 

of loan originators. Over the years, we have had concerns with 

FHA systems and infrastructure to adequately perform its current 

requirements and services. This was expressed by the OIG prior to 

the current influx of loans. We continue to remain keenly interested in FHA’s ability and capacity to oversee the newly generated 

business. 

The past year-and-a-half has certainly produced a lot of changes. 

With the collapse of the subprime market, FHA has seen a dramatic increase in new business. In September 2007, HUD began to 

provide assistance through the FHA Secure Program to refinance 

existing subprime mortgages. The Housing and Economic Recovery 

Act passed last summer created a new HOPE for Homeowners Program to enable FHA to refinance the mortgages of at-risk borrowers. It also authorized changes to the FHA’s reverse mortgage 

program that will enable more seniors to tap into their homes’ equity. The volume of single-family loans, FHA loans, has tripled 

from $59 billion in Fiscal Year 2007 to over $180 billion in Fiscal 

Year 2008. Market comparisons show that FHA’s share of insured 

mortgage endorsements have increased from 21 to 76 percent. And 

this is based on the latest monthly data available compared to last 

year. 

And that includes all endorsements, including refinances. We 

continue to believe there is a critical need for more resources at 

FHA: one, to enhance its IT systems; two, to increase its personnel 

to deal with the volume; three, to maintain a workforce with the 

necessary skills; four, to oversee numerous contractors; and five, to 

increase oversight in all critical front-end processes, including appraisals and underwriting. We are gratified that a new penalty provision was inserted into the Housing and Economic Recovery Act. 

The statute now creates an increased criminal penalty for committing fraud against FHA programs and will be a useful tool for prosecutors. The results of the latest actuarial study show that HUD 

has sustained significant losses in the single family program. As of 

September 30, 2008, the fund’s economic value was an estimated 

9 

$12.9 billion, an almost 40 percent drop from over $21 billion in 

2007. 

The current value represents 3 percent of the mortgages insured 

by FHA. Although above the 2 percent ratio required by law, it is 

well below the 6.4 percent ratio from the prior year. If more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years, requiring an increase in premiums or appropriations to make up the shortfall. Among our many audits, we 

have found that FHA needs to improve its internal control structure by formalizing risk assessments of its program and administrative functions. 

In another area, our audit of the FHA appraiser roster identified 

weaknesses in the quality control and monitoring of their roster. 

Results from a number of other audits at FHA lenders have noticed 

significant underwriting deficiencies, inadequate quality controls, 

and other operational irregularities. We have also recently initiated 

an inspection of the mortgagee review board enforcement actions 

and its efficiency effectiveness and impact in resolving cases of serious noncompliance with FHA regulations. We note that the FHA 

lender approval process is largely manual. FHA will be challenged 

within current resource constraints to keep up with the increasing 

volume of entities doing FHA business. We believe that the oversight of these lenders could be improved with monitoring loan 

prescreening systems. The tightening credit market has increased 

FHA’s position as a loan insurer and with that is coming an increase in lenders and brokers seeking to do business with FHA and 

a concern with some of those loan originators. 

For example, we are currently investigating several FHA lenders 

who were also lenders in the subprime market. The movement toward FHA is already underway and is reflected in recent statistics. 

FHA lender approvals increased five-fold in a 2-year period. Previous investigation of an FHA lender in New York led to the debarment of its owner for a period of 5 years. After the debarment was 

served, the lender resumed operations using the same fraudulent 

practices. Another area of concern is the growing reverse mortgage 

program. The larger loan limits can be attractive to exploiters of 

the elderly whether by third parties or even family members who 

seek to strip equity from seniors. The Office of Inspector General 

stands ready to assist in whatever way is deemed necessary and 

will be vigilant in its efforts to protect the funds of the American 

taxpayer. We thank you for the opportunity to relay our views and 

greatly appreciate the activities of the Congress to protect FHA’s 

funds from predatory and improper practices and to ensure effective oversight of the lending community at this critical time. 

[The prepared statement of Mr. Heist can be found on page 81 

of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Heist, let me ask you on the one last point you made: We 

have found a very enthusiastic response with regard to the home 

equity mortgages, that has been—when done right, that has been 

very helpful. The AARP, for instance, has been very enthusiastic. 

The problem we have found is one you touched on, namely that 

there has not been any significant set of problems in the execution 

of the program itself, but once an individual gets the proceeds from 

10 

that—in some cases, older people who are not as sophisticated, may 

not be at the top of their game—they have been vulnerable to bad 

advice about what to do with the money. 

Now, one of the reforms we put into the bill that became law was 

to say that you cannot be the same entity promoting that and then 

investing the funds for people. That is helpful. But you very carefully referred to abuse by third parties or family members. 

I would urge you, if you have any ideas about how we can further protect the recipients from abuse, to share them with us, because we think this is an important program. And whether now or 

later as we go forward, if there are further safeguards that we 

could put in there to prevent victimization of the people who got 

that money, please work with us. 

Mr. HEIST. We will be happy to do that. And while I am not at 

liberty to talk about ongoing investigations, our investigators are 

seeing schemes where the elderly are being steered into annuity 

products, for example, with unreasonable terms and— 

The CHAIRMAN. Now, these are being steered by—is there collusion between—I don’t want to impinge on the investigation—between the entities that are selling these and then the entities that 

are doing the annuities? 

Mr. HEIST. We have seen where they have had identity of interests. 

The CHAIRMAN. All right. Let us do this because I don’t want to 

in any way interfere with the ability to break that up. 

Please work with our staffs, as I think this is clearly a bipartisan 

interest we have, in whatever you think—whatever recommendations you want to make to minimize that, because I don’t want to 

see a program that can be beneficial and has been beneficial dealt 

with that way. 

Mr. HEIST. The other thing we are doing is partnering with organizations such as AARP to get the word out regarding education 

and fraud awareness. 

The CHAIRMAN. One of the things we can do on that is to say 

that, for instance, we can make sure that these are done through 

the FHA, that the FHA takes on a major role in warning people 

against this. 

So we did take the one step of saying—I think Senator McCaskill 

has been very interested in that. My colleague from Missouri and 

others, we have taken one step, but we are ready to do more to protect this program. 

Mr. Murray—and I apologize; I had to go out and deal with another matter—but we have heard some of the criticisms. Have you 

specific responses to some of them? 

I guess the question is, are there inaccuracies or are these things 

that can be cured going forward? And in particular, are you staffed 

adequately and do you have sufficient authority to find people who 

ought to be rejected from participation and reject them? 

Mr. MURRAY. First, I rather appreciate having the article because it causes us to be here to discuss this. Let me assure you, 

first of all, the sky is not falling. 

The CHAIRMAN. You are a very tolerant man, Mr. Murray. 

Mr. MURRAY. Yes, but the sky is not falling. 

11 

But, yes, we have a real need to upgrade our technology. We 

have an absolute need to hire more staff. Although we hired 142 

people last year who—with retirement and moving elsewhere, we 

only netted 60 individuals. And we are in dire need of additional 

contracting money, so we can procure some more fraud detection 

tools, more people to work on our front-end detections. 

The CHAIRMAN. I assume if we are successful in fixing HOPE for 

Homeowners, which we passed in a form in which the intentions 

outpace the capacity to deliver, if we are able to fix that and send 

you even more business, then these needs would be obviously exacerbated? 

Mr. MURRAY. Yes, sir. 

But in terms of the story, although it may in most places appear 

to be factual, what we did was we allowed Business Week access 

to our public site on our Neighborhood Watch system where you or 

any other citizen can look at the performance of my lenders. They 

chose a few lenders and decided to explore them further. 

The problem that I think we had with this, that may misrepresent, is that they look at these individuals and their performance 

in the subprime market, and then in the next sentence they refer 

to FHA. These two do not—it is not a nexus. 

The CHAIRMAN. In other words, you are suggesting that some of 

the abuses that they alluded to were a non-FHA product? 

Mr. MURRAY. Absolutely, sir. 

And what the article also failed to say in its five—five lenders, 

without talking about any specifics, two of the lenders, one only 

made one loan, the other made 63 loans, which is the very minimal 

loan for any of our lenders. 

The other three, they were already on our radar screen. There 

have been actions taken either by my compliance enforcement people and/or the IG, and we have made referrals. So— 

The CHAIRMAN. I think it would be interesting—I don’t see any 

reason why you could not send us a document that would identify 

those individuals. If there is a confidentiality problem with one or 

two, you can cover that up. 

Thank you. My time has expired and I appreciate that. And I obviously will encourage—do you stay on or do you leave in a week? 

Or what is happening? 

Mr. MURRAY. No, sir, I am a career person. 

The CHAIRMAN. You are career. Good. 

Then what we would like is—someone will have to change it. 

Make sure and tell them that we are specifically requesting—I 

know there are problems with OMB. Please let them know that the 

committee of jurisdiction will be specifically requesting what you 

think you need to staff up both in terms of technology and individuals to deal with this, because we want to make you more of a 

player than you are. 

So we need to know what we need to put into your hands in 

terms of resources so you can do that job. 

Mr. MURRAY. We stand poised and ready to serve, and we need 

the assistance. 

The CHAIRMAN. And that is a direct request from us. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. 

12 

Mr. Murray, Mr. Heist in his written testimony talked about 

your process for selecting lenders or monitoring the quality of their 

loans is a post endorsement process, it is not a prescreening process. Is that correct? And does that bother you? 

Mr. MURRAY. There is an approval process for new lenders coming in. That is one separate set. Once they are in, lenders, fulleagle lenders submit loans to us. During that process, there are 

front-end analyses of that process, of those loans. 

Mr. BACHUS. That is just random and not all of them— 

Mr. MURRAY. Absolutely, it is random. There is an algorithm 

done, a significant statistical sampling of our loans done through 

an algorithm, and so currently we do a random sampling of 5 percent. 

Mr. BACHUS. Mr. Heist, you are recommending actually a 

prescreening, just a program that large lenders use? Would that 

be— 

Mr. HEIST. One of the concerns we have about the review in the 

post-screening is— 

Mr. BACHUS. Pull the microphone a little closer. 

Mr. HEIST. I am sorry. I forgot to push the button. 

One of the concerns we have with the monitoring that is done is 

it oftentimes can take a period of time for the default statistics to 

show up to provide for some intervention. 

FHA has done a lot to enhance its early warning and targeting; 

and, in fact, we work with FHA when we target lenders for our 

audit work. With advances in technologies, there are opportunities 

to do more on a prescreening basis where you can actually—and actually insist on the lenders doing more prescreening to identify red 

flags, if you will, anomalies in appraisal information, whether the 

individual owns multiple properties and is disguising himself as an 

owner-occupant, those sorts of things. 

But FHA needs the resources to be able to do those sorts of 

things. 

Mr. BACHUS. So you just don’t have the resources; is that what— 

or have you thought about doing that? 

Mr. MURRAY. Actually, we agree with the IG: but for funding resources, we would have that. But bear in mind, we have many, 

many tools. There is not one tool that is a panacea for anything. 

So when the new lenders come in, we do test cases. We run them 

through test cases. They actually have to pass a test. 

Mr. BACHUS. Once the loans are made, you are reviewing only 

about 1 out of 20; is that right? 

Mr. MURRAY. I think that refers to our post-tech endorsement at 

the front end. Once they come through the door, we do a thorough 

analysis on 5 percent of the cases, based on the properties and the 

underwriting criteria. 

Mr. BACHUS. For every loan? 

Mr. MURRAY. Five percent of all the loans that come through. 

Mr. BACHUS. Five percent? 

Mr. MURRAY. Five percent. Our evaluation tells us that is an 

adequate statistical sampling to do that with. However, we would 

be more than happy to do a larger amount. But again it all comes 

back to staffing and funding. 

13 

Mr. BACHUS. Yes, if you required a prescreening, that would obviously cut down on your losses, would it not? 

Mr. MURRAY. All of our tools help us in assisting. So as long— 

as you go along the way where there are checkpoints that we stop. 

When you are first approved, we make sure that you actually 

know how to do FHA business through test cases. If you don’t pass 

our test cases, you don’t get approved to do further work. 

Once that happens, once the loans are made, we have a variety 

of tools to monitor— 

Mr. BACHUS. But that is all manual, and it is random, right? 

Mr. MURRAY. Okay. I understand. What you are talking about is 

the very front end when they first submit the loans in. 

It is a manual screening as well as an electronic screening. Seventy percent of our loans are done through lender insurance, which 

is an electronic self-insuring process; the other 30 percent is manual. And I can say despite a lot of objections with us introducing 

lender insurance some years ago, I can tell you today that the reason why we are still standing and are able to handle this workload 

is because we went to lender insurance where 70 percent of our 

loans are being done, which relieves the burden from our staff. 

Mr. BACHUS. Let me ask you really quickly, you mentioned that 

this new legislation on the bankruptcy cram-down presents some 

unique problems for FHA and VA. Would you just give me what 

you see as those problems? 

You mentioned that— 

Mr. MURRAY. Yes, I did. My job was to just sort of make you 

aware of that. I will give you one example. 

We pay partial claims, and if we—and if every borrower who we 

have in partial claims decided to file bankruptcy, that would cost 

us $640 million of lost revenue. That is just one example. 

Mr. BACHUS. It would be significant losses if you weren’t carved 

out of that? 

Mr. MURRAY. Yes, sir. Because we don’t have the authority to do 

that, nor do we have the funding to pay for it. Because the investors have to be paid. 

The CHAIRMAN. We do have the authority. You appropriate it 

through the funding. Don’t hesitate to ask us regarding both. 

The gentlewoman from California, the chairwoman of the Housing Subcommittee. 

Ms. WATERS. Thank you very much, Mr. Chairman. I am very 

pleased. 

The CHAIRMAN. The once and future chairwoman of the Subcommittee on Housing. 

Ms. WATERS. Mr. Chairman, I thank you for holding this hearing. This is very important. We all worked very hard to strengthen 

FHA and to make sure that it was equipped to be back in business 

doing what it was intended to do when it was originated here in 

the Congress of the United States. And it looks as if it is doing 

pretty well; it appears that FHA is now in business. 

We recognize that FHA was practically killed off by the subprime 

market that was offering all kind of exotic loans, which basically 

made FHA relevant; but now we are moving in another direction. 

But, Mr. Chairman, and members, I want you to hear this and 

hear it well. We don’t intend for FHA to do business with some of 

14 

the bad subprime lenders that got us in trouble in the first place. 

Now, there is a scathing article in Business Week about the fact 

that FHA is allowing some of the worst actors and perpetrators of 

fraud to come in and be FHA approved, and putting them back out 

into the market again. 

We have a lot of work to do here with regulatory agencies to 

clean up the mess that has created this economic crisis that we are 

in. Can you tell me why you cannot vet and determine the bad 

subprime actors, some of whom have been indicted, some of whom 

have gone to prison, and some of whom have just changed the 

name on the door; they are still the same players. 

Why can’t you know the difference between legitimate lenders 

and these mortgage companies that we are reading about, Mr. 

Murray? 

Mr. MURRAY. Yes. That is a very good question, and we do—we 

do a thorough vetting process to approve lenders. 

The article is sort of misleading because it is guilt by association. 

Because your father did this, your brother did this or your sister 

did this, you therefore are somehow guilty. Any lender who comes 

in for approval, they are afforded due process. 

We take actions against lenders through the Administrative Procedure Act. We are very diligent in pursuing individuals. You may 

not have been in when, in my opening remarks, when I was saying 

that prior to this job, I was housing’s top cop; and I think in the 

75 years of FHA, this is probably the first time we have ever had 

an enforcement compliance person running the show. So let me assure you that we are very, very aggressive in going after individuals and very diligent in doing this. 

Now, do we need additional authorities? Absolutely. Do we need 

additional resources to help us get to where we need to be? Absolutely. I do believe in the new loan officer registry program that 

would help us even further for local authorities who sanction individuals who can then feed back to us the actions that they have 

taken in the more—a quicker way. 

