U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

80–185 PDF 2013

S. HRG. 112–755 

OVERSIGHT OF THE FEDERAL HOUSING ADMINISTRATION: EXAMINING HUD’S RESPONSE TO 

FISCAL CHALLENGES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING HUD’S RESPONSE TO FISCAL CHALLENGES 

DECEMBER 6, 2012 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

ERIN BARRY FUHRER, Professional Staff Member 

WILLIAM FIELDS, Legislative Assistant 

BETH COOPER, Professional Staff Member 

ANDREW OLMEM, Republican Chief Counsel 

CHAD DAVIS, Republican Professional Staff Member 

DANA WADE, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, DECEMBER 6, 2012 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

Senator Vitter ................................................................................................... 4 

Senator Menendez ............................................................................................ 4 

WITNESS 

Shaun Donovan, Secretary, Department of Housing and Urban Development . 5 

Prepared statement .......................................................................................... 27 

(III)

(1) 

OVERSIGHT OF THE FEDERAL HOUSING ADMINISTRATION: EXAMINING HUD’S RESPONSE TO FISCAL CHALLENGES 

THURSDAY, DECEMBER 6, 2012 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:06 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. Thank you for 

joining us, Mr. Secretary. 

I asked you to testify today because I am deeply concerned about 

the recent report that the FHA could potentially need taxpayer 

support for the first time in its 78-year history. I would like you 

to help the Committee gain greater insight into the fiscal challenges at the FHA and what HUD has done and can do to mitigate 

losses and address the shortfall in the capital reserve ratio. 

FHA has been helping stabilize the mortgage market by ensuring 

that qualified low- to moderate-income and first time home buyers 

have access to mortgage credit since 1934. Since the beginning of 

the financial crisis, the FHA has increased its market share from 

below 5 percent in 2006 to about 30 percent at its peak volume in 

2009 in pursuit of that mission. This countercyclical expansion was 

essential to the mortgage market, especially for first-time home 

buyers who comprised 78 percent of single-family purchase loans 

insured by FHA in 2011. 

FHA’s multifamily and health care insurance programs have also 

played an important countercyclical role since the financial crisis, 

with a fourfold increase in volume from 2008 to 2011. According to 

Mark Zandi, chief economist at Moody’s Analytics, without the 

FHA’s countercyclical support, and I quote, ‘‘the housing market 

would have cratered, taking the economy with it.’’ 

However, providing a backstop for mortgage credit when private 

sources flee from the market has a cost. The losses at the FHA 

stem from the now prohibited seller-funded downpayment program, 

heavy losses in the reverse mortgage program, and loans made at 

the height of the crisis to prevent a cratering of the housing market. While HUD has already taken some actions to prevent the Mutual Mortgage Insurance Fund for single-family loans from seeking 

2 

Federal funds, the Fiscal Year 2012 Actuarial Report suggests that 

much more needs to be done to prevent such a draw. 

I want to hear more today about the administration’s actions and 

proposals to manage the risks to taxpayers stemming from the 

older books of business and what safeguards are in place to ensure 

the quality and sustainability of the new books going forward. 

If the administration’s actions and proposals will not be sufficient to restore FHA’s fiscal health, then I plan to work with my 

colleagues on both sides of the aisle on the Banking Committee to 

find a bipartisan way to make that happen. 

Before I turn to Ranking Member Shelby, I want to recognize his 

work as Ranking Member on this Committee over the past 6 years. 

This may be our last hearing together this year, and we will have 

a new Ranking Member next year. I am proud of our bipartisan 

record over the last 2 years. We continued the tradition of bipartisanship that this Committee has been known for by passing four 

significant bills together this Congress, and I thank Senator Shelby 

for his service. 

With that, I turn to Ranking Member Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman. 

First of all, I appreciate your remarks. I have been on this Committee 26 years, ending it, but I am not ending being on. I will just 

have to move down a notch as I go over hopefully to be the Ranking on Appropriations. I will not be far away, and I will not be far 

from the Secretary on HUD stuff either over there. 

[Laughter.] 

Senator SHELBY. But I enjoy working with this Committee. I 

have enjoyed being Chairman of this Committee in two Congresses. 

The people on this Committee are superb. The staff is superb. And 

this is a very important Committee not only for the Senate but for 

the American people and perhaps the world, as most people know, 

people who are active on this Committee, because banking and 

housing and everything that goes with it goes right to the heart of 

what ticks in America: job creation, availability of money, the regulation of our banks, the Securities and Exchange Commission, 

money laundering, sanctions on Iran. You name it. Most of it, this 

is the active Committee. So I will be around right near here, but 

I will be yielding, moving down one notch next to Senator Crapo, 

and he will do well. 

Having said that, welcome again, Mr. Secretary. Just days after 

the President’s reelection, the FHA released its 2012 Actuarial Report which revealed that the economic value of the FHA Fund has 

fallen to negative $16 billion. A lot of money. That means the 

fund’s capital reserve ratio, as I understand it, now stands at a 

negative 1.44 percent. 

This news is obviously very disturbing to us and to the Secretary, 

for those of us who have long been concerned about the health of 

the FHA. For years, the problems of the Federal Housing Administration have been well known. During the housing boom, the FHA, 

unwisely I thought, guaranteed millions of risky mortgages with 

low downpayments to borrowers with poor credit scores. We are 

3 

reaping that now. These mortgages have resulted in billions of 

losses to the FHA. 

The Federal Housing Administration has made matters worse, I 

think, by failing to come to grips with the magnitude, Mr. Secretary, of the problems. Back in 2007, as the Federal Housing Administration’s poor financial position was becoming clear to all, including right here in this Committee, I urged the FHA to devise 

a credible plan to improve its finances. I stated then, and I will 

quote, that ‘‘before the taxpayers are faced with greater losses, I 

believe we must determine how the FHA got into this position, Mr. 

Secretary, and how it intends to get out.’’ 

Unfortunately, for the past 5 years, the FHA’s leadership has understated their problems and sought to kick the can down the road. 

This is now the fourth year in a row that the FHA Fund has been 

below its statutory minimum capital levels. Yet each year we are 

told that this is a temporary dip and that within a few years everything will be fine. 

In fact, in 2009, Mr. Secretary, you told this Committee that the 

drop in the capital ratio was expected to be ‘‘temporary,’’ and that 

it would ‘‘return above 2 percent within the next 2 or 3 years, even 

if FHA were to make no policy changes at all.’’ 

We now know this forecast was way off the mark. The administration, however, continued to be optimistic. In 2011, for example, 

HUD still had its projections showing the FHA’s capital ratio 

reaching 2 percent in 2014. Now, despite all these reassurances, 

the Actuarial Report projects that the FHA Fund has a capital reserve, as I mentioned earlier, of a negative 1.44 percent. And what 

is the response of the FHA’s leadership here? 