Ms. WATERS. If I may just take back my time for a moment. Are 

you familiar with Premier and Paramount Mortgage Companies? 

Mr. MURRAY. Yes, ma’am. 

Ms. WATERS. Are you telling me that Premier and Paramount, 

given their background of subprime lending and problems, that you 

deem them to be all right to be approved by FHA to do business 

with? 

Mr. MURRAY. As I recall, with those lenders, we have no evidence 

that they have been convicted or indicted of some wrongdoing. We 

have many lenders who engage in subprime and are perfectly—and 

even their own subprime bases may be fine. 

Ms. WATERS. What about Lend America in Melville? Mr. Ashley, 

who pleaded guilty in 1996 in Federal court to two counts of wire 

fraud, on and on and on; and then opened Liberty Market, was on 

5 years’ probation, $30,000 fine, father spent 4 years in prison. 

Is it okay to do business with them? 

Mr. MURRAY. According to our attorneys, there is a—I forget the 

term—there is a period of time. I guess the question: When did this 

happen, what was the offense, is there a nexus to the business? 

15 

For example—I give you a case I can recall—we had a lender 

who was convicted 30 years ago when he was in college, and we 

found that the conviction was that while he was in college, he got 

in trouble with drugs. That did not have a nexus 30-year forward 

to his— 

Ms. WATERS. Excuse me if I may. Obviously, we are not talking 

about those kinds of cases. What we are talking about is this: 

Based on what I am reading, I see the bad actors moving over 

to FHA because the money has dried up, and they can get these 

guarantees. We are going to have a large amount of defaults and 

we are going to have to pay. 

Now, we really want—I would like to hear from FHA how you 

are going to stop this. If you need some help from Congress, you 

need to come and ask us what, and tell us what you think we can 

do to help us to make sure that we don’t—you have one company, 

that is doing Alt-A loans. Why would you authorize FHA backing 

for a company that is doing Alt-A when Alt-A loans are at the epicenter of the crisis on these subprime loans? 

Mr. MURRAY. I don’t have a legal basis for stopping someone 

from doing some other business with FHA. The practices that they 

may or may not be doing have no bearing on FHA’s business, because we don’t allow that. They cannot put that square peg into 

our round hole. It does not happen. 

We have many of our best, top, most-respected lenders who also 

do subprime lending. That doesn’t necessarily mean they are bad. 

Ms. WATERS. The argument has been made here, there is some 

good subprime lending and bad subprime lending. Obviously, I am 

talking about the subprime lending that created the subprime 

meltdown in this country and the economic crisis that resulted 

from that. 

We really do believe that—I believe that FHA does not have to 

deal with people who have a record and a history of fraud and creating problems. 

What are you going to do about it? 

Mr. MURRAY. I agree with you wholeheartedly and I share your 

concerns with that. As a matter of fact, we are in the throes of proposing new rules to help us deny these— 

The CHAIRMAN. Mr. Murray, we are over time. These are very 

important questions. We will ask you to respond in writing to the 

questions of the gentlewoman, and we may be back to you on that. 

The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Mr. Heist, I don’t know if you can answer this question or not, 

but Mr. Murray indicated there is a thorough vetting process to approve lenders. That may or may not be true. My question is, is this 

vetting process a complete enough process or should we be doing 

something more? 

I think everybody up here is vitally concerned about rather questionable lenders. We are hoping that FHA can stop the bleeding of 

subprime lending and—etc. And the reports that I have read and 

seen indicate to me that failure prediction under FHA loans is pretty high as well. And I am very concerned about these lenders, a 

lot of whom by their previous practices are pretty marginal. 

16 

So do we have the right vetting processes in place? I am not sure 

if that falls in your role as Inspector General or not. 

Mr. HEIST. I can’t comment fully on the vetting process except 

to say that regardless of whether FHA is constrained on its ability 

to keep people out, we advocate that they—and we have talked 

about that in answer to other questions—that they take advantage 

of the technologies that are available to be able to prescreen the 

loans on a more comprehensive basis through advances in technology to overcome the— 

Mr. CASTLE. My question pertains to who is being approved as 

a lender, who is being approved as somebody they are dealing with, 

not to the actual people borrowing in this circumstance. And maybe 

you are not qualified to answer that. 

Mr. HEIST. There are limitations. We have an investigative case, 

for example, where at the time the case didn’t meet the dollar 

thresholds to prosecute criminally, but nevertheless we pursued a 

debarment case against the individual. The debarment is for a period of 5 years; 5 years ran, and the person was back in business 

doing the same thing. We took the steps to have—working with the 

Justice Department to file an injunction to prevent that individual. 

There are limitations to the vetting process. You have an example of somebody who was debarred, the individual served their 

time, and FHA has to let them back into the program. But there 

are things they can do to increase the oversight. 

Mr. CASTLE. Let me jump to Mr. Murray. Do you think we 

should enhance or update or make stronger the vetting process, or 

do you feel the vetting process is presently successful? 

Mr. MURRAY. No, sir. I fully agree. We need additional tools to 

help us to, further, to not allow folks in. There are many individuals that I will take a look at— 

Mr. CASTLE. When you say you need ‘‘additional tools,’’ I understand the technology and those kinds of things, but do the additional tools—is this something we should be doing as a Congress 

or something that FHA can be doing? 

Mr. MURRAY. That is something we ourselves can do through additional rulemaking, because as time goes on, there are different 

practices, people get engaged in different schemes and the like. We 

need to constantly reinvent ourselves and to move forward. 

There are many folks I see as— 

Mr. CASTLE. Why aren’t you doing this now? I say this because 

we are going from the subprime problem and the continuing problems with loans in this country, the huge numbers which you have 

indicated here today. So if we do need to enhance the vetting process or the lending process for insurance purposes, why don’t we? 

Mr. MURRAY. No. We are currently—we have a committee in 

FHA single family across the board, putting together new rules and 

procedures that—to address this subprime issue, to address the 

new frauds and the things that we see coming down the road. 

Mr. CASTLE. Let me ask you another question. What is the FHA 

doing to review and update its net worth requirements for FHA 

originators? Is that part of this? 

Mr. MURRAY. Yes. 

17 

Mr. CASTLE. Part of it is that the lender should be able to cover 

potential losses, whatever it may be. And if their net worth is not 

higher, that is an issue. 

Mr. MURRAY. To cover losses is not the purpose of the net worth. 

But to answer your question, that is one of the issues we have on 

the table. We have a litany of things that we are putting together, 

drafting, and we are going to propose for rulemaking. 

Mr. CASTLE. Can you give me a rough time estimate as to when 

you think this work will be completed in terms of things we talked 

about? 

Mr. MURRAY. We can’t do anything until the next Administration 

comes on board, and that is my intent, the first thing when we are 

asked what we are working on is to present all these rules that we 

have. 

Mr. CASTLE. Are you thinking spring or early summer? 

Mr. MURRAY. I am hoping this spring I will have the chance to 

present it, once we get an okay to do it. Rulemaking normally takes 

18 months. That is outside of our control, but that is what it normally takes. But to the extent we can do things through a mortgagee letter, I fully expect to do it that way. 

Believe me, as a compliance person, I am very aggressive in handling any potential fraud and people who are hell bent on doing 

mischief. That is certainly something that I simply do not tolerate. 

Mr. CASTLE. Thank you. I yield back, Mr. Chairman. 

The CHAIRMAN. Since we are not in regular order, I am going to 

use some discretion here. The gentlewoman from California, Ms. 

Speier, has been a very diligent member of the committee and 

spends long hours at the bottom, although the good news for her 

is that she has now gained several members to whom she is senior 

on this committee. She had a question that was directly relevant 

as a follow-up to her colleague from California. In the absence of 

what I am sure will not be strenuous objection, I call on the gentlewoman from California. 

Ms. SPEIER. Thank you, Mr. Chairman. 

Mr. Murray, you just said that you are very keen on compliance 

and the gentlewoman from California went through a list of problem lenders, and you suggested that they were lenders who had 

very few loans or lenders who had violations that did not have a 

nexus. Have you have an opportunity to read the Inspector General’s presentation to the committee? 

Mr. MURRAY. Yes, ma’am. 

Ms. SPEIER. So you are aware then of his reference to problem 

lenders. As he highlighted in their audit, he references a lender 

who had a number of serious issues related to RESPA violations, 

such as paying marketing fees, noncompetition fees, and quality incentives to real estate companies in exchange for more than $57 

million in FHA mortgage business. The corporation’s license was 

suspended by the State of Arizona and has filed for bankruptcy. 

One of the principal owners and principal managers reconstituted 

under a different name, but operates from the same location. In 

2008, HUD approved the new entity to originate and process FHA 

loans despite its principal’s prior convictions for RESPA violations. 

How do you respond to that? 

18 

Mr. MURRAY. I am glad you mentioned that, because that is an 

issue that is very near and dear to my heart. The issue here is the 

problems are with the lending entity. The individual was not subject to that. If that individual had been debarred, indicted, convicted, fine. I would have some legal authority to not let them in. 

Absent that, I have no authority to stop them from coming in. 

Now having said that, that is part of one of the new rules that 

we are putting together to allow us to say if you were a principal 

of a company, we get a chance to ask you what was your role, and 

we can then decide whether or not we will allow you to come into 

FHA. 

Even without the authority, I have attempted to do that, but 

through our own attorneys, they caution me that legally I cannot 

do that. 

Ms. SPEIER. Are you saying that you have no discretion to determine whether or not to allow someone to be a lender? 

Mr. MURRAY. I have no discretion to say because you were a part 

of this company, and this company did bad acts, that I can infer 

those bad acts to you and not allow you to come in. 

Ms. SPEIER. This is a principal of that company. 

Mr. MURRAY. Yes, ma’am. 

The CHAIRMAN. Would the gentlewoman yield? 

Ms. SPEIER. I do. 

The CHAIRMAN. Thank you. That has been very useful. You say 

it takes 18 months to do this by rule? 

Mr. MURRAY. For ruling. 

The CHAIRMAN. But if we were to do it by statute, specifically 

give you that authority, it would take a lot less time, wouldn’t it? 

Mr. MURRAY. Yes, sir. 

The CHAIRMAN. I’m sure the gentlewomen, my two colleagues 

from California would want to work on that. Thank you. 

Mr. MURRAY. I will be glad to work with you. 

The CHAIRMAN. The gentleman from—they gave me the list and 

I lost the list. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Gentlemen, back in April of last year when this committee 

marked up the FHA modernization bill, I offered an amendment 

that was accepted by the chairman—it doesn’t happen often around 

here, but it happened on that particular day—that required borrowers to agree in writing to be liable to repay the FHA any direct 

financial benefit achieved from the reduction of indebtedness on 

the existing mortgage that was derived from any purposeful misrepresentation that was made in their certifications and documentation. 

I had offered another amendment, which was not accepted, that 

required that the mortgagor would actually provide documentation 

to the originator of the mortgage that certified that the data was 

complete and accurate, including statements regarding income assets, debt, occupancy, and matters of identification. 

The Chair didn’t accept that. There was a legitimate debate and 

discussion. I think the Chair concluded he felt that was too onerous. I didn’t conclude that, he did, his opinion was relevant. But 

as most of the questioning from the panel has centered upon fraud 

19 

on the lender part, I want to focus somewhat on potential fraud on 

the part of the borrower. 

The first question I would have with respect to the language that 

was included in the statute is, how is it being implemented? How 

are applicants being notified of the process? Is there a form that 

they now sign, acknowledging that they will be liable for the indebtedness for purposeful misrepresentations? Mr. Murray, what 

can you tell me about the matter? 

Mr. MURRAY. I am sorry, are you referring to HOPE for Homeowners? 

Mr. HENSARLING. Yes. 

Mr. MURRAY. Yes. We propose to have the borrowers sign a certification and to provide counseling to them that they are signing 

the certification that they will be liable for any fraudulent statements that they make. 

Mr. HENSARLING. I’m sorry, I didn’t hear the first part of the 

statement. This is currently being done? I know the program has 

had scant demand. 

Mr. MURRAY. Yes. The HOPE for Homeowners committee, they 

have developed a form for the express purpose of notifying a borrower that they will be held liable for any fraudulent statements 

that they make. 

Mr. HENSARLING. But I am still unclear. Is it currently in use or 

is it not currently in use? 

Mr. MURRAY. Yes, it is. 

Mr. HENSARLING. Okay, thank you. Thank you. 

The CHAIRMAN. It is called the Hensarling oath. 

Mr. HENSARLING. I like the name, Mr. Chairman. 

Can you enlighten me, Mr. Murray, then just on the general vetting process? We have talked about the vetting process for the borrowers. I would like to be enlightened more on the details of the 

vetting process for borrowers. 

Mr. MURRAY. Borrowers? 

Mr. HENSARLING. Borrowers. Again, according to FinCEN, we 

had the majority of the mortgage fraud over the last decade that 

arose from borrowers misrepresenting their income and misrepresenting their assets, misrepresenting their occupancy. So again 

there is much predatory lending that took place in the market. I 

would also offer the opinion there was much predatory borrowing, 

according to the Inspector General’s observations. Already the single family program has sustained significant losses. We have had 

a 40 percent drop in value. So I am concerned about, again as I 

mentioned in my opening statement, sustaining the fee-based program that we have here, and I am concerned about what is the vetting process that is being used on the borrower’s side, not just the 

lender’s side to protect the taxpayer. 

Mr. MURRAY. Yes, thank you, I understand. 

We have introduced a Social Security check that we and the 

lenders can use to go in to ensure that the person who is representing themselves is not dead or that they are truly in fact they 

themselves who are there. 

We validate their employment and we also validate and verify 

their income. And we also do Federal checks. 

20 

Mr. HENSARLING. Now, how are you validating and how are you 

verifying? Can you get more specific? 

Mr. MURRAY. Yes, that is part of the loan underwriting process 

where you actually go out, using the— 

Mr. HENSARLING. Clearly, it hasn’t been done well in the past, 

so I am somewhat concerned as to how are you using it now. 

Mr. MURRAY. I have no indication that it has not been done well 

in the past. 

I think it is important to say that the little snippets of the examples of wrongdoing and fraud by everyone, and I—as an enforcement person, I can tell you many, many stories. But when you get 

down to it, it is less than 2 percent of people who tend to do wrong 

things. FHA is no different; it is a macrocosm of the society as a 

whole. There will always be someone there trying to circumvent the 

system. Having said that, we are very diligent in making certain 

we go after those folks, try to stop them in any way, fashion or 

form that we can do that. But historically we have always done 

verifications of the borrower’s income, to identify who they are, 

make sure they don’t owe other Federal debt and verify that they 

are in fact employed. That is totally unlike in the subprime. 

Mr. HENSARLING. My time has expired. 

The CHAIRMAN. Thank you. The gentleman from New York. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Murray, let me ask you this, one of the big problems I have 

had with a number of mortgage brokers is that they are able to 

charge what I think is basically almost a kickback. I know they do 

it on FHA loan originations also, yield spread premiums, and these 

yield spread premiums seems to give the lenders an advantage for 

steering borrowers into higher mortgages than what they actually 

qualify for. And this has a devastating affect on poor people and 

folks who are just aspiring for a better life, having to pay these 

yield spread premiums. 

So I would like to know whether or not the FHA, you believe the 

FHA loans, which are supposed to be low cost as it is, should ban 

the use of yield spread premiums? 

Mr. MURRAY. That is a good question, and I share your concern. 

FHA has absolutely no authority over yield spread premiums. If 

Congress would like to provide us with that, I would certainly find 

it useful. 

Mr. MEEKS. So you are saying that if we do something statutorily 

with reference to that, it would be something that you would see 

helpful? 

Mr. MURRAY. Yes. 

Mr. MEEKS. I agree. Would you work with us on developing that 

legislation? 

Mr. MURRAY. I would gladly work with you on any and every 

possible thing that we can do to safeguard the Federal funds and 

the American public. 

Mr. MEEKS. We will be in touch with you to make sure we work 

on that. Thank you. 

Maybe you be help me with something else, because I am having 

this huge difficulty in my district also in regards to foreclosures 

and I have found that when I was able—I have people coming into 

my office every day, counselors and lawyers, trying to help the 

21 

number of individuals who are going into foreclosures, and when 

we are able to get to the banks, etc., we have been able to help 

some people stay in their homes. 

When I look at the voluntary program, on its face, it seems like 

it should be good. When I look at the HOPE for Homeowners Program, it doesn’t seem to be as successful. I was wondering if you 

could give us any insight as to why, for example, it looks—I think 

the statistics say 2.2 million subprime foreclosures through the end 

of next year. We have to stop this hemorrhaging—whether you can 

give us insight why HOPE is not working or how HOPE can improve because it seemed like these voluntary programs are not 

doing what they are supposed to be doing. 

Mr. MURRAY. We have been concerned with that, that the eligibility criteria is candidly a little too restrictive. Recently, there 

have been some changes to make it a little bit more workable and 

we are now seeing more loans being done. I think we are now at 

380-something applications have been filed and there are actually 

15 loans that have gone to closing. And so hopefully some of the 

relief we have given, but candidly we would love to see further relief and some refinements to that program. 

Mr. MEEKS. We then agree that something needs to be done. I 

think that is something again that we need to work on very closely 

because every day, somebody is being put on the street. And until 

we get to the bottom of stopping this problem, we are going to continually have the economic problems, the problems of the value of 

homes continuing to depreciate, as people leave, neighborhoods are 

being destroyed, because you homes are being boarded up. And I 

am starting to feel that maybe just voluntary participation in the 

program is not working. We have to do something more than that. 

The CHAIRMAN. Would the gentleman yield? In fairness to the 

people from HUD, part of the problem is we drafted it for homeowners, which we wrote. We did it at a time when there was a lot 

of concern that we were being too lavish, too open-handed and to 

respond to that we toughened it up some. We may have toughened 

it up beyond what current circumstances require. 

We have requested, in consultation with HUD and others, 

changes in the plan to meet some of those problems, and we are 

hoping it will be in the stimulus or maybe in the TARP bill. So part 

of that has been offered and we have been working. Some changes 

have been made administratively, but we acknowledge that we 

were tougher than was workable and we are trying, without being 

excessive, to open it up some. 

Mr. MEEKS. My last question is to Mr. Heist. Again, I am trying 

to work my way through this because we are trying to make the 

market move again. And it seems as though now the only one who 

can buy a house or get involved in a house, I still believe that the 

best investment that one can make is in real estate or into owning 

their own home if they can afford it, but now, you have to have a 

750 or better score in order to get a house, which then keeps the 

market stagnant and we can’t get out of these crises. 

I was just wondering and trying to figure out with your FICO 

scores of 750 or better being the only way that you can get a mortgage nowadays, liquidity, thereby shutting down people who have 

decent credit can’t get a house. Do you have any ideas or solutions? 

22 

I would like to hear your thoughts on how we can deal with this 

dilemma that keeps spiraling; it seems like we can’t get out of this 

circle. 

Mr. HEIST. As someone who is responsible for auditing these programs, I can only deal with the requirements that are in place 

right now. The reality, as you suggested, is a dilemma and there 

is a correlation between credit scores and the likelihood of that 

loan to default. That is a reality that FHA has to deal with and 

factor in when it makes its rules and sets standards for lenders 

when they underwrite loans. 

The CHAIRMAN. One last comment, because I took some of the 

gentleman’s time. 

Mr. MEEKS. I yield back. 

The CHAIRMAN. Thank you. The gentleman from Florida, Mr. 

Posey. 

Mr. POSEY. I thank you very much, Mr. Chairman. 

Gentlemen, in last year’s Housing and Economic Recovery Act, a 

provision was inserted to prevent the FHA from implementing a 

risk-based premium pricing structure for the riskier loans. Under 

the proposed initiative, in exchange for a significantly lower interest rate, those with a higher risk of default would have paid a 

slightly higher insurance premium. 

We have seen a significant expansion of the FHA loans over the 

past year. We have seen the balance in the insurance fund drop by 

approximately 50 percent. We have seen FHA take on riskier loans, 

and we have seen the Congress pass a law that prevents the FHA 

from managing risk. It looks to me that the Congress may have put 

in place policies that increased the risk of FHA going into default 

like it did the conventional market. 

Do you think that by eliminating the ability of FHA to adjust for 

risk in this manner to fund is less solvent and thus the taxpayers 

are put at a potentially greater risk? I would like a response from 

both of you. Yes or no would be perfect. 

Mr. MURRAY. First, I would like to say that we don’t believe that 

FHA has riskier loans, but we would also be very desirous of having risk-based pricing. 

Mr. POSEY. Is that a yes or a no? 

The CHAIRMAN. That was a Senate provision, so don’t feel inhibited in answering fully. 

Mr. BACHUS. We actually passed a bill and there was bipartisan 

agreement in the House to put risk-based pricing in. It did move 

to the Senate and a Member there added that amendment, that 

amendment prohibiting risk-based premiums. 

Mr. HEIST. My only observation at the time was implementing a 

risk-based pricing and the ability of FHA again to deal with the increased complexities and the resources in the systems to be able do 

it effectively, as far as a concept we were neutral on that. Just concerned as far as the capacity to implement it. 

Mr. POSEY. Thank you for following up, Mr. Chairman. But do 

you have an opinion whether the ability to do that would make the 

taxpayer safer from risk? 

Mr. HEIST. No, I don’t. 

Mr. POSEY. You really don’t, no? 

Mr. HEIST. No. 

23 

Mr. POSEY. Do you know who in the world might be able to give 

us an answer on that? 

Mr. MURRAY. For us, it reduces the burden of premiums and the 

like on the less riskier borrowers. In other words, the cost for an 

FHA loan would be slightly less. So in other words, the risk goes 

to those who are—need to be the more riskier borrowers. 

Mr. POSEY. Thank you, Mr. Chairman. I didn’t want to even take 

up this much time, but I think it is just a fundamentally good 

question. 

The CHAIRMAN. No, I appreciate it. I think this is a case of Congress doling out authority to the FHA, so maybe it will change. 

The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. To both of 

the witnesses, I think we all would agree that there is a foreclosure 

crisis going on in our country right now. FDIC Chairman Sheila 

Bair has a plan which I believe is reasonable to address this problem. I believe we all appreciate the lenders who are working with 

homeowners who are refinancing, modifying loans to keep people in 

their homes. As Congress considers how to allocate remaining 

TARP funds, would it be appropriate to utilize a substantial 

amount, perhaps $100 billion, for foreclosure mitigation to keep 

people in their homes and address this foreclosure crisis. 

I am addressing this question to both of our witnesses. 

Mr. HEIST. I would defer to Mr. Murray on that one. 

Mr. MURRAY. I am sorry. I really can’t answer that. I don’t have 

an answer for that. 

Mr. MOORE OF KANSAS. Do you have any thoughts as to what we 

might do to address the foreclosure crisis then if we don’t use 

TARP funds? 

Mr. MURRAY. I would be more than happy to send you a written 

response to that. 

Mr. MOORE OF KANSAS. I would appreciate that. 

The CHAIRMAN. Mr. Campbell from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

I wanted to ask Mr. Murray, during Mr. Heist’s testimony he 

talked about the reserve requirement being 2 percent and how it 

has fallen from 6 to 3, and we all know about the conditions in the 

marketplace and so forth. Since FHA is making—the volume is up 

so much, and since there is such a much greater percentage of the 

market is now FHA that is going out there, shouldn’t we be making 

loans now that should be adding to that reserve requirement and 

not having it fall quite so much given all this increased volume? 

Am I wrong? What is happening? 

Mr. MURRAY. I would initially tend to agree with you that with 

the uptick in volume, that does add to the reserve, but that whole 

calculation is a highly, highly technical thing with people who are 

far brighter than I at HUD who deal with that, and I would be 

more than happy to have any questions answered for you if you 

would like. 

Mr. CAMPBELL. Mr. Heist, I don’t know if you are one of those 

far brighter people, but take a stab at it. 

Mr. HEIST. Absolutely not. But I do know that those estimates 

are profoundly sensitive to changes in overall macroeconomic conditions, how much house prices are going up and down. When you 

24 

foreclose on a property, given the market conditions in that particular community, how much are you going to get on that property? FHA’s loss rates, for example, have been going up from what 

was in the 30s percentage range up through the 40s over the past 

couple of years. So those sorts of factors really drive how much 

FHA is going to expect to lose. 

Mr. CAMPBELL. I guess for both of you—and here is where I am 

going and I think you can tell that and what I am worried about, 

is that we all know no matter how good your underwriting was, 

you are going to have losses on things that have happened because 

of the drop in house prices and the unemployment that has continued to increase, etc. So we all know that is going to happen. But 

now we have the benefit of knowing that has all happened as we 

are making new loans and that presumably the new loans we are 

making should be on more solid footing and thereby should be adding to that reserve. 

I guess I am just concerned about this thing, as the volume gets 

bigger and the reserve numbers keep dropping, that is a concern. 

Is there something wrong with the underwriting that is going on 

now? Everybody has touched on this to some degree, because the 

underwriting we are doing now is not as good as it ought to be, and 

we are putting new loans on the books that are actually damaging 

the reserve requirement as we are putting them on? 

Mr. MURRAY. I think—again, I don’t want to step out here. As 

a room full of Ph.D.s sort of articulate to us, it is more of an accounting process that the reserve is small because of the increase 

in volume that we took dollars from the reserve to cover potential 

losses associated with the new huge book of business. So it is an 

accounting function, but that is totally outside of my ability to even 

comment on. So I don’t want to mislead anyone. 

Mr. CAMPBELL. Mr. Heist, anything more you want to add? 

Mr. HEIST. Not at this point, no. 

Mr. CAMPBELL. Madam Chairwoman, I hopefully—I am not sure 

we got a good response to that, but I do think it is something we 

need to be concerned about. Clearly, there will be more volume 

going through here as we move forward. And that volume should 

be helping the reserve balance, not hurting it, I would think. 

Ms. WATERS. [presiding]. Absolutely. 

Mr. Hinojosa. 

Mr. HINOJOSA. Thank you, Madam Chairwoman. Before I ask my 

questions of the witnesses, I want to say thank you to you and 

Chairman Frank for having this hearing to discuss FHA oversight 

of loan originators. I ask unanimous consent to include in today’s 

record two documents, a CRS report entitled ‘‘Housing and Economic Recovery Act of 2008,’’ and, secondly, an Overview of the 

Conference of State Bank Supervisors, Supervision of the Mortgage 

Industry Through Collaboration and Technology. 

Mr. Chairman, I ask for unanimous consent. 

The CHAIRMAN. Oh, I am sorry. As I said earlier, not everybody 

was here, since it is not a formal committee we announced that 

anything anybody wants to be put into the record will be put into 

the record. I can’t guarantee anybody will read it, but it will be in 

the record. 

25 

Mr. HINOJOSA. Thank you for that clarification. By the end of the 

year, CSBS reportedly will have 33 States on the mortgage origination system. Only 2 States have not committed to be on the system, 

but they likely will join us in 2010 at the latest. If not, it is my 

understanding that HUD will be doing the licensing in those 

States. 

Mr. Murray, I would like to ask you my first question. Would you 

like to comment on the performance of CSBS, considering what is 

required of the supervisors? 

Mr. MURRAY. Sir, unfortunately I can’t answer that. That issue 

is not in my office. That is done in our Office of Consumer Regulatory Affairs. 

Mr. HINOJOSA. Mr. Heist? 

Mr. HEIST. Is that the licensing of lenders and brokers? 

Mr. HINOJOSA. Yes. 

Mr. HEIST. Only just to say that the States control the licensing, 

and we have noted, again given in light of FHA’s resources, there 

is minimal staff assigned to oversee that process. And it is a concern of ours that FHA’s oversight of that and ensuring that the 

States are equipped to do the licensing that they need to do is adequate. 

Mr. HINOJOSA. In listening to some of the questions that some 

of my colleagues have asked before me, I question why you have 

not requested an increase in funding for administrative staff. 

Mr. HEIST. I can say that the Office of Inspector General has 

asked for additional resources. We, like FHA, are strained in our 

ability to audit and investigate single family fraud cases. 

Mr. HINOJOSA. Mr. Murray, you said that you all were only examining 5 percent of the loan applications and you thought that if 

given the resources you might be able to increase that to at least 

10 percent of applications. How much money would it take in resources to be able to do that? 

Mr. MURRAY. I am sorry, I couldn’t answer that just right here. 

Mr. HINOJOSA. I have been informed that there are a lot of 

claims and foreclosures to come before Federal Housing Administration. So Mr. Murray, in light of this, why has the FHA not taken 

the actions to adjust the underwriting requirements to reflect a 

changing environment? 

Mr. MURRAY. I think HUD’s underwriting requirements are very 

sufficient, they are well tested. I think most of the foreclosures are 

due to economic conditions. It has nothing to do with the quality 

of the loan. It is more like personal circumstances. 

Mr. HINOJOSA. The reason I ask that question is that the area 

that I represent in south Texas, deep south Texas, 80 percent of 

my constituents are Hispanic. And I find that the highest hurdle 

for Hispanics seeking to purchase loans is the downpayment. And 

that of course is getting worse under the present changing environment that I am talking about. So I think that FHA is the best path 

to homeownership for Hispanics because they seem to be a little bit 

more lenient on that downpayment. So I find that there needs to 

be some changes considered and, if not, I think that you just don’t 

have a good pulse as to how difficult it is in regions of the country 

like the one that I represent. 

26 

Mr. MURRAY. And I am quite certain that is correct what you are 

saying, and it may be so in the conventional market, but what we 

find, our—Federal fund rates are relatively low. The fund rate for 

2007 was 6.56 percent, and in 2008, it was 6.9 percent. But that 

is default, because people go in and out of default. But the claim 

rate, which is what costs money, was 1.42 percent in 2007 and 1.3 

percent in 2008. So that is a very, very low rate. 

I think that there is evidence that we pretty much have our underwriting criteria pretty tightly triggered, but we can always, always look at more. As I said earlier, we have an internal task force 

to look across our business front end, back end, REO and the like, 

and we are looking at what can we tweak or fix given today’s economic environment so we are not sitting still. So we will make sure 

we take a look in Texas. 

Mr. HINOJOSA. My time has run out, and I have to yield back. 

The CHAIRMAN. The gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. Mr. Murray, on page 

2 of your testimony, the middle paragraph, ‘‘FHA-insured loans are 

neither high cost nor high risk for homeowners.’’ Do you see that? 

It is actually the first page of your testimony. 

Mr. MURRAY. Yes, sir. 

Mr. MANZULLO. Has FHA always required written verification of 

a borrower’s employment? 

Mr. MURRAY. Absolutely. 

Mr. MANZULLO. Is that standard? 

Mr. MURRAY. Absolutely, sir. 

Mr. MANZULLO. That obviously goes to the borrower’s capacity to 

meet the monthly mortgage obligation. 

Mr. MURRAY. Right. 

Mr. MANZULLO. I guess what perplexes me, what bothers me is 

July 17th, I believe, we had a hearing here with Fed Chairman 

Bernanke who said that the Fed had done a top to bottom review 

of all mortgage applications, etc. And they are now going to require 

written verification that somebody actually does make that amount 

of money once it is put into the application. However, I believe that 

requirement does not go into effect until October 2009. There was 

a gasp in the room when I asked Mr. Bernanke why he waited 13 

months. He said, ‘‘because we don’t expect the housing market to 

recover until then.’’ I thought that was pretty cavalier on his part 

because these are opinion makers. What I don’t understand is why 

the FHA has apparently always adopted very common-sense requirements for a loan; i.e., you have to be able to repay it before 

you can sign the note to get the property. I know you can’t speak 

on behalf of the Fed, but what happened here? You are the good 

guy. 