Just this year, after further declines in the FHA Fund, both Secretary Donovan and Acting FHA Commissioner Carol Galante testified to two different Senate Committees that the fund would ‘‘return to the congressionally mandated capital reserve ratio of 2 percent by 2015.’’ 

Needless to say, I am not nearly as optimistic about the future 

of the FHA. I hope it works. I hope it does. 

The inability of FHA’s leadership to clearly recognize and address its problems is raising doubts, Mr. Secretary, about their 

credibility and their willingness to properly manage FHA’s financing. I think it is time for FHA to face facts. We have to. 

First, the capital reserve ratio, the Federal Housing Administration Fund, is dangerously low. You know that. And it has shrunk 

nearly every year since 2006. 

Second, the fund’s capital ratios have been below FHA’s statutory 

obligations every year since 2008. 

Third, every year since then, future growth in the capital ratio 

has underperformed in relation to FHA’s predictions. Hopefully, 

the shock produced by these latest projections will finally be a 

wake-up call for everyone. Hard choices lie ahead for this program. 

We have talked about this. 

FHA leadership, I believe, must fully realize its existing authority to shore up the value of this fund. Additionally, Congress must 

consider reductions in permissible risk layering and further underwriting reforms and a reexamination of premium structures. It is 

4 

time, I believe, to get serious reform of FHA before it needs a taxpayer bailout, if it is not too late already. 

I wish you well, Mr. Secretary, but you have a real challenge 

here. We do with you. 

Thank you. 

Chairman JOHNSON. Thank you, Senator Shelby. 

Are there any other Members who wish to make a brief opening 

statement? Senator Vitter. 

STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thanks, Mr. Chairman. Just briefly, I want to 

agree with the comments of our Ranking Member, Mr. Shelby. And 

our general concern is that we have seen this coming for a while. 

We have been talking about it, and the response from the administration has been very modest. Unfortunately, our worst fears are 

coming true, and even today I am very concerned that the response 

even given this news is just way too modest. 

In discussing last year’s Actuarial Report, the Acting Commissioner, Carol Galante, said there is no evidence or widespread prediction that home prices are going to decline to the kind of levels 

that would require a bailout. Yet right now the question is quickly 

becoming not if but when. And, still, even in the Secretary’s testimony today, we are only talking about things like waiting until the 

second quarter of next year to raise premiums and then buy ten 

basis points. 

So I would really urge the Secretary and others to consider other 

more aggressive, more proactive measures. Even the Washington 

Post, which is not exactly a right-wing think tank, said recently, 

‘‘Right now the critics are starting to look pretty prescient. Affordable possession of one’s own home is the American dream. Government support for excessive borrowing has turned into a national 

nightmare.’’ And the focus of that editorial was we still have not 

fundamentally reformed that, including at FHA. So I hope we start 

getting on that track starting today. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Mr. Chairman, thank you very much, and I 

will be brief. I look forward to hearing the Secretary’s response on 

how FHA balances the goals of remaining self-sufficient without 

taxpayer funds, but also helping what is still a fragile housing market and ensuring that first-time home buyers can get credit. 

There is a clear case to be made, in my mind, that but for FHA 

in the midst of this housing crisis we would have a far greater crisis on our hands. And so reconciling the fiduciary responsibilities 

here to the taxpayers as well as the mission to people of America 

is incredibly important, and I look forward to hearing that. 

And with your indulgence, Mr. Chairman, when it comes to my 

time to question, while I certainly care about FHA, I have an even 

more pressing issue in the State of New Jersey after thousands of 

homes were lost, lives were lost, and we are facing the greatest 

devastation the State has ever had. The Secretary has been 

charged by the President in that regard to be the—I call it ‘‘czar,’’ 

5 

but whatever the appropriate title is, and I will have some questions in that regard on behalf of my State. 

Thank you. 

Chairman JOHNSON. Thank you all. 

I want to remind my colleagues that the record will be open for 

the next 7 days for opening statements and any other materials 

you would like to submit. 

Now I would like to briefly introduce our witness. The Honorable 

Shaun Donovan is the 15th Secretary of Housing and Urban Development. This is his ninth time before the full Committee. 

Secretary Donovan, you may proceed with your testimony. 

STATEMENT OF SHAUN DONOVAN, SECRETARY, DEPARTMENT 

OF HOUSING AND URBAN DEVELOPMENT 

Mr. DONOVAN. Mr. Chairman, thank you, Ranking Member Shelby, and Members of the Committee. Thank you for the opportunity 

to testify today regarding the status of the Federal Housing Administration’s mortgage insurance programs. I, too, want to add my 

thanks to Ranking Member Shelby for his leadership and partnership on so many issues these last few years. 

This is an important moment for our housing market and our 

Nation’s economic recovery. As 2012 draws to a close, there are encouraging signs: housing construction growing faster than at any 

time since 2008, the strongest year of home sales since the economic crisis began, and rising home values lifting 1.3 million families above water in the first half of the year alone. 

FHA’s programs have been a critical component of this economic 

recovery. That should come as no surprise given the programs’ 

goals and history. With the dual mission of providing access to 

home ownership for underserved, low-wealth populations and critical financing for multifamily developments, nursing homes, assisted living properties, and hospitals, the FHA is designed to fill 

gaps in the market, meet important community needs, and act as 

a stabilizing force during economic distress. 

It is clear that FHA has done just that. By ensuring much needed liquidity in the Nation’s mortgage finance markets, FHA was a 

vital, stabilizing force as we experienced the worst economic decline 

since the Great Depression. 

In the last 4 years, the FHA has made home ownership possible 

for over 3.5 million families, including 2.8 million first-time buyers 

and for 50 percent of all African American and Latino home buyers 

last year. While FHA has acted as a critical support, it has not 

been immune to the stresses of falling home values and rising unemployment of the recession. According to the independent actuary’s annual report on the MMI Fund, this fiscal year the capital 

reserve ratio fellow below zero to negative 1.44 percent, representing a value of negative $16.3 billion. 

We take and I take these findings extremely seriously. As stewards of taxpayer dollars, we have, since the start of this administration, made it a priority to strengthen the fund, and we are continuing to take aggressive action to return the fund to fiscal health, 

including those measures just announced in our annual report to 

Congress. 

6 

It is important for me to start by highlighting several key points 

that put the actuary’s report in perspective. Fully $70 billion in 

claims are attributable just to the 2007–09 books of business. 

These 3 years are the major source of stress to the fund. In fact, 

in its report, the actuary attests to the high quality and significant 

profitability of the books insured since 2010, the strongest in the 

agency’s history. 