Mr. MURRAY. I don’t know. I think since 1934, which was when 

someone decided that you needed a mortgage that lasted more than 

5 years, underwriting standards were put into place and they have 

been continually refined. It is my understanding— 

Mr. MANZULLO. What year, 1994? 

Mr. MURRAY. I said 1934. And no, sir, I was not there. 

Mr. MANZULLO. 1934, okay. 

27 

Mr. MURRAY. The new Federal rules will mimic the FHA’s longstanding underwriting requirements. It is just good basic business 

sense. 

Mr. MANZULLO. You just answered an inquiry as to the default 

rate, FHA being 1.5, something like that, under 1.5. 

Mr. MURRAY. The claim rate this past fiscal year was 1.3 percent. 

Mr. MANZULLO. Is that dollar volume or actual numbers of mortgages? 

Mr. MURRAY. That is a percentage of loans. 

Mr. MANZULLO. Pardon? 

Mr. MURRAY. A percentage of loans. 

Mr. MANZULLO. Okay. So that would be— 

Mr. MURRAY. 1.3 percent of the loans went to claim. 

Mr. MANZULLO. Meaning that the FHA insurance had to be 

used? 

Mr. MURRAY. Yes, sir. 

Mr. MANZULLO. Okay. That is pretty low, isn’t it? 

Mr. MURRAY. Absolutely. 

Mr. MANZULLO. Do you have any problems with the—it was FHA 

Secure that allowed people who had loans that they could not afford, not because of employment problems, but because of balloons 

and teasers, and were allowed to bring those into the FHA umbrella. It was about 350,000. The program ended at the end of last 

year. 

Do you have any problem that any of those loans could exceed 

the normal rate of default to which you just testified? 

Mr. MURRAY. Absolutely not, sir. We subject those loans to the 

same underwriting requirements. And if they don’t match, they 

don’t come in. 

Mr. MANZULLO. The HOPE for Homeowners Program has been 

less than successful. I never liked it in the first place because it 

is called a common law composition, which lenders could do at any 

time with their borrowers, especially in light of fact that this Congress at least did something wise where we said that any forgiveness of principal—as to your principal residence would not be considered to be imputed income under the income tax. 

Let me ask you an open-ended question. Aside from asking for 

more manpower, etc., what do you think FHA can do to even further improve your performance? 

Mr. MURRAY. I think I answered earlier to the gentleman over 

here that what we can do is put together some thoughts on that. 

I am not prepared off the top of my head. 

Mr. MANZULLO. Okay. 

Mr. MURRAY. I think that is a very deep subject and there is an 

array of things that we could consider, and that is also a part of 

our task force that we are working on now. 

Mr. MANZULLO. I appreciate that, because we always like to look 

at models, government programs that have worked, and it is apparent that there is a model going here, especially helping out people 

who don’t have the full amount downpayment that could qualify 

under conventional mortgage. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

28 

This is a critical time. It is important that we prevent a precipitous decline of home prices in all neighborhoods, including those of 

us who represent the high-cost areas. The FHA loan limit in the 

Fannie and Freddie limits as well have declined with the new year. 

It is my understanding that FHA actually makes a profit on its 

larger conforming loans, as does Fannie and Freddie; and I hope 

that Congress passes soon legislation so that the limits for Fannie 

and Freddie and essentially FHA are no lower in 2009 in each 

area. 

The CHAIRMAN. Will the gentleman yield? 

Mr. SHERMAN. Yes, I will. 

The CHAIRMAN. That will be in the economic recovery package as 

a result of the conversations yesterday. We got the approval from 

the Obama Administration. Obviously, it is something near and 

dear to the heart of the Speaker; and keeping the loan limits at 

last year’s level for this year so we can then think about what we 

will do going forward will be in the economic recovery program for 

FHA, Fannie Mae, and Freddie Mac. Because the gentleman is accurate that they are moneymakers. 

Mr. SHERMAN. I thank the chairman, not just for those comments 

but for his work in achieving a legislative result that is so important to so many areas of the country and the country as a whole. 

Now, shifting to FHA operations, every mortgage broker is required to submit an audit financial statement showing a net worth 

of a quarter million dollars for some and for the nonsupervised loan 

correspondents a $63,000 net worth. The thing is that net worths 

of that level can evaporate very, very quickly. They are not very 

large. We have seen 313 mortgage bankers, lenders, and Wall 

Street firms go out of business. Their net worth of much, much 

larger amounts evaporated very quickly. And so we see that the 

thousands of dollars spent on audit fees every year are not available for consumers. Instead, they go to my old home boys in the 

accounting profession. 

So I would hope that the FHA would take seriously effort proposals to require a surety bond in lieu of an audit financial statement or the creation of a recovery fund so those thousands of dollars that are going to audit fees are instead going to a fund that 

will be available for consumers. 

I hope to be able to ask a formal question on that issue, but I 

want to shift Mr. Murray to another issue. 

The National Association of Realtors has expressed serious concerns about the shortcomings of FHA technology. As they note in 

their statement submitted for the record, currently, FHA operates 

technology which is an average age of 18 years old; and Brian 

Montgomery, FHA Commissioner, has stated that the software programs are often older than the staff maintaining them. You still 

have a COBOL system that is 30 years old. 

It is estimated that $65 million is required to upgrade FHA systems, according to the National Association of Realtors; and that 

would not only upgrade the system but provide for appropriate 

staffing. What is the status of your current technology initiatives? 

When and at what cost do you expect to bring the agency into the 

21st Century? 

29 

Mr. MURRAY. The status is, as I said in my opening statement, 

we are managing it. We are using it. We have managed to do 

tweaks here and there through maintenance. 

Candidly, in one of our 35 systems, for less than the cost of 

maintenance, 1 year’s worth of maintenance, we can turn it into a 

Web-based system that would work fantastically for us. We can’t 

do it because we don’t have working capital funds to do it. 

Our systems are adequate at this juncture, but it will not sustain 

itself as our business continues to increase. So we absolutely need 

additional funding. Our technology people estimate somewhere between $20 million a year for us to segment these certified systems 

into— 

Mr. SHERMAN. So you feel you need $20 million a year over a period of how many years? 

Mr. MURRAY. Five years. 

Mr. SHERMAN. $20 million in order to upgrade your technology. 

I don’t know whether—all we can do is work with the Appropriations Committee on that or whether there is a way to change legislation through this committee that would achieve that goal. But I 

can’t imagine a better use of funds, given the new mission or expanded mission of the FHA. 

Actually, I believe my time has expired. 

The CHAIRMAN. The gentlewoman from West Virginia. 

Mrs. CAPITO. I would like to thank the witnesses for sharing information. 

First of all, I would like to ask unanimous consent to submit my 

opening statement into the record. I think that was already going 

to be done, but I wanted to make sure that was all right. 

In 2008, Congress shut down the avenue of the seller-funded or 

the downpayment assistance avenue for FHA borrowers; and I 

would like to know what percentage of your portfolio that you have 

right now still has those seller-funded downpayment assistance 

and what effect you think that might have on your future portfolio 

moving forward and what you are finding now that particular avenue has been shut down? 

Mr. MURRAY. We don’t—I don’t have those numbers of what they 

have, but I would guess that there is a pipeline of loans that are 

there. We do know that 30 percent of those would generally go to 

default. 

Mrs. CAPITO. Let me just clarify that. Thirty percent of the seller-funded downpayment assistance loans go to default? 

Mr. MURRAY. Yes, that is correct. Yes. And we do know we have 

significant amounts of new volume coming in, so, hopefully, that 

would tend to offset that. 

Mrs. CAPITO. Okay. So, hopefully, that will have the intended effect to steady that downpayment issue. 

We also raised the downpayment requirements from 3 percent to 

3.5 percent. What effect does that have? If we are having more volume of FHA loans, where do you speculate or how do you document 

where people are getting their downpayment and are able to meet 

that requirement? 

Mr. MURRAY. My staff is confirming what I was thinking. What 

we are seeing is going back to where it was before, before the 

30 

downpayment assistance program came into being, and that is 

from family and relatives and the like. 

Mrs. CAPITO. Thank you. 

I would like to say, as the volume of FHA loans has increased, 

I know a lot of financial institutions that have put in applications 

to become loan originators, I share the concern of my colleagues of 

those who have been in maybe the subprime and less than maybe 

aboveboard practices can then migrate into becoming a large vendor, so to speak, for FHA loans. But I would say I think we want 

to be careful not to cast a broad brush here. Because, having been 

in one of my lending institutions, a community bank in my own 

community, they have an application before the FHA right now to 

become a lender. They are a terrific institution that has, I think, 

a wonderful reputation for providing great community services, financial services to our local communities. 

I would hate to see a situation where, as we cast a brush to try 

to cast out the bad actors, that we then unintentionally begin to 

harm the folks who are there doing the right thing, have their applications in order, and intend to fulfill that dream of helping folks 

achieve homeownership. So I would just throw that cautionary flag 

before you, having been in several of these institutions in my State 

of West Virginia and knowing they are doing it the right way and 

want to be able to offer FHA as a possibility for home buyers. 

Mr. MURRAY. As part of our vetting process, to the extent that 

we have the legal authority to prevent someone, a so-called bad 

actor, however that may be defined, both from a personal perspective and a legal perspective, if there are bad actors, our process is 

not to allow you to come in. But, having said that, absent us having that, then we approve them. 

Now, if they are so inclined to engage in mischief, we have so 

many checks and balances and electronic surveillance in our operation they could not prevail for a long period of time, because you 

will be caught very quickly. 

Mrs. CAPITO. And the taxpayer will be on the hook once again 

for the unscrupulous actions of certain folks, whether it was the 

subprime lenders or it is somebody moving to FHA and putting forward unscrupulous practices. It will be not only that individual 

homeowner hurt in some form or fashion but all of us as a general 

constituency will be hurt as well. 

Mr. MURRAY. Right. Invariably, you have that, no matter what. 

Across the country I would argue—and I think the IG would 

even agree with me—there is less than 2 percent of people probably 

who stretch out to engage in mischief or wrong activities. The vast, 

vast majority of lenders are very good. They have exercised with 

extreme integrity. 

I do want to point out that we have a process called Credit 

Watch that no one else in the industry has that will do electronic 

surveillance on a quarterly basis. At a press of a button, we can 

examine the default and claim rate of every approved branch of 

every approved FHA lender, that’s 44,000 views, and the combinations of places they can do business across the country. Every quarter, any lender who exceeds the default and claim rate by 200 percent for the local jurisdiction in comparison with others doing business, we will send them a proposed termination notice of their 

31 

branch and in a 9-day period, we will send the notices, have a 

hearing and make a determination whether or not to terminate 

them or have them make some corrections and stay in place. 

Mrs. CAPITO. Could I just make one clarification? On the sellerfunded downpayment assistance programs, you mentioned that 30 

percent of those were in default. Would that mean 30 percent of 

the mortgages in default are seller funded or that, of the sellerfunded programs, 30 percent of those are in default? 

Mr. MURRAY. Compared to our standard book of business, sellerfunded downpayment assistance as an entity is 30 percent—I am 

sorry, their loans perform 2 to 3 times worse. 

Mrs. CAPITO. Thank you. 

Mr. MURRAY. Okay. 

The CHAIRMAN. The gentlewoman from New York, Mrs. McCarthy. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Mr. Murray, you just talked about Credit Watch. Is that in place 

now or has that been in place for a while? 

Mr. MURRAY. Yes, ma’am we launched it in May, 1999. 

Mrs. MCCARTHY OF NEW YORK. So if you could clarify it for me, 

the way you were explaining it, why didn’t we see all the subprime 

loaners during these years being picked up a little bit faster? 

Mr. MURRAY. Because we don’t have subprime lenders in FHA. 

Mrs. MCCARTHY OF NEW YORK. So you are only looking at the 

loaners that you have? 

Mr. MURRAY. Yes, we only do FHA. So even if those folks, the 

bad actors, were doing subprime and they now come to FHA, they 

couldn’t fit their square peg in our round hole. They would be 

caught. 

Mrs. MCCARTHY OF NEW YORK. Maybe it is something we should 

be looking at to expand then, being that we will not be able to do 

that much. 

One of the things I wanted to ask you, with your FHA loans— 

I work a lot with the Long Island Housing Partnership in Long Island, New York. We basically—or I should say they basically work 

with low-income families, obviously trying to allow them to buy 

their first home. Financial literacy has been a big thing on my part 

here on this committee. I know we worked on helping these different groups on educating people on how to buy a home, to see if 

they could buy a home. 

With your loans, even with your loans, even though they are 

lower, do you educate them that it is not just the mortgage, it is 

the insurance, it is the electric bill, it is the taxes in the area that 

they live? Because, obviously, a lot of people could buy a home. 

That doesn’t mean they can keep up with what it costs to keep that 

home going. To me, that is something that I personally believe 

should be mandatory on every single housing loan. 

Mr. MURRAY. Yes. We have 2,300 housing counselors that we 

fund; and their services are free or at very low cost. Part of their 

pre-purchase counseling, that is exactly what they do, to help them 

establish budgets and help them understand they have to make a 

payment. You can’t put that off. You put something else off. 

In terms of mandatory counseling, that may be somewhat problematic. There has been tests of that back in the 1990’s and the 

32 

like. There are just not enough housing counselors to go around. If 

you have it mandatory, you may have a segment of the population 

who is not served regularly or soon enough to enter into a real estate deal. 

Mrs. MCCARTHY OF NEW YORK. The thing of it is, the housing 

authority on Long Island has no defaults. 

Mr. MURRAY. Right. 

Mrs. MCCARTHY OF NEW YORK. So if you are looking at a cost 

basis, who is coming out ahead? Even though—I know it is not 

mandatory. Nobody on this committee likes the word ‘‘mandatory.’’ 

I often wonder if we wouldn’t be in the problem that we are in 

today if things had been done differently that we have been fighting for, for years on this committee. 

With obviously your increased responsibility, and we have heard 

constantly over and over again that you need more staff and higher 

technology to work into to do what you are doing, could you give 

me an idea on the flow of work that you have had in the last 10 

years and what has the growth been on having staff, keeping staff? 

We heard you talk about the computers and what kind of money 

you need for that. Obviously, that will be a tough sell on every 

issue. Because, basically, every branch is saying they need more 

help in that particular organization. So if you could give me an 

idea of how much more work you are doing over the last couple of 

years with maybe the same amount of staff coming back from the 

1990’s. 

Mr. MURRAY. Our environment has pretty much tripled. The first 

2 weeks in December, we have seen the largest volume we have 

ever had in the history of FHA. 

Our staffing levels have been pretty much the same over the last 

4 or 5 years, which is slightly less than 900 employees. But also 

during that process, we have been embracing technology to the extent that we can. For example, we had a contractor and some staff 

doing the annual financial audit. We completely automated that 

process and—where a system will run through the audits to find 

deficiencies, and we maximize our staff resources by just hiring five 

accountants to help look for the deficiencies. 

So we have been embracing technologies to the extent we can 

and have the monies available to do that. Not only do we want to 

fix the technology that we have, we want to embrace new technologies. There are a lot of things we want to do that would be 

state-of-the-art, that we want to embrace. 

Mrs. MCCARTHY OF NEW YORK. I can’t see—my time is up. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Lance. 

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

To Mr. Heist, about a year ago, an audit was conducted of HUD’s 

Quality Assurance Division, and the audit determined that it did 

not consistently require FHA-approved lenders to indemnify loans 

with similar material deficiencies and did not always resolve material deficient or potentially fraudulent loans in a consistent fashion. 

Sir, could you update the committee as to what has occurred in the 

last year and what steps the Department has taken to ensure that 

uniform resolutions to loan underwriting deficiencies are handled 

in an appropriate fashion? 

33 

Mr. HEIST. I believe our recommendations spoke to among the 

various homeownership centers ensuring that they are referring 

things on an equal footing, making decisions about whether a particular case was so egregious that it should be indemnified by the 

lender. And we spoke to headquarters improving their oversight of 

the field just to make sure things are being done consistently and 

that when they do have fraudulent loans, they are referred to the 

IG. 