It is important to understand this report does not in and of itself 

mean that it will be necessary for the FHA to use its authority to 

draw from the Treasury to cover projected losses. While this possibility obviously exists, it is dependent on several factors. 

First, that determination would be made using the assumptions 

in the President’s budget to be released in February, not the assumptions used in the actuary’s report. 

Second, we expect that the new books of business generated after 

2012 will create approximately $11 billion in economic value, further strengthening the MMI Fund. 

Third, since the Actuarial Report is a point-in-time snapshot, it 

does not take into account changes FHA recently has announced to 

address the health of the fund. The final accounting of any shortfall would be done at the end of fiscal year 2013 in order to determine whether funds from the Treasury are necessary. 

I would also like to address the primary drivers of the decline in 

the capital reserve ratio as compared to last year’s projections. 

First, the house price appreciation estimates used by the actuary 

for this review were significantly lower than those used last year. 

That may seem counterintuitive given the economic progress we 

have seen, but the actual turnaround in the market occurred later 

than was projected in last year’s forecast. In addition, for technical 

reasons, the forecast is also somewhat artificially dampened by the 

significant increase in refinancing activity in the market this year. 

Second, the continued decline in interest rates, while good for the 

overall economy, impacts the actuary’s model by indicating marginally higher defaults as well as lost revenue to FHA as its borrowers 

pay off their mortgages to refinance at lower rates. 

Third, based on recommendations made by the GAO and HUD’s 

IG and at the direction of FHA, in this year’s report the actuary 

changed the way it reflects losses from defaulted loans and reverse 

mortgages in the economic value of the MMI Fund. 

Let me be clear. These are all important factors to consider when 

explaining the current status of the fund, but they do not minimize 

the seriousness of this report in any way. As I said at the outset, 

we have already taken significant actions to protect and strengthen 

the fund, including premium increases and changes to credit policy, 

such as increasing downpayments for lower credit score borrowers 

and ending seller-financed downpayment assistance. With your 

help, our efforts have added well over $32 billion to the fund. 

The measures I will outline today further address the primary 

source of the problem: losses stemming from legacy books of business, particularly those insured during the 2007–09 period, and are 

designed to reduce our loss severities by at least 5 percent, generating approximately $3 billion in economic value over the next 2 

years. 

7 

First, we have announced changes to our Loss Mitigation Program that targets deeper levels of relief for struggling borrowers to 

more effectively assist families in meeting their obligations and 

avoid costly foreclosures for FHA. Similarly, we are streamlining 

the use of short sales and aligning our practices with those recently 

announced by the GSEs to provide more families the opportunity 

to avoid foreclosure while reducing costs for the FHA. And we have 

dramatically increased the use of alternative dispositions for defaulted loans, including our new Distressed Asset Stabilization Program. The improvement in recoveries to FHA from this program is 

estimated at over $1 billion this year alone. 

We are also taking proactive measures on new loans. In particular, we are reversing a policy change made over a decade ago 

that allowed borrowers to stop paying premiums after their loans 

reached a certain loan-to-value ratio. This change left the FHA 

without premiums to cover the losses on loans held beyond the period for which those premiums were collected, reversing the policies 

expected to improve the value of the fund by $2.6 billion in this fiscal year alone. 

In addition, we will raise our annual mortgage insurance premiums by 10 basis points. We estimate this will increase costs to 

new borrowers by about $13 per month, but it will also further reduce our footprint in the market while adding an estimated $1 billion of additional economic value to the fund this year. 

As private capital returns, FHA must continue to balance pricing 

to ensure that it occupies a smaller, healthier share of the market. 

In fact, FHA’s market share has been declining since 2009, and 

2012 represents our lowest-volume year since the start of the economic crisis. 

While I focused today on FHA’s single-family programs, I wanted 

to take the opportunity to reassure the Committee that our efforts 

to protect our insurance funds span the range of our programs. We 

have already raised our mortgage insurance premiums on multifamily and health care loans and instituted other risk management 

reforms, such as special reviews for large loans, post-commitment 

reviews by credit risk officers, and an active loan committee process. 

Even as we use our existing authority to take these aggressive 

measures to protect the fund, other actions require your partnership. In addition to the increased indemnification authority and 

broader geographical enforcement powers recently passed by the 

House, we have a number of proposals designed to place FHA in 

a stronger fiscal position over the next 12 months and beyond, including new loss mitigation authority, additional enforcement authority, and greater administrative flexibility in managing the reverse mortgage program. 

The house has recently passed important bipartisan FHA reform 

legislation, and we look forward to continuing to work with both 

chambers to create the tools we need to strengthen the program, 

meet its mission, and place the MMI Fund back on firm footing. I 

encourage the Senate to engage in discussions that build on this 

progress in the House in order to achieve a consensus that will give 

FHA these tools as quickly as possible. 

8 

There are no guarantees that the actions I have described will 

prevent FHA from tapping into the Treasury next September. However, swift action from Congress, coupled with the $11 billion in additional value from the new fiscal year 2013 business, will reduce 

the likelihood that a Treasury draw will be necessary. 

Furthermore, these changes, as well as those we have made over 

the past 4 years, have laid the foundation for a stronger FHA and 

a healthier MMI Fund that supports the recovery of the housing 

market and economy while actively reducing FHA’s market share. 

As we work together to adapt and reform the FHA program, we 

must proceed with a balanced approach that recognizes both the 

challenges to FHA and its contributions to our economy. We are 

eager to work with you to achieve these shared goals. 

Thank you again for the opportunity to testify today, and I look 

forward to taking your questions. 

Chairman JOHNSON. Thank you for your testimony. 

As we begin questions, I will ask the clerk to put 5 minutes on 

the clock for each Member. 

Secretary Donovan, I am very concerned about the FHA’s fiscal 

condition, as detailed by fiscal year 2012 report, particularly the 

negative capital reserve ratio. What action have you taken to restore FHA’s capital reserve and prevent FHA from requesting taxpayer support? 

Mr. DONOVAN. Mr. Chairman, the most important actions that 

we have taken have been in partnership with this Committee, and 

I would particularly recognize the fact that you passed a ban on 

seller-funded downpayments, which went into effect and we implemented in 2009. That action alone we believe has saved the FHA 

fund about $12 billion. 

There are additional actions that we have taken. We have raised 

premiums four times, made underwriting changes that include 

raising downpayments for the riskiest borrowers. That series of 

changes has added, we estimate, an additional $20 billion to the 

value of the fund. Quite simply, if we had not taken those actions 

in partnership with you, we would find ourselves in a vastly worse 

position today for the FHA fund. 

Chairman JOHNSON. Mr. Secretary, you have detailed several 

steps that would help stabilize FHA’s finances. Given the condition 

of the FHA’s old books of business, why weren’t these changes 

made earlier? Will these changes allow the FHA to outperform projections again this year and avoid drawing funds from the Treasury? 

Mr. DONOVAN. As I said in my testimony, I cannot guarantee 

that we will not need to draw at the end of the fiscal year. What 

I can say is that I believe we are taking all appropriate steps to 

try to avoid that, balancing both the health of the fund but also the 

fragile recovery that we have in the market. 

For example, we have already moved to increase premiums for 

the fifth time. We believe that that is an appropriate step and that 

it leaves FHA appropriately priced. We would be concerned, however, about going significantly further in raising premiums both because it would have potential negative impacts on the housing market—we are seeing a recovery, but it is still fragile, and we do not 

9 

want to hurt the market and in turn hurt the FHA fund by going 

too far to stop that recovery. 

But I would also suggest, as you see in the chart on the right, 

we are currently—and the independent actuary confirms this, that 

the new books of business are highly profitable. And so I think 

there is, beyond the market question, a question of how far do we 

go in visiting the sins of the past on new borrowers. The premiums 

that are being paid by new borrowers more than cover the expected 

losses. We think that is appropriately priced and will help to 

shrink our market share. But what we need to do is continue to 

focus on these older books of business, and that is why I have focused, in the changes that we have made, we announced in our report to Congress, on steps that will increase our collections from 

these older books of business. 

Just from the asset sales that we have instituted, and we are 

going to ramp up going forward, we have increased the returns on 

these distressed loans by more than 10 percent simply with those 

steps. 

So we need to continue to focus on things, and we have asked 

for authority from you to take steps that would help increase our 

returns on the older books of business. We think those are the most 

appropriate measures that we can take. 

Chairman JOHNSON. Secretary Donovan, one of these steps is 

better loss mitigation by transferring sourcing from servicers who 

are underperforming. What is preventing FHA from doing that 

under its existing servicing contracts? 

Mr. DONOVAN. Quite simply, we need legislative authority to be 

able to force those transfers to happen, and that is a critical step. 

It is something that we have seen in the private market start to 

increasingly happen. It is something we believe would be very helpful to send a very strong message to those servicers that are underperforming. But it is one of a number of steps that we would ask 

that you give us legislative attorney for as quickly as possible. 

Chairman JOHNSON. One more question. Secretary Donovan, the 

Actuarial Report’s finding of a negative economic value in the MMI 

Fund is mainly a reflection of problem legacy loans guaranteed 

during the housing bubble. What steps has FHA taken to improve 

its underwriting criteria and risk assessments for the new loans? 

Mr. DONOVAN. As I mentioned earlier, clearly the steps that you 

took to ban seller-funded downpayment loans were a critical piece 

of that. We also looked at the performance of our loans very carefully, and so in addition the premium increases, we did require a 

10-percent downpayment for our riskiest borrowers. That we believe was a very important step in changing our underwriting. 

We also have taken many other steps on other aspects of underwriting that have to do with what costs can be rolled into the loan, 

and other steps that reduce the effective risk of those loans that 

are quite important. Part of that has been able to be done because, 

quite frankly, we did not have a strong enough risk focus at FHA 

in the midst of the crisis. We have created a very strong risk management focus through the creation of a chief risk officer for FHA— 

that has never existed before—as well as building a team of analysts that are really providing data on an ongoing basis on early 

10 

payment defaults and a whole range of other information that we 

simply did not have before in real time. 

So it is not only the underwriting changes themselves, it is also 

the focus on risk and the way that we are measuring it on a realtime basis that has given us new tools. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Secretary Donovan, lead me through this and tell me if I wrong 

on this, or right, or what. It is my understanding that under the 

statutes now prevailing, the Federal Housing Administration could, 

if necessary or you deemed it necessary, tap the Treasury for an 

endless supply of money. A lot of us would call that a bailout. Do 

you anticipate that? Can you assure us and the American people 

today, as the Secretary of HUD, that FHA will not do that? Or you 

do not know yet? 

Mr. DONOVAN. Senator, I wish I had a crystal ball and I could 

tell you that we will not at the end of the year. Given the Actuarial 

Report this year, obviously I am highly concerned about that possibility. 

Senator SHELBY. Are you getting close? 

Mr. DONOVAN. Certainly we are closer than we have been in the 

past. 

Senator SHELBY. And how close are you, honestly? 

Mr. DONOVAN. What I will tell you is, again, an independent actuarial report is the best I can give you in terms of that view. 

Senator SHELBY. And that is not good, is it? 

Mr. DONOVAN. What it says—— 

Senator SHELBY. The Actuarial Report is not good. 

Mr. DONOVAN. It is not. But one important piece of this is that 

what is required for the actuarial is a review as if we stopped doing 

business on the date of the actuarial. The important thing that we 

can do and that we have done to try to avoid taking funds from 

the Treasury at the end of the year is to look at the revenue we 

expect this year—that is about $11 billion—and to make changes 

to underwriting and other steps that would help avoid that. 

Senator SHELBY. Does that include upping the premium a little? 

Mr. DONOVAN. We have already moved to increase the premium 

an additional 10 basis points, an average of about $13 a month 

that we expect from borrowers. 

Senator SHELBY. And how much money would that be projecting? 

Mr. DONOVAN. That would add about $1 billion just this year 

alone and much more into the future. 

Senator SHELBY. What is the size of your portfolio today, roughly? 

Mr. DONOVAN. It is over $1 trillion when you combine—— 

Senator SHELBY. $1 trillion worth of loans, right? 

Mr. DONOVAN. When you combine all of the various programs. 

Senator SHELBY. And how close are you as far as working capital, so to speak? 

Mr. DONOVAN. It is an important question. Today, even though 

the Actuarial Report shows a negative balance, we have a cash balance of over $30 billion today, $30.5 billion. And, in fact, one of the 

things the actuary looks at, assume that we continue to do busiVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS
11 

ness, assume that we continue to operate, what is the likelihood— 

which obviously we plan to continue to operate. 

Senator SHELBY. Sure. 

Mr. DONOVAN. What is the likelihood that we actually—the cash 

balance goes negative? And the actuarial, despite the worse condition this year, still has a less than 5-percent chance that we actually run through all of those cash reserves going forward. 

Senator SHELBY. Give us the worst-case scenario. It is the first 

week of December now. Say 3 weeks from now, what is your worstcase scenario getting up to the 1st of the year where you might be 

or not be? What would cause you to have a lot of heartburn say 

around the 1st of the year? 

Mr. DONOVAN. The single greatest issue of concern is where the 

housing market will go from here. If the housing market continues 

to recover, as it has this year, that is the most important thing 

that we can see to restore the fund to health. House price appreciation is the single most important variable in the health of the fund 

going forward, and that is also why I will say we are so concerned 

about balancing the steps that we are taking to make sure we are 

not doing anything that would impede the recovery and come back 

and harm the FHA in the long run by decreasing the improvement 

that we see in housing markets. 