Mr. LANCE. Mr. Murray, would you like to comment on that, sir? 

Mr. MURRAY. Yes, we both strive for consistency. 

With respect to looking at asking someone to indemnify a loan, 

it must be material. These things are not one-size-fits-all. You can 

have two lenders, in two different parts of the country, perhaps 

having the same violations, but there are also mitigating circumstances and factors that led to that. That is a discussion in resolving those issues. So you will not have it 100 percent from 

homeownership center to homeownership center or even within a 

homeownership center. Because you cannot just say, you did this; 

therefore, you pay that. You just cannot do that. It is not that absolute. 

Mr. LANCE. And, Mr. Murray, would it depend based upon the 

region of the country and the cost of housing in the country or 

would there be other factors? 

Mr. MURRAY. No, it would be mitigating factors, what led to that 

or did you subsequently find support documentation that would 

allow us to say, okay, we will do something differently. 

Mr. LANCE. As a follow-up to the question from the gentlelady 

from West Virginia, Mr. Murray, what percentage of the FHA portfolio is in the now-banned seller-funded downpayment programs? I 

am not sure I heard the— 

Mr. MURRAY. FHA does not allow seller funding downpayment. 

Mr. LANCE. Yes, sir, I know that has been banned since October 

of 2008. What percentage is in the portfolio now? 

Mr. MURRAY. Before the ban, it constituted 30 percent. 

Mr. LANCE. Thirty percent. 

Mr. MURRAY. So I would assume it is decreasing—not decreasing, 

but with the influx of new loans— 

Mr. LANCE. Presumably, it is decreasing because of the influx of 

new loans. But it was 30 percent when it was banned on October 

1, 2008. 

And what effect will these types of loans have on the capital reserve ratio? 

Mr. MURRAY. That is one of those questions I have to defer to 

my office of evaluation for that, but we are glad to get an answer 

for you. 

Mr. LANCE. Thank you very much. I would appreciate that 

through the Chair. 

Thank you, Mr. Chairman. I yield the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Baca. 

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

Mr. Murray, many of the foreclosure consultants work in the best 

interests of the clients to modify troubled mortgages so homeowners may avoid foreclosure. However, as the foreclosure rate has 

gone up, communities across the country, including my district, 

34 

have seen a rise in fraudulent actors to provide legitimate foreclosure prevention services. Many of these predatory actors have 

taken money in advance while not performing any service at all, 

leaving many homeowners on the streets with home foreclosures on 

them. You probably have seen false flyers on cars and on homes 

and on TVs. 

Just as with any real estate transaction, those assisting with 

loan modifications should only receive payment once a transaction 

is complete. In California, a foreclosure consultant must be certified—and I state—must be certified under the new real estate 

laws or pay penalty. Is this something that FHA might be willing 

to consider? 

Mr. MURRAY. I think in FHA, there is not that problem. Part of 

our process is we require loss mitigation of our lenders. That is 

early on in the process, from the first time they become 45 days 

behind, the pamphlet goes out. So at least FHA borrowers are informed or should be informed that these are resources here to assist you in that. 

And let me just add that in the last year, we did over 100,000 

loan modifications, and 65 percent of those folks retained their 

homeownership as a result of that. 

Now the broader picture about these individuals who are—there 

are many, many schemes. As we go to conferences, we try to warn 

people. But that is totally beyond the purview of HUD. We certainly cannot do what Justice and the FBI themselves cannot do. 

Poor little FHA certainly can’t do anything about that. But to the 

extent that we might find our own servicers, FHA-approved 

servicers, not offering loss mitigation, yes, we will take immediate 

action against those guys. 

Mr. BACA. You talked earlier too as well about new rules that are 

needed. And as we look at new rules, we can come up with all of 

the new rules, but we need the enforcement, which goes back to 

what the chairman indicated at the beginning: having the appropriate staff to make sure that the enforcement is done there, because all the regulations, the oversight, the accountability, can be 

there, but if you don’t enforce those laws, then we have these same 

predators continuing to do what they are doing right now. I know 

you talked a little bit about that Credit Watch, a little bit, but that 

is something that is not in place. 

Mr. MURRAY. It is in place. 

Mr. BACA. It is is place. Then my question would be: What legal 

authority would you need, because that is one thing you said earlier; you need legal authority. So what do you need—what do we 

need to do to make sure you have the legal authority that we can 

go after some of these individuals? 

Mr. MURRAY. We are going to propose rules. I don’t know—perhaps with respect to the Mortgagee Review Board, we may need 

some statutory changes, making some statutory changes. But I 

think for the most part, just through rulemaking we can enhance 

and tighten our requirements. 

As Ms. Waters was saying, I too am bothered by principals of an 

entity who got into trouble, dissolved themselves, and recreated 

themselves again. I do not have the authority, absent these people 

being debarred or convicted, from stopping that individual from 

35 

forming another company. We have that on the table right now to 

do that. 

What we are trying to do is to say that if you have unfinished 

business, unresolved issues, and we are looking that if you have received a letter from either my monitoring staff or from the Inspector General’s Office, and if you shut down business once receiving 

that letter, that we can then hold the individuals accountable. Because we often, my monitors, as well as Mr. Heist’s folks, when 

they go out, oftentimes by the time you send the finding letters to 

the lenders, they are gone. We want to be able to hold the principals accountable. That is rulemaking for us. 

Mr. BACA. Did you want to answer, Mr. Heist? 

Mr. HEIST. On one front, the Congress has acted. Part of the 

Housing and Economic Recovery Act provided for increased penalties, making a criminal offense against FHA equivalent to that 

against a financial institution. So we are hopeful that will give 

some more motivation for prosecutors to go after some of these 

cases. We also agree that going after the principals is an excellent 

idea because it prevents being able to set up shop as another company. 

Mr. BACA. My final question—and I know my time has run out— 

but in reference to the regulations that were not in place, when did 

this actually start occurring? Because I know that the chairman 

over the last 2 years has tried to put in regulations and enforcement, but the regulations were lacking, and that was part of the 

problem. When did all of this occur in the regulations of the enforcement aspect, because apparently there have been statements 

that say, we are overregulated, we don’t want government intervention; and yet, government needs to intervene and needs to have 

those kind of regulations to have the kind of accountability and 

oversights in the enforcement. 

When did this all start happening? 

Mr. MURRAY. People and miscreants engaged in wrongdoing have 

always existed. I think what happens is as situations evolve, we 

need to evolve with them. There is always the next mortgage fraud 

scheme. So I think what we are finding, and we all agree, is that 

we are in a particularly difficult situation now. There may be more 

and more people who have been engaged in wrongdoing maybe 

looking to come to HUD, not knowing that they probably cannot 

get away with what they were doing, but nonetheless we still need 

to be able to hold folks accountable. 

Believe me, my staff, we have 120 monitors who actually go out 

on site and get into your books and your business. They are very, 

very aggressive individuals. What we need to have as well, as Mr. 

Heist is saying, is the authority to hold people accountable to do 

the things that we really need to do to make an example. 

Mr. BACA. Let us know how we can help you there. 

The CHAIRMAN. I will also note that starting in 2002, there was 

a precipitous drop in FHA guarantees. It dropped very significantly. It has gone back up again. I think what has happened is 

the staffing hasn’t tracked the increase in activity. It went down 

in the 200,000 range. It is back up to where it should be. It 

dropped by about two-thirds. I think part of the problem is the lag 

there in staffing up as there was an increase. 

36 

The gentleman from Texas. I keep ignoring him. 

Mr. NEUGEBAUER. I thank the chairman. 

Mr. Heist, I think it has been alluded to a couple of times that 

there is a model that determines what the current reserve requirement is, based on actuarially and the portfolio condition, and I 

heard you say maybe economic conditions that are being projected, 

I guess, forward. Is there third-party validation on that formula 

and how it is being calculated? Because some companies got in 

trouble coming up with their own models and leading someone to 

believe that in fact the reserves were sufficient, when in turn they 

were not. So is there third-party validation? 

Mr. HEIST. The actuarial study itself is by law required to be 

conducted by an independent actuarial firm. That is actually beyond the auditing realm that I deal with. So there is some degree 

of third party, at least with respect to the assumptions used. 

Again, this isn’t under my purview, but in addition to coming up 

with a bottom-line best estimate, they report what would happen 

if certain things happened. If you were more pessimistic in your assumptions, here is what the impact would be. This is a concern because if things turn out worse than it was projected back in September, the value of the fund will be determined to be less. 

Mr. NEUGEBAUER. Which brings me to the question that legislation has been introduced that would allow bankruptcy judges to 

cram down lenders, and obviously FHA would fall under that. Has 

anybody done any—or thought about doing some calculations of 

what impact that legislation might have on the condition of the 

fund? Because one of the things that could happen here, we could 

actually pass this into law, and the impacts of that on the fund 

could in fact cause the actuarial number to go down; and, in fact, 

the fund could then be not meeting the statutory requirement. I 

think that is important information for this committee to have. 

Mr. HEIST. I am not aware of any study. 

Mr. NEUGEBAUER. Mr. Murray, who would we request some evaluation of what impact this legislation would have on the fund? 

Mr. MURRAY. I will take that back to my principals. 

Mr. NEUGEBAUER. Could you put that on somebody’s ASAP list, 

because I have a feeling that legislation is moving rather quickly. 

I think that is important, because the fund has lost half of its value 

in just 1 year. So the trend is not good. Additional legislation in 

the form of a cram-down could in fact accelerate that. And I think 

if that is, in fact, going to happen, I think this committee needs to 

know that. 

Mr. Murray, the other question I have is, you feel like you are 

doing a good job in vetting the people who are direct endorsers and 

people who are able to participate in the FHA program. But while 

you don’t have risk-based pricing authority, do you feel like you 

have the latitude on terms and conditions? For example, have you 

thought about or is there a policy in some areas where you have 

experienced high losses and you have seen major devaluation in 

real estate values? Do you have the authority or are you able to 

increase the downpayment requirement on some of those loans? 

Mr. MURRAY. No. FHA has never done this pricing regionally. It 

has always been a national— 

37 

Mr. NEUGEBAUER. In other words, if somebody applies for a loan, 

and they apply for a 31⁄2 percent downpayment, you don’t have any 

latitude—or, say, this is an area or a borrower where we don’t feel 

that it is in the best interest to make a loan with a 96.5 percent 

loan? 

Mr. MURRAY. I think the only two requirements are that clearly 

if it is in a declining market, we now require two appraisals. If the 

individual has a credit score of less than 500, we would require at 

least 10 percent down. That is a new procedure we now have. But 

otherwise, our underwriting criteria is consistent nationwide. 

Mr. NEUGEBAUER. So the credit score drives the downpayment. 

Anything below 500 has to be a 10 percent loan? 

Mr. MURRAY. That is the only credit score requirement we have. 

Mr. NEUGEBAUER. What is your minimum credit score? 

Mr. MURRAY. We don’t use credit scores at all. The industry may 

impose credit scores on our borrowers, but FHA, as a policy, that 

is not part of our underwriting. 

Mr. NEUGEBAUER. But you do require additional downpayment 

for a below 500 credit score; is that what you said? 

Mr. MURRAY. That is correct. 

Mr. NEUGEBAUER. So that is really the only time that you would 

look at a lesser downpayment, a credit-score threshold? 

Mr. MURRAY. If we do cash-out refinances, that also requires a 

higher so-called downpayment. 

Mr. NEUGEBAUER. I will look forward to hearing back from you 

on the impact of the cram-down on the reserve fund. 

Mr. HINOJOSA. [presiding]. I would like to call on Congressman 

Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank the witnesses for their patience today. 

Mr. Murray, a long, long time ago in your opening statement, 

you said that in your opinion, the sky is not falling. While that 

should be reassuring to the committee, over the previous months 

we have had a parade of stellar witnesses who have given us the 

same expression. I call to mind Secretary Paulson and Chairman 

Bernanke who sat in that very same chair, at that very same table, 

and said that, first of all, they said, we had no problem. Secondly, 

they said, we have it contained. We heard from Fannie Mae and 

Freddie Mac that they were fine, in good shape going forward. So 

please forgive me for my skepticism. 

While the sky is not falling, the balance in the FHA Mutual 

Mortgage Insurance Fund certainly is; would you agree? 

Mr. MURRAY. No, sir, not necessarily so. 

Mr. LYNCH. I have numbers here that said that last year we had 

a balance of $21.2 billion, and today we have a balance of $12 billion, a drop of 40 percent. That would constitute a falling balance. 

Are we cool with that? 

Mr. MURRAY. No, sir. It is in the unencumbered reserve account. 

It is an accounting exercise. 

Mr. LYNCH. I understand how you calculate it. You calculate a 

total. You calculated a total last year and you calculated a total 

this year. I know you are projecting losses in the future. But last 

year you projected—let’s see, 40 percent higher—let’s say you proVerDate Nov 24 2008 16:25 Jan 19, 2011 Jkt 063128 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\63128.TXT TERRIE
38 

jected a 40 percent greater drop this year than you projected last 

year, using your own numbers. 

Mr. MURRAY. I would have to say what I stated earlier, that the 

actuarial and those sort of things are done out of our Office of Evaluation. That is well beyond my purview. 

Mr. LYNCH. Let’s go to Mr. Heist. You are the Inspector General, 

correct? 

Mr. HEIST. Yes. 

Mr. LYNCH. You are familiar with this accounting? 

Mr. HEIST. Yes. In some limited way, yes. 

Mr. LYNCH. By statute, the Mutual Mortgage Insurance Fund 

has to maintain at least a minimum 2 percent ratio between the 

balance in the fund—the projected balance in the fund and the 

amount of FHA loans out there. They were at 6.4 percent last year; 

and they are at 3 percent this year, after a 40 percent drop. Correct? 

Mr. HEIST. That is correct. 

Mr. LYNCH. The data forecast that was used to project that is 

based on June 2008. Is that correct, Mr. Heist? 

Mr. HEIST. That is correct. 

Mr. LYNCH. I just want to say, June 2008 is a significant date 

for the following reasons: it was before IndyMac, that failure, 

which was mortgage-related; it was before the government takeover of Fannie and Freddie; before Lehman went under, the largest 

single bankruptcy in the country, in our history; it was before the 

failure of AIG as a private entity; it was before Washington Mutual 

went under, which was the biggest thrift failure ever in this country; it was before the Citigroup bailout; it was before Morgan Stanley and Goldman Sachs went out of the investment bank business; 

it was before Merrill Lynch collapsed, and also the collapse of 

Wachovia; and it was before the unemployment rate went to 6.5 

percent. 

Now, all that considered, with all that data in front of us, Mr. 

Heist, based on all the available data, I am concerned about this. 

I think they are going to drop below 2 percent. And I think they 

are going to need a bailout from Congress. And you are somebody 

who has looked at these numbers. Could you give me your opinion 

on this? 

Mr. HEIST. In fact, the independent auditors who work for us, 

who did FHA’s financial statements which were published in the 

middle of November, said the same thing and expressed the same 

concern; that the assumptions that were used may be optimistic, 

and expressed a concern that the capital ratio may indeed decline, 

at least towards 2 percent. And that is a concern. 

Mr. LYNCH. Mr. Murray, anything to add to that? I understand 

it is a different department within FHA, and a different team, but 

the numbers are what they are. Can you persuade me that we are 

not going to approach that 2 percent? 

Mr. MURRAY. No, sir. I am sorry; I couldn’t do that. 

Mr. LYNCH. All right. 

Mr. Chairman, I yield back. Thank you. 

Mr. HINOJOSA. I would like to call on the gentleman from Texas, 

Congressman Green. 

39 

Mr. GREEN. I thank you, Mr. Chairman, and I thank the witnesses for appearing. 

Mr. Heist, because time is of the essence, I may not have an opportunity to ask you questions. I do want to assure you that this 

does not mean that I do not love you. I will have to show you some 

love on another occasion, possibly. 