Senator SHELBY. We all realize that FHA serves a good purpose, 

but it is just not sound financially. As the Secretary of HUD, 

shouldn’t the fiscal well-being of FHA be one of your highest priorities? 

Mr. DONOVAN. Absolutely. Absolutely. 

Senator SHELBY. And are you just going to deal with what comes 

up like you outlined today? 

Mr. DONOVAN. I would welcome additional ideas and suggestions 

that you may have. I certainly feel that there—we will take steps 

within our power. We would like to work with you, as I have said, 

as quickly as possible to move additional authorities that would 

help us do this. But I am also open today or at any time to additional suggestions about what further steps we could take. 

Senator SHELBY. If you do tap the Treasury—in other words, 

there is a bailout, so to speak, if it is a sizable one—how would you 

pay that money back? Premiums or efficiency or the housing recovery, or all of the above? 

Mr. DONOVAN. We certainly believe that we need to keep FHA 

in a position where our new books of business are producing substantial revenue for the taxpayer. This year alone, we expect our 

new loans to return a $10 billion profit, if I can use that term, to 

the taxpayer. That is the way that we need to continue to restore 

the health of the fund and, should we need to draw on the Treasury, to restore that money to the taxpayer. 

Senator SHELBY. Thank you. 

Thanks, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman, and thank 

you, Mr. Secretary. 

I would repeat what my colleagues have said. It is very disturbing to have a report that shows 1.4 percent negative equity in 

12 

a critical fund, and this is an issue that has not suddenly emerged. 

It has been growing over several years. 

You have indicated that you are taking steps to fix these problems, and many people have said that in the past, too, and, again, 

can you sort of give us some assurance that this time is different? 

Mr. DONOVAN. What I can say, Senator, is that I believe we are 

taking every responsible measure that we can to improve the 

health of the fund, while at the same time not hurting the fragile 

recovery that we have. I do not have a crystal ball, and I believe 

that we need to continue to take input and guidance on getting a 

better picture of the fund. 

One of the reasons why the fund looks significantly worse this 

year than it did last year, we got criticism last year from outside 

experts, from the GAO, from our IG, of the way that we model 

claims in our actuarial. We went back and directed our actuary to 

change the way we model, and that change alone subtracted $13 

billion from the value of the fund. 

So I am not going to sit here and say we have been perfect in 

the way that we have looked at the fund or that we have modeled 

it. And one of my responsibilities is to continue to make changes 

to get as accurate a picture as we possibly can and to take steps 

based on that. 

Senator REED. Let me ask perhaps a related question. As you 

look forward in terms of the health of the fund, one fact, it would 

seem to me—and I would assume it would be explicitly in the 

model—would be an assumption about unemployment rates going 

forward. What unemployment rate are you assuming over the next 

year or so? Because it directly affects payment. 

Mr. DONOVAN. Absolutely. One of the important changes we 

made to the model this year, not to get too wonky here, is to go 

to something that is called ‘‘stochastic modeling.’’ One of the criticisms we had is that we—the way the model worked is we chose 

one path and modeled based on that. State-of-the-art modeling assigns probabilities to a whole different range of paths that the 

economy might go through. So we have actually modeled a vast 

range of scenarios. 

One of the things we looked at last year, that we directed our 

actuaries to look at, was to say: What if interest rates go low? 

What is going to happen to the fund? We ran that last year. That 

scenario predicted that the fund would go negative. In fact, we 

have had what is effectively the low interest rate scenario happen 

this year with QE3, and that has clearly had a substantial impact, 

roughly a $10 billion negative impact on the fund, just from those 

interest rates alone. So those are clearly steps that we are taking. 

We would be happy to share with you the various unemployment 

rate scenarios that we are looking at and home price paths that we 

are looking at. But, again, we look at a range of those to get to the 

best possible prediction. 

Senator REED. You got close to watching this with stochastic 

modeling, but you avoided Bayes’ theorem, so you are fine. 

One of the problems that you face is this series of years of terribly mispriced loans in 2007 to 2009, and it would seem to me one 

of the things that you are trying to do is to clear these as quickly 

as possible. But as you have indicated to us, you need help with 

13 

servicing, that you have to do much more aggressive modification 

sales, and also for the real estate that effectively you own, you 

have to dispose of it. 

Can you comment on how much you think you can achieve in relieving pressure on the fund by doing that, looking back and taking 

care of that period? 

Mr. DONOVAN. We think with a set of changes that we are already taking, that we announced in our report to Congress with 

the actuarial, that include the loan sales that we have taken, 

changes to short sales, changes to what we call our loss mitigation 

waterfall, how we work with borrowers that are in trouble, those 

alone could add about $3 billion to the fund over the next couple 

years. 

What we need help on is that many of our enforcement authorities—and, again, if you think about how we collect on the bad 

loans, enforcement is an important piece of that, to say to lenders, 

you made a bad loan, there was fraud or there was something else 

involved, we need to hold you accountable for that and bring funding back to the taxpayer. There are a number of provisions that 

would help us. 

One is giving us broader geographic authority. We have some 

perverse restrictions right now in legislation in terms of the way 

that we can hold lenders accountable on a narrow geographic basis, 

what we can do to require indemnification of loans, the standard 

for fraud. Those are all pieces of what we would want to work with 

you to get passed very quickly to be able to enhance our enforcement authority. Those as well would likely add billions of dollars 

to the fund. 

As you know, we have been able to recover well over $1 billion 

just this year in settlements around servicing and originations with 

many of our biggest lenders. 

Senator REED. Thank you very much, Mr. Secretary, and thank 

you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. And, Mr. Secretary, 

thank you for your testimony today. You asked for some suggestions, and I would like to make just a few. 

It is my understanding that on the private side right now, FICO 

scores really at 620 is where the market is. And FHA is at 580, 

and basically it is creating a situation where the private lenders 

are being made out to be bad guys because even though your FICO 

scores are 580, they are not doing anything below 620. 

As one of the steps that you might take, would it make sense for 

you to go ahead and get on up to 620? Right now there is huge demand out there, and at some point that is going to diminish, and 

then we will drive back down as people try to get market share 

again. Would it not make sense to go ahead and implement what 

the market is telling you to do? 

Mr. DONOVAN. That is something that we are actually looking at. 

I think it is likely that we take additional steps as we are working 

toward the President’s budget and understanding in more detail 

the results of the actuarial. That is clearly something we are looking at. 