Mr. Murray, I do have questions for you. Without getting into 

statistical analysis or differential equations or vector analysis, let’s 

talk for just a moment about this default rate that you referenced 

a while ago. And I am talking about now with seller-assisted downpayment. 

Do you agree, sir, that if the buyer provides his or her own downpayment, the success rate for those loans with HUD is 97 percent? 

Mr. MURRAY. I am not aware of the statistics, but I guess from 

a general theory— 

Mr. GREEN. I believe it is correct. If you need to confer with one 

of your colleagues with you, I will honor that. 

Mr. MURRAY. They are not are from the Office of Evaluation. 

Mr. GREEN. Ninety-seven percent. The success rate for buyers 

who receive downpayment assistance from relatives, from various 

programs, perhaps a program that a municipality is affording buyers, is 95 percent. The success rate with seller-assisted downpayment is 94 percent. If we subtract 94 from 97, we have a difference 

of 3 percent. That is 3 times the default rate that HUD has been 

referencing. 

If this is incorrect, provide me with your statistical information 

so that I may have some degree of clarity with reference to what 

I have called to your attention. 

Mr. MURRAY. Yes. Again, I really cannot speak to that. That is 

an issue I have to get back with the Office of Evaluation. 

Mr. GREEN. Mr. Murray, God bless you. You spoke to it earlier. 

That is the reason I am back here. I had other business to attend 

to, but I monitor these hearings. You spoke to it earlier when you 

indicated that it was 3 times, I believe, the default rate. Did you 

not make that comment earlier? 

Mr. MURRAY. Yes. HUD has long been on record saying the— 

Mr. GREEN. Mr. Murray, you need to look into this statistical information because it is entirely misleading if what I have said is 

correct. Because what it causes one to conclude is that the 3 times 

is some large number, some large difference between the seller-assisted and the case wherein the buyer actually pays his or her own 

downpayment, because 94 from 97 gives us 3, and that is the 3 

times that HUD has been referencing. 

Again, if you have specific information to the contrary, I beg that 

you give me the specific information to the contrary. 

Mr. MURRAY. Absolutely. 

Mr. GREEN. When you provide this, if you would, sir, I would like 

to, for our purposes, have some timeline. How long do you think 

it will take you to provide me with this information? 

Mr. MURRAY. My staff tells me we can possibly have our office 

do it today. 

Mr. GREEN. I understand. Staff tells me most things too. So I appreciate what you are saying. It is exceedingly important that we 

deal with this, because the seller-assisted downpayment program is 

40 

one that I support, Mr. Murray. I want to make my position very 

clear, transparently so. 

I support it, Mr. Murray, because we have many persons who 

can make mortgage payments but don’t have a downpayment. I 

support it, Mr. Murray, because many persons who receive 

downpayments from relatives are still having that benefit with 

HUD, but the persons who get the downpayments from the seller 

do not. And for those who would contend that this may create some 

sort of collusion, we can move to what is known as a blind-pool appraisal process, something used by the VA. The VA utilizes a blindpool appraisal process such that you don’t have collusion between 

the appraiser and any of the parties associated with the loan itself. 

I am honored to visit with you on any occasion to talk to you 

about this, because I will be moving in this next session of Congress, along with colleagues—by the way, I don’t like using the personal pronoun ‘‘I.’’ Most things are done with other people. It is just 

that in this environment if you don’t say ‘‘I,’’ sometimes you lose 

the opportunity to let people know that you are doing things. So 

I only use it for the purpose of letting people know that I am involved. But I would like to talk to you more about it. 

I thank you for your testimony today, and I yield back the balance of my time. 

Mr. HINOJOSA. Thank you. I would like to now call on Congresswoman Melissa Bean from Illinois. 

Ms. BEAN. Thank you, Mr. Chairman. Thank you both for your 

testimony today. 

I want to go back to something that Congresswoman Speier mentioned earlier. She had talked about some of these past convictions 

of individuals and firms who are now applying for FHA involvement and participation in their applications. 

You have talked about lack of resources and an extensive increase in the number of applications you are receiving, which 

makes it even harder to go through. In the Business Week article 

that mentioned some disturbing examples of those who are now 

participating in the FHA programs but had been contributors to 

the subprime crisis that we are now all suffering through, in their 

past practices there was an example of one individual who didn’t 

include their criminal record in their applications. In many cases, 

there are many firms and individuals being investigated who have 

not yet been convicted. 

Is it my understanding—and you can correct me if I am wrong— 

that it is only those who have been convicted that you have to consider. And if that is the case, do you have suggestions on what you 

prefer to see as the criteria so that you can better weed out those 

individuals and firms who are contributing those types of practices 

as bad actors? 

In other words, should they have to report investigations or associations with or past employment with firms who have been under 

investigations or convicted? 

Mr. MURRAY. We have requirements where we do look at past 

criminal activities and behavior and the like. The article is kind of 

difficult to follow because there is a theory of present responsibility. So when was one convicted, what did they do when they 

were convicted, how does that play into the action? 

41 

Yes, there are a lots of things that we want to do to try to tighten up the requirements that will give us the ability to say no, we 

don’t want you to participate in FHA. Right now we don’t have that 

authority. We are very limited in what we can and cannot do. And 

I mentioned earlier, clearly if we have an entity that has been 

sanctioned, we can act on that. Because the entity has been sanctioned and its principals chose to reestablish itself, I don’t necessarily have a basis for going after that person unless someone 

took an action against that individual, like a debarment or a conviction, or those sort of things. 

So, yes, there are things we want to do. But let me just clarify 

one thing though. Even though we have tripled the number of lenders trying to come back in, we have not lessened our requirements 

at all. It will take as long as it takes to go through a thorough investigation and review of an individual before we approve them to 

come into our program. 

So that is why it does take longer, and people complain about 

that, but so be it. We are very, very mindful with our gatekeeping, 

and not anyone will come into our program. If, as I said earlier, 

if people would come in and choose to make mischief, we have so 

many systems in place that you will get caught sooner as opposed 

to later. 

If I might, we have a process that no one else in the industry 

has, whereas a lender—or let’s say broker for example—I don’t 

want to pick them out, but if they wanted to do bad paper in the 

conventional market, they would send it to several different sponsors, and that sponsor would notice, hey, this guy is sending me 

bad paper. 

When you come to FHA, you can do the same thing, but I track 

the performance of your loans by you. I don’t care where you send 

them, it is being tracked. So they all start going up, I know that, 

and I can terminate your participation at least for a 6-month period until you fix the problem. So we have that and no one else has 

that. 

Ms. BEAN. Was that the Credit Watch that you were talking 

about? 

Mr. MURRAY. That is the Credit Watch. 

Ms. BEAN. I am only going to interrupt you because my time is 

running out. Just to clarify, you are open to further suggestions 

and further restrictions from this body? 

Mr. MURRAY. Yes, absolutely. But whenever we put too many restrictions on things, it just will not work. 

Ms. BEAN. Just eliminating bad actors. 

Thank you. I yield back. 

Mr. MURRAY. Thank you. 

Mr. HINOJOSA. I now call on Congressman Bill Foster from Illinois. 

Mr. FOSTER. Thank you. 

This is for Mr. Murray. If the current trends continue, have you 

done an analysis of how your rates would have to change to preserve the 2 percent reserve fund? Are you in a situation where you 

can make a relatively modest change in your rates and have the 

reserve fund stay healthy? 

42 

Mr. MURRAY. I would not be in a position to speak to that. That 

is all done through the Office of Evaluations, and they are constantly doing these models. 

Mr. FOSTER. I guess maybe this is a similar question, but are you 

aware of any analysis where if there is, as many people expect, a 

further 15 percent or 25 percent drop in real estate prices, what 

that would do to the reserve fund? 

Mr. MURRAY. I am not personally aware. 

Mr. FOSTER. Would you be able to get that information to us? 

Mr. MURRAY. Yes. We can get it from the Office of Evaluation. 

Mr. FOSTER. In regards to the Credit Watch Termination Initiative, you say that the lenders with a relative compare ratio greater 

than 200 percent are subject to proposed termination. First off, is 

the 200 percent 200 percent of the nationwide average, or some 

sort of local average? 

Mr. MURRAY. We do this at the branch level because we are concerned about the effect on neighborhoods. So we do it at the branch 

level. So if a particular branch of a lender, if his relative default 

and claim rate is higher than that of the national rate, and is also 

200 percent or more of the local rate, there— 

Mr. FOSTER. They make allowance for neighborhood conditions 

and so on. 

Mr. MURRAY. Yes, because we are comparing them with other 

lenders who are doing business in the same jurisdiction. 

Mr. FOSTER. Which is sensible. 

What fraction of these are actually terminated of the ones proposed for termination? 

Mr. MURRAY. We have not put a number on that. I can tell you 

at one time it was like 80 percent we sustained termination on. 

Eighty percent. That was at one point in time, maybe 3 years ago. 

That is not something we track deliberately because we don’t want 

the industry to believe that we have a quota and that we are trying 

to get the folks. We want them to understand it is a fully administrative proceeding. You can make your case, mitigating factors, and 

we will review the facts. 

Mr. FOSTER. When an originator starts originating a large number of mortgages that default promptly, are there any other financial penalties that they suffer immediately? 

Mr. MURRAY. First of all, we believe from a monitoring standpoint that any loan that goes in default within the first 2 years, 

they are subject to monitoring. Those are the ones we target. Clearly, any loan that goes into default within the first 6 months, we 

assume it is more of a problem with the loan as opposed to borrower circumstance. 

Mr. FOSTER. My question is: Does the originator suffer promptly 

when he starts shoveling out a bunch of things? 

Mr. MURRAY. Credit Watch is the quickest thing that one can do. 

But at 6 months, they are required to go back and to reassess why 

that loan went bad. Now, through our monitoring, as we go out to 

the field and we look at fact base to see what caused that, we then 

will request an indemnification if we find there is a material violation. 

43 

Mr. FOSTER. What I am fishing for is, there was some sort of deferred payment or penalty that would kick in so they wouldn’t get 

paid the full amount—or something like that. 

Mr. MURRAY. That is what indemnification would do. 

Mr. FOSTER. That is sort of a retroactive thing. I was thinking 

if it was automatic, if they knew for sure that if this thing defaulted for any reason that they simply wouldn’t get their last payment. Something like that. 

Mr. MURRAY. We don’t have the same authority that is done in 

the private sector where when you bring bad paper, they make you 

buy it back. We cannot do that. 

Mr. FOSTER. Okay. 

My last question: What is the role of tax records in verification 

of income, and is there a useful legislative or technological initiative that might make them more useful or more immediately useful? 

Mr. MURRAY. For borrowers or for lenders? 

Mr. FOSTER. For borrowers. 

Mr. MURRAY. That is what we use them for. 

Mr. FOSTER. So you take the Social Security number and ask the 

IRS, hey, is this income real? 

Mr. MURRAY. We don’t currently do that today, but that is one 

of the things we have in our proposal. 

Mr. FOSTER. It is on your technological roadmap. But you do access tax records by asking the IRS? 

Mr. MURRAY. The lenders do that. 

Mr. FOSTER. The lenders get tax records. 

Mr. MURRAY. It is up to the lenders to verify income and employment and the like, and they do verify the tax records. 

Mr. FOSTER. By going to the IRS, or does the mortgage applicant 

provide them something? 

Mr. MURRAY. There is an electronic process that they use. 

Mr. FOSTER. So it doesn’t represent a hole that fraud is leaking 

through. 

Mr. HEIST. It would take a legislative change, but OIG has advocated making those sorts of income verification mechanisms available. There is a whole host of privacy questions that have to be debated as part of that. Right now, the lender has to verify the income through the borrower and through the employer that the borrower says he is employed with. That wouldn’t necessarily catch all 

income, and it might not be the most administratively efficient way 

to do it. 

Mr. HINOJOSA. Thank you. I would like to advise everyone that 

in approximately 15 minutes or so, we expect that there will be 

some votes. I have visited with the chairman, and if any member 

here would like to come back and ask questions, you may do so. 

So let me move forward and get as many as we possibly can, and 

work with me and we will give everybody an opportunity to ask 

their questions. 

I would like to ask Congressman Walt Minnick from Idaho if he 

has any questions. 

Mr. MINNICK. Thank you, Mr. Chairman. 

Mr. Murray, I gather from your opening statement that you 

think CitiBank is mistaken as a matter of public policy in now apVerDate Nov 24 2008 16:25 Jan 19, 2011 Jkt 063128 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\63128.TXT TERRIE
44 

proving of the restoring of a bankruptcy court’s authority to modify 

mortgages? 

Mr. MURRAY. No, sir. I am only speaking about FHA. 

Mr. MINNICK. You think that would be appropriate policy. 

Mr. MURRAY. I am only speaking in terms of how that affects 

FHA and Ginnie Mae. We don’t have the authority or the financial 

wherewithal to pay the investors. 

Mr. MINNICK. I know you don’t. But as a matter of public policy—in your opening statement, you said you opposed any kind of 

cram-down authority to a bankruptcy judge. 

Mr. MURRAY. I was just talking FHA. It was not a broad statement. Only FHA. I just wanted to bring that to this body’s attention. 

Mr. MINNICK. Even with respect to FHA, wouldn’t giving a bankruptcy judge that authority keep more people in their homes and 

reduce the number of foreclosures and ultimately the cost to FHA 

lenders? 

Mr. MURRAY. I was not prepared to offer a personal opinion. That 

would be a personal opinion of mine. 

Mr. MINNICK. So you have no view on the topic. 

Mr. MURRAY. No, sir. 

Mr. MINNICK. I would hope that your Administration would see 

the wisdom of giving a bankruptcy judge that authority. And perhaps you could convey a message back that there are members of 

this committee who believe that if we are going to keep people in 

their homes, if we are going to make purchasers of credit-backed 

mortgage securities do a better job of due diligence, that we need 

to have that authority in the system. 

Thank you very much, Mr. Chairman. I yield back the balance 

of my time. 

Mr. HINOJOSA. At this time, I would like to call on Congresswoman Suzanne Kosmas from Florida. 

Ms. KOSMAS. Thank you. I appreciate the opportunity to be here. 

Frankly, most of the questions that I had in mind during the 

course of the conversation have already been asked. But referencing back to those questions asked by Congresswoman Bean 

and to the Credit Watch, I too—we have been full circle, starting 

with the Business Week article and the difficulties described there, 

and then your very healthy confidence in FHA and its ability to 

control and maintain the processes as well as the requirements. 

At the same time, it seems that the article that does refer specifically to one specific lender that had 9.2 percent—I think was the 

number of its loans in default— and I heard you talk about a suspension or termination for some period of time. 

I guess I am more curious what enforcement measures that you 

have beyond that for lenders who obviously are way outside the 

realm of normal in the numbers of loans that they are producing 

that go into default. That is significantly higher than your 1.3 percent you described as the FHA number. 

Mr. MURRAY. For that article we have to put that 9.2 percent in 

context. And I think that was a national number. I think where we 

would look at where they performed their business, there were only 

like 218 percent. 

45 

What I can say, two of those lenders we have absolutely zero 

problems with that we have done an array of look-sees at. We have 

had absolutely no problems. There are another three, I believe, we 

have looked at prior to this article, and they were already on our 

radar. We have reviewed them, we have taken certain actions, we 

have made certain recommendations and referrals to the Office of 

Inspector General by law, as we are required to do. That just helps 

to support that even if you come in, you will get caught if you continue your practices. 

But Credit Watch is just the tool to do that. We have no other 

authority to deal with people. It is not a violation to have a high 

default claim rate. That is not a violation of our program. But 

Credit Watch is a tool that we use to put you in check; that if you 

do, we will give you a time-out. 

Ms. KOSMAS. I certainly appreciate that. Although it appears 

minimal, as you can understand the reason for the hearing and the 

reason that we are here is the fear that the explosive number of 

FHA applications and mortgages that have occurred during this 

time when the public, our taxpayers, have lost their confidence in 

the processes in the financial sector applies also to FHA. 

While, as I said, I respect your confidence in what you do and 

your ability to defend FHA’s programs, and I certainly, having been 

in the real estate business for 30 years, I think much of what you 

say is entirely accurate, but we are in a new ball game, so to 

speak. 

My question to you would be specifically: If there were greater 

opportunity for you to enforce some stricter standards, if there are 

consistent situations in which the numbers higher than what you 

deem to be an acceptable amount for any company—and I am not 

trying to single out any company, just trying to put you in a position where you have the opportunity—we have talked about ways 

in which you can prevent; now I am talking about ways in which 

you can stop the hemorrhaging if you do have bad actors who are 

causing this problem to be exacerbated. 

Mr. MURRAY. Absolutely. I have never been accused of being shy 

about going after people. We are standing at the doorway very diligently. We are very interested in any additional tools that we can 

use. As a matter of fact, in Credit Watch, we are expanding that 

and we are actually going to monitor the performance of the underwriting lenders as well. Currently, we do the origination, but now 

we are going to do the underwriting. So we are tightening it up. 

Ms. KOSMAS. I guess what we are all saying is, tell us what you 

need in order to fill your toolbox so that we cannot wake up one 

day and say, we saw it coming but we didn’t do anything to prevent 

it. So we would appreciate being partners with you in making that 

happen. Thank you. 

Thank you, Mr. Chairman. 

Mr. HINOJOSA. Thank you. I want to give ample time to the Congressman from Florida, Alan Grayson, to have his questions heard. 

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

Mr. Heist, how many FHA mortgages are outstanding today? 

Mr. HEIST. I don’t have that information. I would have to get it 

for you. 

Mr. GRAYSON. Mr. Murray? 

46 

Mr. MURRAY. Possibly 4.5 million. 

Mr. GRAYSON. Any idea how many Fannie Mae and Freddie Mac 

loans are outstanding today? 

Mr. MURRAY. No, sir. 

Mr. GRAYSON. Since the housing crisis began 2 years ago, how 

many of those 4.5 million loans have gone to foreclosures claims? 

Mr. MURRAY. Our claim rate in 2007 is 1.42; in 2008, 1.3. The 

claim rate. 

Mr. GRAYSON. So if there were 4 million, can you help me with 

the math? 

Mr. MURRAY. One percent of 4 million. Let me look from this 

standpoint. We have approximately 38,000 homes in our inventory. 

Typically, in the last 2 years—sorry; we have about 50,000 homes 

in our inventory. We sell about 38,000 a year, for the last 2 years. 

Those are the ones that have gone to claim. 

Mr. GRAYSON. So, cumulatively, somewhere approaching 100,000 

homes since the housing crisis began; is that correct? 

Mr. MURRAY. I guess. 

Mr. GRAYSON. That is the number that have gone into foreclosure 

during that time that are FHA-loan houses, correct? 

Mr. MURRAY. Yes. 

Mr. GRAYSON. Now, how many people have actually been convicted of mortgage fraud since the housing crisis began 2 years 

ago? 

Mr. MURRAY. I have no idea. That is probably something in the 

Office of Inspector General. Now if you are talking very specifically 

to FHA, any instances of fraud—because we make hundreds of referrals to them each year, and we are required by law to do so. I 

think we did 700 last year. So any incidences of fraud we refer to 

the IG’s Office of Investigation for further review. They have to tell 

you from there. 

Mr. GRAYSON. Right. But my question is, how many people have 

actually been convicted of mortgage fraud since the housing crisis 

began? 

Mr. MURRAY. I don’t know. That moves beyond the realm of what 

we do. 

Mr. GRAYSON. Let’s explore that a little bit. You said you have 

made 700 referrals. Of those 700 referrals, I think you said, each 

year, how many of those resulted in a criminal conviction? 

Mr. MURRAY. Once it leaves us—because of our agreement with 

the Office of Inspector General, once we make a referral, that is 

their domain. We are no longer involved. Our hands are off. So I 

do not track that data. I have no knowledge of that data. 

Mr. GRAYSON. Mr. Murray, aren’t you a little bit curious to know 

what happens after you make a referral like that? You are accusing 

people of criminal fraud, and you seem to lose track of them. 

Mr. MURRAY. Not the ones that we take action against. I know 

fully well what happens to those. We refer those to the Office of 

Inspector General. They have their own reports and audits. 

Mr. GRAYSON. Mr. Heist, would you like to try to answer my 

question? 

Mr. HEIST. I have the statistics right here, but that is for the entire Department. We would have to break that out for you and submit it to you for the record. 

47 

Mr. GRAYSON. All right. My question specifically is: How many 

people have been convicted of criminal fraud since the housing crisis began? I am talking mortgage criminal fraud. How many? 

Mr. HEIST. That is the number we would have to get for you. I 

would be happy to do that. 

Mr. GRAYSON. Any idea? Is it a thousand? 

Mr. HEIST. One thing to keep in mind, criminal cases take a period of time to get to us. So I would suspect that the number would 

appear fairly small, because we are seeing cases now that were in 

the pipeline when FHA’s volume was low. As the volume increases, 

we will expect more cases to come in. Very few of those would likely have been criminally convicted at this stage. 

Mr. GRAYSON. The statute of limitations is 5 years, Mr. Heist. 

How many people have been convicted of mortgage fraud in the 

past 5 years? How many? 

Mr. HEIST. I don’t have that information. I would be happy to 

provide it. 

Mr. GRAYSON. A rough order of magnitude, please? 

Mr. HEIST. We don’t know at this point. 

Mr. GRAYSON. Will you please provide the information? I think 

the American people would like to know. 

You provided information that said that 6.5 percent of FHA loans 

are in default, and you said that you use Credit Watch and Appraisal Watch to try to keep that amount in check and to keep the 

foreclosure claims in check. How many lenders actually have been 

terminated from the FHA program since the mortgage crisis began? 

I am not talking about branches, I am talking about lenders. How 

many? 

Mr. MURRAY. I may have that here. 

Mr. GRAYSON. I see my time is up, so maybe you can provide that 

separately. I will point out to you that given the increase in approved lenders in the past 2 years from 692 to over 3,300, it seems 

that this would be a good time to do some culling. Maybe you could 

make sure that lenders who have 3 times the default rate are excluded from the program because, after all, inclusion in the program is not a right, it is a privilege. 

Thank you. 

Mr. HINOJOSA. Thank you, Congressman Grayson. 

At this time, I want to thank the two witnesses for taking the 

time to testify before our committee. We all appreciate your appearance. This panel is now dismissed. 

The chairman will bring up the second panel following the last 

three votes we are now in the House, that is taking place now. 

I declare this portion in recess. 

[recess] 

The CHAIRMAN. I am sorry, guys. When we scheduled this, I 

didn’t anticipate votes today. So I thought we would have been able 

to have fewer members around. This committee, we were hoping to 

shrink it, but instead it got bigger. 

I would, just as a courtesy to people, tell people that in the future I am probably going to have to try to do more hearings 

through subcommittees. It is unwieldy, and it is nice to have people 

who want to be members, but we will have to deal with it. 

48 

So I appreciate your staying around for this is directly relevant. 

And I am here and, more importantly, the staff members are here 

who will be listening. 

So let us go ahead. 

Mr. Courson, let us begin with you. 

STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION 

(MBA) 

Mr. COURSON. Thank you very much, Mr. Chairman. Good afternoon, Chairman Frank, Ranking Member Bachus, and members of 

the committee. Thank you for inviting the Mortgage Bankers Association to testify this afternoon on the Federal Housing Administration and the risk and rewards that come with the Agency’s recent 

growth in market share. 

As someone who has been an FHA-approved lender for 40 years, 

I have special appreciation for the important role FHA plays in our 

Nation’s housing mission. When FHA began to lose market share 

to subprime, MBA was one of the first to advocate for legislation 

to modernize FHA. While some argued that FHA had outlived its 

usefulness and should be allowed to wither on the vine, we at MBA 

felt that more borrowers, not less, should be encouraged to utilize 

its programs, programs we knew to be safe, sound, and affordable. 

And so, with so much credit drying up, it has become a lifeline to 

borrowers and a key component to our Nation’s economic recovery. 

I would like to take a moment, Mr. Chairman, to acknowledge 

the priority this committee has given on a truly bipartisan basis to 

reinvigorating FHA. Working together, we passed a strong FHA 

modernization bill as part of last year’s Housing and Economic Recovery Act. Many of the provisions of that legislation were ones 

MBA had advocated even back in the years when I was its chairman, reforms that will allow FHA to play an expanded role in the 

current housing crisis for years to come. 

Now, here is the good news: These efforts have worked and FHA 

is back. It has gone from a mere 3 percent of the market share 18 

months ago to a healthy 20 percent today. That is quite a rebound, 

and it is where we believe FHA should be. 

But as we applaud FHA’s turnaround, that increase in volume is 

a double-edged sword that requires FHA and FHA-approved lenders to be more vigilant than ever about who is allowed to originate 

FHA loans. Much like you, we are concerned that some unscrupulous lenders may now be turning their attention to FHA and its 

programs. To be clear, MBA strongly opposes mortgage practices 

that jeopardize consumers and damage the reputation of the mortgage industry. 

In the next few weeks, Mr. Chairman, MBA will be unveiling its 

FHA agenda for the new Congress. Let me touch briefly on the 

issues that will be at the heart of this agenda. 

First, we need to provide FHA with greater resources, both staff 

and technology, to expose and eliminate lenders that do not uphold 

ethical standards. MBA has long supported an increase in staff and 

newer technology to enable FHA and Ginnie Mae to better serve 

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49 

ing for this purpose under HERA, and now we want to work with 

you to ensure these funds are appropriated. 

FHA faces enormous challenges in managing its programs in an 

ever-changing world, and it would be unfair to expect FHA to respond to the housing crisis with anything less than our full support. Moreover, MBA believes that FHA cannot keep pace with an 

industry that is becoming increasingly technologically driven as 

long as it lacks the authority to use its revenues to invest in technology. Improvements in the FHA system will allow it more effectively to manage its portfolio, thus increase efficiencies and lower 

operational costs. Such an investment would yield savings far in 

excess of any initial cost. 

Second, we need to approve the quality of FHA originations. 

MBA believes that an integral part of protecting the soundness of 

FHA is ensuring the mortgage lenders and mortgage brokers that 

participate in the program and originate FHA-insured mortgages 

have the confidence and the wherewithal to protect consumers and 

taxpayers from undue loss. MBA supports a bonding requirement 

for mortgage brokers to participate in the program, just as there 

is such a requirement in place now for mortgage lenders. 

We all support net worth requirements to assure that every lender has a stake in the industry. We believe this committee and Congress were right to reject proposals over the last 3 years to lower 

FHA’s financial requirements. 

And, finally, we continue to push for ways to reduce mortgage 

fraud. As FHA endorses more and more mortgages, its insurance 

fund runs the risk of being exposed to higher levels of mortgage 

fraud. According to the Mortgage Asset Research Institute, reports 

of mortgage fraud increased 45 percent in the second quarter of 

2008 from the same period of the previous year. 

Mr. Chairman, on behalf of MBA, we look forward to working 

with the committee on our shared priorities: stabilizing the markets; helping keep families in their homes; and strengthening regulation of our industry to prevent future relapses. I know it may be 

a little difficult for some people to believe, but I am here today as 

the president and CEO of MBA to say that we need more and better regulation in this field. Thank you for the opportunity to testify. 

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

60 of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. Hanzimanolis? 

STATEMENT OF GEORGE HANZIMANOLIS, CRMS, FOUNDER, 

BANKERS FIRST MORTGAGE INC., AND PAST PRESIDENT, 

NATIONAL ASSOCIATION OF MORTGAGE BROKERS (NAMB) 

Mr. HANZIMANOLIS. Good afternoon, Chairman Frank, Ranking 

Member Bachus, and members of the committee. My name is 

George Hanzimanolis, and I am the past president of the National 

Association of Mortgage Brokers and the founder of Bankers First 

Mortgage. Thank you for inviting NAMB to testify today on FHA 

oversight of loan originators. 

The FHA program has helped insure over 34 million properties 

since its inception in 1934. The program was created to help home 

50 

buyers who may have had some financial problems in the past or 

didn’t have a lot of money saved. 

Since subprime products have slowly dissipated and conventional 

loans are very difficult to obtain for some borrowers, the FHA program has become a viable alternative. As such, the FHA has experienced an increase in interest among loan originators and borrowers. 

There are significant differences between subprime and FHAoriginated loans. The FHA has some controls in place to prevent 

losses similar to those seen in the subprime market. If HUD is able 

to identify problematic individuals, properly monitor its mortgagees, and is empowered to disbar them in a reasonable timeframe, 

losses should be minimal; however, even conservative mortgage 

lending is expected to have some losses. In times of economic instability, FHA premiums may need to be adjusted to cover added risk. 

In order to provide stronger protection to the FHA insurance 

pool, NAMB believes Congress should allow risk-based pricing for 

FHA premiums and repeal the 1-year moratorium or implement a 

complete government subsidy of FHA loans. 

There are three types of FHA loan originators: supervised mortgagees, which are depositories; nonsupervised mortgagees, such as 

mortgage lenders who are not depositories; and finally, nonsupervised loan correspondents who are often mortgage brokers who 

originate for one or more sponsors. A loan correspondent must be 

sponsored by a fully approved supervised or nonsupervised direct 

endorsement mortgagee who agrees to underwrite and fund the 

FHA loan. 

Mortgage brokers never underwrite the FHA loan. A sponsoring 

lender always underwrites the FHA loan and makes the final lending decision. There are eligibility requirements, including HUD policy and regulatory criteria a mortgage broker must adhere to in 

order to become an approved FHA loan originator regarding operations, employees, credit checks, licensing, auditing, and more. 

To become more effective in compliance and enforcement, NAMB 

suggests the following: remove the $250,000 and $63,000 net 

worth; require FHA originator applicants to be on an individual 

basis and subject to registry requirements of the SAFE Act; update 

the Neighborhood Watch early warning system; and increase the 

efficiency and speed of reviews performed by the Mortgagee Review 

Board. 

Net worth is a false predictor of honesty, integrity, and performance; and a minimum net worth does not indicate the competency 

of the originators within the company. Current market reality as 

witnessed by hundreds of mortgage bankers, lenders, and Wall 

Street firms that have gone out of business proves that net worth 

can disappear quickly and without notice. Net worth is not available when a borrower seeks redress. 

Instead of the mandate for a net worth, NAMB suggests the implementation of a recovery fund whereby every FHA loan originator 

must contribute to such a fund in order to originate an FHA loan. 

Similar requirements are standard for any person who wants to become licensed in the State pursuant to the SAFE Act. 

Since 2002, NAMB has called for the licensure and registration 

of all mortgage originators through background investigations, testVerDate Nov 24 2008 16:25 Jan 19, 2011 Jkt 063128 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\63128.TXT TERRIE
51 

ing and continuing education. I would like to point out that this 

committee was the first to respond to the need to track individuals. 

NAMB is very proud to have been part of this process and to finally see the bill become law. 

The SAFE Act should help to keep track of all FHA loan originators as they now have to be part of the loan registry. Since the 

tracking system created by the registry applies to each individual 

and not each company, NAMB recommends that the FHA application for loan originators apply to the individual and not just the 

company. If the application process was set up this way, it would 

be easier and more efficient for HUD to track bad FHA actors. 

In order to monitor compliance, HUD instituted the Neighborhood Watch early warning system to identify mortgagees who have 

unacceptable default rates. However, 24 months must elapse to 

achieve a true average. NAMB recommends that HUD update the 

Neighborhood Watch early warning system and expedite the recognition of high default rates. 

NAMB also suggests that HUD put more resources towards improving the Mortgagee Review Board process, including computerization. 