14 

We are concerned that some of the overlays that lenders are putting on go farther than are necessary. In other words, we do believe 

that there has been an overcorrection, if you will, in some parts of 

the market where we have what are very safe borrowers that are 

having a hard time accessing credit. But I also agree that we need 

to be looking at and perhaps adjusting on the FICO side as well. 

Senator CORKER. And, generally, for what it is worth—I appreciate your testimony today. I know we have had discussions about 

that sometimes in the past, and I do realize you had a lot of bad 

loans on the books that you inherited. I do think there are things 

you can do now to really cause the fund to be far more sound, and 

I do think you all are being a little slow in moving that way. 

And so a second one I would move to is reverse mortgages. I 

mean, you are losing your shirt on reverse mortgages. Losing your 

shirt. It is a small part of what you are doing, and yet you have 

got mortgage brokers out there that are making an absolute fortune right now—a fortune. Some of them are good operators. A lot 

of them are schlocky operators. And I do not understand why you 

do not shut the program down for 24 months, as I know has been 

suggested to you. Why don’t you do that? 

Mr. DONOVAN. Once again, Senator, you have hit on an issue 

that is an important one and that we do believe we need to make 

changes on. 

Senator CORKER. But why don’t you just do it? 

Mr. DONOVAN. Well, frankly, we did make changes. We introduced a much safer—better, we thought—alternative through our 

SAVER program. We could effectively do what you said, which is 

to just create a moratorium on the other program. What we are 

concerned about is, particularly given the economic crisis that seniors are going to—have gone through, that we would be eliminating 

an option that works for some seniors if it is done safely in order 

to eliminate also the bad loans that are being made. 

Our preference, if we could get the authority from you to change 

the structure of the program to make it much more effective and 

safe, that would be a better way to go. If we cannot get that authority quickly, we will have to look at—— 

Senator CORKER. I mean, I would think—why can’t we do a 

unanimous consent? It seems to me that most people would be willing to do that. 

Mr. DONOVAN. Let us talk about that today. I would love to—— 

Senator CORKER. I know you have got a partial situation that 

has been very healthy, and it seems to me if you are worried about 

seniors, you could keep the ability to draw down a partial amount, 

which is very safe, and you would eliminate—and you could do that 

all by yourself, and we could worry about the legislation whenever 

it is time. I am willing to look at it now, but just for what it is 

worth, it does feel like there is a lot you could do to make FHA 

healthy today that is not being done. But let us talk further, OK? 

Loan limits. It seems like right now—I mean, Fannie and 

Freddie are down at, I think, 625. You are still up at 729. Wouldn’t 

it make sense to go ahead now and make some changes that need 

to be made? I mean, you can do that yourself. Why don’t we do 

that? 

15 

Mr. DONOVAN. We, as I think you know, supported our loan limits coming down, and they were supposed to expire last year. Congress made the decision to lower the GSEs’ loan limits, but kept 

FHA’s—— 

Senator CORKER. Can you self-implement that, though? You cannot do that without—— 

Mr. DONOVAN. I do not believe, given that Congress explicitly extended those higher limits, that we can take that step and—— 

Senator CORKER. Would you like for us to help you do that? 

Mr. DONOVAN. We have supported before and I will state again 

today that going back to the pre-HERA limits makes real sense, 

and I will go further than that, that we should lay out a path to 

go back to even lower limits that existed before the crisis in a way 

that is done consistent with how we do housing finance reform. 

That is a larger question, but the immediate step of going back to 

the pre-HERA limits is one that we would support. 

Senator CORKER. Well, you are developing a fan, and I hope that 

we can look at some of those things. 

Home mortgage insurance. The way I understand that it works 

is private mortgage insurers, when you get down to a certain loanto-value ratio, the premium is dropped, but also the insurance is 

dropped. And yet you have a $1 trillion in loans on your books 

where the loan-to-value has dropped, they are no longer paying 

premiums, but you are keeping the guarantee in place. That does 

not make any sense to me. Why don’t you continue to make the 

homeowner who has that guarantee continue to make the premium 

payments? That would be something that, it seems to me, would 

be extremely helpful to you during this difficult time. 

Mr. DONOVAN. Once again, an excellent suggestion. We announced with our report to Congress that we are doing that for new 

loans. Unfortunately—— 

Senator CORKER. But why not the trillion that are on the books? 

Mr. DONOVAN. Unfortunately, we cannot go back and modify a 

contract. When that homeowner took that loan, they signed a deal 

with FHA that said this is the way the premium structure would 

work. We looked at this. We fully analyzed it. We cannot break 

those contracts, unfortunately. And so it is something that we’re 

going to need to implement. 

I will say, however, that the value of doing it now in a low interest rate environment is substantially larger on these new loans, for 

two reasons: the lower the interest rate, the faster the amortization 

of the principal, and, therefore, this will be a more valuable 

change; second, because these loans are so low interest rate, they 

will be on our books far larger. So, frankly, not many loans in the 

past have hit that limit. So even though it is a $1 trillion portfolio, 

the value of that change is quite small for the old loans. It is really 

going to be quite valuable for these newer very low interest rate 

loans. 

Senator CORKER. Mr. Chairman, I made no opening statement. 

Briefly, two more questions. 

I see that FHA is now making loans to people who 3 years ago 

were foreclosed upon, and that is a very different standard than 

even exists at Fannie and Freddie. I do not understand. Why are 

you doing that? 

16 

Mr. DONOVAN. This is another area where we are working on 

changes, and here is the issue: We have a significant number of 

homeowners that were responsible homeowners, had good credit 

scores, that lost their jobs in the biggest economic crisis this country has faced since the Depression. And we believe if somebody can 

show that they are back at work and are a responsible borrower 

again, that is somebody that we ought to work with. 

I would agree that our standards are not clear enough in dividing those, so what we believe we need to do is clarify those standards, but not necessarily eliminate the possibility that somebody 

who has done the right thing and through no fault of their own lost 

a job but can now be a responsible homeowner again has the 

chance. 

So my view would be it is not just the 3-year limit that is important. It is: What are the criteria that we set for how somebody reestablishes their credit and being a responsible homeowner? That is 

where I would propose we work together. 

Senator CORKER. OK. My last question, and thank you for your 

patience. First of all, it sounds like there are a lot of things that 

could be done right now to solve a lot of problems, and I hope that 

we as a Committee will figure out a way to work with you on those 

things we need to work with you on, but that you will do the things 

you can do on your own now. 

You and I had a pretty long conversation several months ago 

when Carol Galante had the opportunity, candidly, to assume her 

post on a permanent basis, and we could not get the Administration to agree to not air-drop something and bypass the Committee. 

It was an unfortunate circumstance. But I guess, as I look at it, 

I would just ask you the question: Did we dodge a bullet in appointing her full-time with all the issues that we have at FHA? 