Finally, the temporary increase in FHA and GSA loan limits in 

the Economic Stimulus Act of 2008 is having a significant impact 

in the high-cost areas, particularly in the California housing market. For example, in October 2007, FHA insured only 688 mortgage 

loans in the State. A year later, the FHA insured over 14,000 home 

loans in California. Under the proposed new limits by FHFA and 

FHA, most areas in California and other high-cost areas are scheduled to experience significant reductions due to the transition for 

the terms of last year’s stimulus bill to permanent loan limit provisions in the Housing and Economic Recovery Act. 

We look forward to working with you and HUD to help sustain 

the FHA program and all it has to offer consumers. Thank you. 

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

page 67 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Hanzimanolis. 

Let me begin by saying that is striking. I have been a big advocate, as you know, of keeping the loan limit. I just want to be clear 

on all of it. The single most variant price in America, based on geography, is housing price because of the immobility. Virtually every 

other price, given the mobility of things these days, is either uniform or varies very slightly. House prices, housing not being mobile, vary greatly. For the Federal Government to maintain one single house price, it has to be either too high somewhere, too low 

elsewhere and skewed. 

I am pleased to be able to report to you—you probably heard this 

as you patiently sat through this longer hearing this morning— 

that in the economic recovery plan, there will be legislation that 

will keep the loan limits up for this year. And then, because it is 

not healthy to do it year by year, I am hoping that this year we 

will set a higher limit indefinitely. 

What we have also done is—standard metropolitan statistical 

areas were not geared to be a predictor of the relevant house price 

because you can have an SMSA with widely variant housing markets even within one area. So we have given the administrators the 

52 

authority to set subareas for the purpose of assessing the appropriate median. 

But as much as I was for that—those figures you gave us, something like 600 to 14,000—it is one of the best demonstrations of the 

success of an action that I can see. So I thank you for that. 

Let me just do a couple of things. As I understand it—because 

in order to be honest, there was some concern before—the ranking 

member had been a strong advocate of mortgage licensing, and that 

wasn’t always one of the most popular ideas he put forward. But 

I take it that there is now general agreement that is an important 

thing to do; is that correct? 

Mr. COURSON. From the mortgage banker’s standpoint, that is 

correct. And I will admit—being the new CEO, I will admit that 

we were opposed to individual license fees, as the ranking member 

knows, for a number of years. But, look, we are in a situation now 

where we need to restore faith in the mortgage industry, and there 

are a number of bold and aggressive actions we need to take. 

So we are in support. 

The CHAIRMAN. I appreciate that. And you were very lucky that 

the ranking member is far more gracious than I. So he will accept 

your acknowledgement in that spirit. 

But I appreciate the point you made about regulation, and that 

if that is done right, regulation is promarket. The absence of regulation can be very bad for the market because confidence is an important part of a well-functioning market. And when people don’t 

have confidence, you get a resistance to participating. So having 

people know, okay, I am going to be dealing with this individual, 

and he or she is licensed by a competent authority, that is one 

step—not the only step—towards giving people some assurance. 

Let me just ask one more question and turn it over to—Mr. 

Hanzimanolis, you gave a list of things you thought could be done 

to improve things. Could you tell me which of those could be done 

by regulation, which would require a statutory change? If you don’t 

have that—if you don’t have it now off the top of your head, let us 

know because we do want to make these—yes, sir. 

Mr. HANZIMANOLIS. We will have a list and we are going to release it next week. 

The CHAIRMAN. Let us know we can do—which ones are statutory and which ones are not. 

Let me ask one other thing. It has been—on risk-based pricing, 

by the way—you follow as well, that came from the United States 

Senate; and I think it had its motivations in some people who were 

in some competitive situations. I have this one concern about riskbased pricing and that is, I don’t want a hardworking man or 

woman making $50,000 a year who takes a loan and makes the 

payments ultimately to have to pay a lot more than I would pay. 

And I would like to work out a way so that the risk-based pricing, 

that the burden falls on those people who are risks, but not unduly 

on everybody. And I will ask your help on that. I would like to return the right to do risk-based pricing, but in a way that does not 

unduly damage people in lower incomes. 

But let me ask you about the only other controversial one, sellerfinanced downpayments. Do either of you have any views on that? 

53 

Mr. HANZIMANOLIS. Our position has been to support the seller 

downpayment assistance in the past. We are evaluating that now, 

and especially given the numbers that we hear— 

The CHAIRMAN. Let me make this—Mr. Courson, let me ask 

what your sense— 

Mr. COURSON. We are opposed to that, the seller-financed. 

I was—I just resigned as chairman of the California Housing Finance Agency, and those housing financing and many other downpayment assistance programs are available to borrowers for FHA 

loans that are not seller— 

The CHAIRMAN. Let me put it this way. 

I think there is—and many of my colleagues who represent minority communities have been interested in this. I think there is 

a burden that exists on those who think seller-financed has a role 

to play to show us how we can do that to minimize the risk. And 

we would be willing to entertain that, but I think that is what is 

going to be have to be done. So I invite you to work with others 

to see if we can find ways to minimize the risk. 

We had proposals for a minimum credit score and some other 

things. Mr. Olson, behind me, did very good work in trying to make 

that less of a problem without throwing out the whole thing. So we 

will need a consensus if we are to go forward. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. Let me ask Mr. Hanzimanolis, you and 

Mr. Courson, what are you all doing to encourage lenders to defend 

themselves from fraudulent mortgage schemes? Are there any programs that you have found helpful or that you believe that Congress could benefit from knowing about? 

Mr. COURSON. We are very concerned. Obviously, it is a strain 

on us and our members and our industry. So what we are doing 

are a couple of things. 

We have developed a model mortgage fraud bill, and we are taking that to the States—to each of the States and introducing a 

model fraud bill that really puts—in many States mortgage fraud 

is not even in the same category as other fraud. So this would create a statutory basis in each State to prosecute on a criminal basis 

mortgage fraud. 

The second is that a group of our members—and we are working—we are doing the work for them—are putting together a mortgage fraud database. This will be—it is a very expensive, very big 

project. All of our large members are in it, and they will be able 

to submit—and this will have mortgage insurers, lenders as well— 

data on fraud that they see either by their employees who have 

been terminated or by borrowers into a database. They are going 

to make no judgment as to whether it is or is not guilty—not guilty 

and so on. But the data is going to go in and be able to be shared 

by a broad base. 

We need transparency. We need to have transparency between 

lenders on fraud that is taking place one against the other. 

Mr. BACHUS. Sure. How about the mortgage brokers? 

Mr. HANZIMANOLIS. The National Association of Mortgage Brokers developed the Lending Integrity Seal of Approval. We rolled 

that out this past year, and it holds mortgage brokers to a higher 

54 

standard in addition to all the things that you see in the SAFE Act, 

which is the equivalent background check. 

Before it was ever required, we required a criminal background 

check, education, ethics, and then also adhering to our code of ethics and best business practices. And anyone who is found not to 

comply with that would be thrown out of the association and reported to the State associations and also possibly the regulators, 

depending on what the situation was. 

Secondly, as mortgage brokers, we are always working with our 

lenders, our large lenders, and we have a number of them that are 

industry partners within our organization. So we meet with them 

regularly to try to determine what issues there might be in the 

marketplace and how we can better make corrections within the industry to prevent fraud. 

I think we are making some great steps in that direction. 

Mr. BACHUS. Thank you. 

Let me ask both of you: You have heard a lot about bankruptcy 

cram-down, and it is back again. I will tell you that I am uneasy 

about that provision because I—it sounds wonderful, and it actually—since it applies to other properties, it almost seems like a fair 

thing to do. But I am concerned that it could cause maybe even almost an immediate increase in the cost of a mortgage or in the interest rate that is going to be factored in and everybody is going 

to pay it. 

Do your associations have concern about these proposals? 

Mr. COURSON. I think the mortgage bankers’ concern is probably 

pretty well-known by this time about the cram-down, and we are 

concerned. And we are concerned not only for the immediate effects; it is the long-term effects on the markets and the security 

holders. 

And, frankly, thinking about where we are at FHA, I will tell you 

that Mr. Murray this morning talked about the fact that if there 

is a cram-down, FHA will not pay the lender the amount of the 

cram-down as part of the claim. That means that lender, therefore, 

has to pay that and has to, more importantly, advance that cash 

through to the Ginnie Mae security holder. 

Even for big lenders, that is an issue. But for your smaller and 

medium-sized servicers, it could get to the point, Congressman, 

where they frankly just don’t have the cash or capital. And now 

what have we done? 

Ginnie Mae takes the responsibility of making good on their 

guaranteeing passing back. So there is—I won’t take your time, but 

there are many issues that have to be addressed despite an agreement that we heard about yesterday. I wouldn’t say that was a real 

agreement in terms of really addressing all of the issues that need 

to be addressed, particularly the FHA— 

Mr. BACHUS. My concern has been an increase in the interest 

rate. But I think what you are saying is that another concern is 

not only just the availability of mortgages, but what you are saying 

is, a shift or the private market won’t be able to come back as 

quickly, I guess, is that— 

Mr. COURSON. Congressman, I know that history tends to repeat 

itself. And once you statutorily change a contract by allowing a 

cram-down, the market looks and the investor and the worldwide 

55 

markets look and say, can it happen again? And the fear is, if an 

FHA who doesn’t have the authority to pay those claims—if you 

are an FHA lender and you fear that coming back, what you might 

do is raise the downpayment requirement despite the fact that 

FHA will take this 96.5 percent loan, you—to protect yourself and 

your customer. So it has a lot of ramifications. 

Mr. BACHUS. All right. I agree. And if you all would like to submit a letter concerning that I would invite you to do so. Or— 

Mr. HANZIMANOLIS. It certainly is not an easy topic, and our 

board of directors has met several times to discuss it because while 

we definitely see there are concerns in the marketplace and how 

it could be affected, we also look at the other side of that from a 

consumer standpoint on how many foreclosures could be out there. 

So it took several board meetings to discuss this in great detail. 

At this time, we support the cram-down because we feel that if 

there are people with second or third homes that can easily have 

their mortgages crammed down, why shouldn’t a first-time home 

buyer or someone with a primary home have that same right? 

With the Citi announcement yesterday, we are evaluating that to 

see if we agree with that completely, with that position. But at this 

time, it is something that we are taking the position that we support the cram-down, which some people may find strange that 

someone on the lending side of the business would do that, but we 

feel is a more responsible road to take. 

Mr. BACHUS. Is that just a blanket ‘‘we support it’’ or is it let us 

maybe—it is going to be hard to abrogate contracts in the past, so 

I am not sure you can support it except for going forward. I think 

there are some real constitutional problems. 

But let us just assume that we are talking about mortgages that 

are made tomorrow or the next day, because after the law is enacted, I see tremendous problems. I don’t think you are ever going 

to get something that the courts are going to ever give a green light 

on. I think you are going to see injunctions and all sorts of legal 

action. 

But let us just say that you were to agree to something going forward. Don’t you have some unease about making that permanent 

as opposed to just say they were reacting to an emergency and we 

are going to do this for 6 months and see if it works? 

Mr. HANZIMANOLIS. I think when I say it not an easy decision to 

make, it is not clear to say I am going to take this one side completely. I think—I know our association feels that is some merit in 

the cram-down. But the details are very, very important. 

So I agree with you, Congressman, it is not something that 

should just be, yes, it is an absolute endorsement of it. We need 

to make sure the details are right. That is why we are evaluating 

Citi’s position that was announced yesterday and how it can be instituted to help the consumers and at the same time not affect the 

lending side of the business. 

Mr. BACHUS. Yes. I think even a short term—a shorter term to 

it and an expiration date if you are going to do it, I think that only 

makes sense because I think there are—there had been pretty 

much bipartisan agreement before the last 2 or 3 months that this 

is not a good thing, particularly not long term. Thank you. 

Mr. Courson? 

56 

Mr. COURSON. I was just going to respond to that. I agree. And 

when you look at what was discussed yesterday, despite their opposition to it, if, in fact, there is going to be an agreement, we need 

to make sure that all the elements of the agreement are considered—FHA, VA loans perhaps being exempted. 

If it is crafted because of the subprime issue, then let us include 

subprime loans. Let us have a sunset period. And maybe there 

should be a waterfall that says no Congressman, and no Senator 

wants to put people into bankruptcy. Maybe there ought to be a 

waterfall that says, you go through these steps with your servicer, 

and if you don’t qualify for A, B or C, then move into the cramdown with these strictures in it. 

Mr. BACHUS. I think those would all be moves in the right direction and I think would minimize, at least short term, some of the 

effect. You agree to these things and they are with you for the rest 

of your life. And so I would caution you about responding to an 

emergency with a permanent fix. Thank you. 

Mr. KANJORSKI. [presiding]. I am not going to take very much 

time because it is getting late. I just wanted to welcome to the committee my good friend, George Hanzimanolis. He is not only a constituent of mine, but a friend of mine. And he is a very progressive 

individual in the real estate community. 

Mr. BACHUS. Mr. Courson is, too. 

Mr. COURSON. Thank you. 

Mr. KANJORSKI. The question I have, just to sum this up is, all 

day today I have been sitting in meetings that give some pessimistic views of what we can expect and where we are going. 

Could you tell us your opinions of where we are vis-a-vis real estate, the deflation that is occurring in real estate? And if you anticipate a turnaround in real estate and the economy, when and 

under what circumstances? It gives us an opportunity for some of 

the viewers of this meeting to get an optimistic view before we 

bring this hearing to a close. 

Mr. COURSON. Mr. Chairman, as the new president and CEO, I 

am sure that my research and economic department will shudder 

when I respond to your question, but I will. 

I think our view is—and we have said clearly that this not going 

to be a quick turnaround. This is going to be a slow process, and 

I think the market in terms of real estate values and so on—remember—I must say that we have to remember that there are few 

States impacting a large amount of the numbers that we are seeing. And being from California, being one of those States, there are 

many parts of the country where, in fact, we have seen the diminution of value the way we have others. So it is a very uneven—when 

you look at it globally, it is a big number. But it is very uneven 

regionally. 

But having said that, I think that the greatest concern now is 

we were seeing real estate obviously decline. Now we have the jobs 

issue. People have to have jobs. We are now moving into delinquencies and loans coming into default that are prime loans because of the lack of economic activity and the lack of jobs. So we 

are into another set of borrowers. So we think that until you solve 

the jobs issue, until the economy can start moving forward, we are 

not going to see a substantial improvement in prices. 

57 

Mr. KANJORSKI. George? 

Mr. HANZIMANOLIS. I agree with Mr. Courson. It is not something that turns quickly, but I think there are things we can do, 

especially with regards to FHA, that may be able to help us move 

this along. Certainly, the more mortgage programs that are available to the consumer, the quicker the inventory dries up; and I 

think we all agree if inventory—if more people out there are able 

to buy homes and the inventory dries up, then we will start to see 

things move in the right direction again. 

That is one of the reasons in my testimony I mention the idea 

of eliminating net worth from mortgage brokers when it comes to 

offering FHA and, instead, putting in a recovery fund. It is more 

responsible and it allows mortgage brokers to be able to offer the 

FHA product to more people. Those people who deal with mortgage 

brokers throughout the country would have access to homes, easier 

access to credit and I think that would help. We also—the $7,500 tax credit that was passed and is in effect 

until July 1st; personally, as a mortgage broker dealing with customers every single day—it is a wonderful program and very, very 

well received by the consumers. I would love to see if that is something that can continue on because a lot of people are coming out 

and buying homes now because of that. 

So certainly jobs are an issue and these others are issue, but 

what we have control over here is helping the real estate market; 

and I think including mortgage brokers more, by allowing them to 

offer more products, would certainly help the consumers and help 

the economy. 

Mr. KANJORSKI. Thank you, George. 

We are now at that time where the Chair notes that some members may have additional questions for this panel which they may 

wish to submit in writing. Without objection, the meeting record 

will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record. 

The meeting is adjourned. 

[Whereupon, at 2:16 p.m., the meeting was adjourned.] 

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A P P E N D I X 

January 9, 2009 

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