And does she really have the ability to press the Administration to 

overcome political issues to actually cause the fund itself to be actuarially sound? Because it appears to me that we are still not 

quite doing the things we ought to do to make the fund operate. 

And it seems to me that maybe there is a little political pressure, 

and maybe she is not strong enough to make that happen. 

Mr. DONOVAN. Senator, here are the facts as I see them: We have 

taken the most aggressive steps I think in the history of the agency 

to make sure the new business that we are doing is strong. If you 

look at that chart right there, what you will see is huge profitability relative to the history for the new loans that we are making. 

We have only so much that we can do to fix the problems of those 

older loans. 

So I agree with you on many of the steps that you describe today. 

What we should not imagine is that somehow taking those steps 

can take us from the difficult financial condition that we find the 

FHA in today, somehow eliminating what has been an enormous 

trauma in the housing market. 

I have enormous confidence that Carol can and will lead us on 

the path that we need to take. And, in fact, you do not have to take 

my word for it. I think the evidence of the changes that we have 

made, the steps that we took—you remember last year the President’s budget thought that we might need a draw at the end of last 

year. Carol took aggressive steps on enforcement, on changes to unVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS
17 

derwriting that meant instead of close to a negative $1 billion balance, we ended the year with a more than $3 billion positive balance. 

Those were aggressive steps that she took. I listened to her, but 

she took those. And I believe that that is the kind of leadership 

that can help us continue down this path. 

Senator CORKER. Thank you. 

Chairman JOHNSON. Senator Hagan. 

Senator HAGAN. Thank you, Mr. Chairman. And, Mr. Secretary, 

thanks for your testimony today. 

I know that Senator Corker asked about reverse mortgages, and 

I am concerned about that issue. And I am particularly concerned 

that $2.8 billion of the $16 billion economic shortfall are related to 

that program. 

Can you talk a little bit more about why these losses under the 

reverse mortgage program are so severe? 

Mr. DONOVAN. Here is the fundamental problem, without getting 

into too much of the history. At one point when Fannie Mae was 

issuing these loans, they were generally variable rate, and they allowed a borrower to basically draw on, you know, over time the 

amount of money that they needed. 

As that program has switched to being a Ginnie Mae program, 

there is basically no option for those borrowers to do anything but 

draw the full amount. 

Senator HAGAN. And why? 

Mr. DONOVAN. Because we do not have the statutory authority 

to be able to make the changes to the program that would allow 

us to limit the draw up front. That is the change that we are asking that be made. 

Our alternative—and I was just discussing it with Senator Corker—we could basically eliminate or put a moratorium on our regular program and just go to what we call our SAVER program, 

which is somewhat safer. But the problem is we still do not have 

the authority even under that program to avoid this full-draw feature of it. 

So the right answer, in our view, is: Give us the authority to 

make the changes we need so that we end up with what is a safer 

product for FHA and, frankly, a safer and better product for seniors. What we are finding is with this full-draw product, too many 

seniors end up in situations where they cannot cover their insurance and their taxes, and too often we lead to a situation where 

they have more leverage, more debt than their home is worth by 

the time they are ready to sell that home. 

Senator HAGAN. And so you are saying because of that change, 

there is what resulted in the $2.9 billion? 

Mr. DONOVAN. That is for many of these—for most of the new 

loans that we are making, they are at this full draw, and the actuary predicts there are going to be enormous losses on those going 

forward because of this full-draw feature. 

Senator HAGAN. OK. And, also, the last time you testified before 

the Committee, we discussed the National Mortgage Settlement. 

Can you talk briefly about the MMI Fund, how it has benefited 

from the settlement? 

18 

Mr. DONOVAN. In the most direct way, it has benefited by well over $1 billion that came directly to the fund from that settlement 

or that series of settlements. Also important, though, is we put in 

place, not just for FHA loans but for every kind of loan serviced 

by the five banks that were part of it that control 60 percent of all 

servicing, new standards for how they foreclose on loans, how they 

work with troubled borrowers, and in the long run those changes 

will have very important effects not just for homeowners and communities but also benefits to the FHA fund, because we will have 

fewer foreclosures and better recoveries on the loans, whether it is 

through short sales or keeping homeowners in their homes. 

Senator HAGAN. The settlement also includes billions of dollars 

in debt forgiveness for the borrowers, and generally the discharge 

of indebtedness is taxable to borrowers, but certain exceptions exist 

for indebtedness related to principal residences. This exception is 

set to the expire at the end of this year. 

What is the interplay of the expiring tax provision and principal 

reduced from borrowers? And how would the expiration of that provision impact participation in the settlement and the relief that 

borrowers see now? 

Mr. DONOVAN. Well, it would be a cruel irony if homeowners 

have the ability to stay in their homes because of a principal reduction that is both good for them and their lender because it is going 

to lower the losses on that loan in the long term, only to get, come 

tax time, a giant tax bill for that principal reduction, which drives 

them back into delinquency and potentially foreclosure. 

And so the President has made it a real priority to try to get that 

provision into whatever tax extenders we may do at the end of this 

year, and it is a very high priority for us among the many things 

that will be at issue in that tax extender. 

Senator HAGAN. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman. Thank you, Mr. Secretary. 

Again, as I said at the beginning, I have the real concern that 

I think is shared by a lot of Committee Members that the changes 

in reforms FHA has made and you are talking about today are not 

significant enough given the looming threat. And you say they are 

unprecedented. Both of those things could still be true. They could 

be more than ever before, and still not enough given the magnitude 

of what we are talking about. And that is the concern. 

First of all, let us talk about the clear potential now for a taxpayer bailout. Is it not right that under the Federal Credit Reform 

Act it would allow the Treasury to make necessary cash or credit 

transfers to FHA in order for them to continue making payments 

sort of automatically? 

Mr. DONOVAN. That is absolutely correct. That is the way not 

only FHA but other similar programs are designed. 

Senator VITTER. That is obviously significant for the taxpayer. 

We all care about that. Can you commit to us that you will keep 

us and the Congress fully apprised of your moving projections with 

regard to that, and certainly fully apprised when that happens? 

Mr. DONOVAN. I am absolutely committed to make sure that if 

we are going to take that step, you would be fully notified. 

19 

Senator VITTER. Well, my question was a little more than that. 

It was to keep us fully apprised of your current and updated projections toward that issue. Can you commit to us to give us that information, your best projections today and whenever that changes, 

and certainly if that is going to happen? 

Mr. DONOVAN. I do. And, Senator, what I would suggest—we do 

provide a monthly report to Congress on the status of the fund. If 

there is additional information or somewhat different information 

that would be useful to you in that, we are very happy to work 

with you on that. 

Senator VITTER. OK. Well, what I am talking about is, as of 

today, when do you project there is going to have to be a taxpayerfunded bailout? What is your best projection? 

Mr. DONOVAN. What I would say is our best projection will be 

contained in the President’s budget. We are still working on the 

underlying economic assumptions that go into that. And so I do not 

have anything beyond what the actuary did that would be a different prediction today. 

Senator VITTER. So today, within all of HUD and all of FHA, you 

have no best guess about that? 

Mr. DONOVAN. I am not sure what you would suggest is a best 

guess other than to say the Actuarial Report has a value of the 

fund as of the date it was performed. In addition to that, we expect 

about $11 billion of new revenue, and the changes that we have implemented we believe will bring billions of dollars of additional revenue to the—— 

Senator VITTER. Based on all of that, do you expect a taxpayer 

bailout, as we sit here today? If so, when? 

Mr. DONOVAN. Based on those steps, I believe we have significantly decreased the chance of having a bailout at the end of 2013 

or having to draw on the Treasury. I am not going to assign a probability at this point because we are still working on the assumptions and other steps in the budget, and I will be able to give you 

a number when we have completed the budget projections. 

Senator VITTER. OK. Well, again, I want to re-ask for your best 

information about that as it develops, and, unfortunately, we do 

not have that today. I think you all have some idea, some best 

guess. You are not giving it to us. We would really like that as soon 

as you can give it to us and from then on, on an updated basis. 

With regard to changes that are being made, you just said they 

are unprecedented and the proof is in the pudding and the changes 

that Ms. Galante made in the last year stepped us back from that 

possibility. I just want to add for the record, there was another big 

factor. The $1 billion in the AG settlement—that was just found 

money—was a huge factor that had nothing to do with reforms or 

changes. 

But I also want to associate myself with Senator Corker’s suggestions about a whole menu of things that we believe exist that you 

all are not doing that I believe is warranted. There are several 

ways—and Senator Corker touched on this—that FHA has much 

laxer standards than Fannie and Freddie. And as a result, you are 

creating a huge magnet to draw the worst problem loans to FHA 

because of that. One of those is maximum loan limit, and another 

20 

is the issue he brought up of allowing a borrower to reborrow 3 

years after a foreclosure. Fannie and Freddie, that is 4 to 7 years. 

On those two things and anything else like that, why wouldn’t 

you align FHA with Fannie and Freddie to stop this negative selection that is occurring toward FHA? 

Mr. DONOVAN. Senator, two things I would just say. 

One is it is not accurate to say that the reason the fund remained positive last year was because of the settlement. The value 

at the end of the year was over $3 billion. If the settlement had 

not happened, we still would have been positive. 

And the second thing I would say is I do not see the settlement 

as unrelated to policy changes. Strong enforcement is part of what 

we need to do to make sure that we hold lenders accountable and 

that we minimize losses from those older books of business which 

are causing the stress to the fund. 

And so I believe very strongly it was the right policy decision. It 

is related to steps that we have taken. And even if it had not happened, we would have remained positive last year. 

So on loan limits, as I said before, we do not have the authority 

without Congress acting. The administration advocated that loan 

limits come down. I thought it was, frankly, perverse to bring 

Fannie and Freddie’s loan limits down and not to lower FHA’s at 

the same time, exactly for the reasons that you have said. We are 

concerned that it would drive business to FHA that should go back 

to the private market. 

So I would urge you and others—I know you are supportive, but 

to work with your colleagues to try to do that as quickly as possible. And I do agree that we need to look at—and we are doing 

that, looking at the standards for how we allow borrowers who may 

have defaulted in the past to borrow. Again, I would say, though, 

we should not hold a responsible homeowner who has demonstrated their ability to pay back their debts and to be a homeowner, a successful homeowner, simply because they may have lost 

a job due to what is an unprecedented economic crisis that we have 

been through. 

So this is not just about timelines. It is about what the standards 

are for when we allow folks to borrow. 

Senator VITTER. Well, my broader point is this and several other 

factors should also be about doing it in a way that you are aware 

of what competing opportunities’ rules are, like Fannie and 

Freddie. And if FHA has laxer standards, I mean, clearly you are 

going to encourage the accumulation of weaker loans. I think that 

is obvious. 

Mr. DONOVAN. Yes, I agree with you. One of the things that we 

announced just a few weeks ago with the Actuarial Report is that 

we are implementing standards on short sales that are aligned 

with what Fannie and Freddie are doing. So we are looking for opportunities wherever we can to try to align those standards. That 

does not mean on everything that we should be identical to them, 

but aligning where appropriate makes great sense. 

Senator VITTER. And as I understand it, another significant factor in terms of potential loss is the whole reverse mortgage program, which is projected to be a drain on the system even in the 

best economic circumstances. And as I understand it, FHA has the 

21 

authority to suspend that program. It is a huge profit center for 

folks who participate in the private sector. It is costing the taxpayer money essentially, or threatening exposure in the best of 

times. Why wouldn’t we suspend that tomorrow? 

Mr. DONOVAN. That is an option that we are clearly looking at. 

We believe there is a better option, which would be to get legislative reform to allow us to implement a better product. That is 

something, as I talked about with Senator Corker, we would love 

to work with you on the next few weeks. The House has passed an 

FHA reform bill. We would love to be able to do something even 

in this session of Congress before the Ranking Member leaves. 

That is area—— 

Senator VITTER. Well, let me—— 

Chairman JOHNSON. Senator Vitter, please begin to wrap it up. 

Senator VITTER. Sure. I will wrap it up very quickly. 

Let me suggest melding those two ideas together. I think if you 

suspend that program tomorrow, you will start saving the taxpayer 

money and create more pressure for the reform you are describing. 

Thank you. 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, while I clearly have questions about Sandy, let me 

just create some balance here from my perspective. 

First of all, am I wrong to say that the HUD report says that 

FHA continues to be impacted by losses from mortgages originated 

prior to 2009? 

Mr. DONOVAN. That is exactly right, and, Senator, if you look at 

the chart, on the right here, what you see is that through 2007 and 

2008 in particular are huge costs to the fund that in 2009 we saw 

still negative impact but real improvement, and then in 2010 

through 2012, those loans are expected to contribute substantial 

revenues to the fund and to the taxpayer. 

Senator MENENDEZ. So a good part of the portfolio that we have 

been suffering with here certainly took place prior to this administration. 

Mr. DONOVAN. That is correct. But I would also give you all credit for acting to end seller-funded downpayment at the end of 2008, 

which we implemented in 2009. 

Senator MENENDEZ. Now, I know there is some talk about the 

higher loan limits and your own view, but let me just say, Doesn’t 

the audit also say that ‘‘larger loans tend to perform better compared with smaller loans in the same geographical area, all else 

being equal’’? 

Mr. DONOVAN. Our early data is that these larger loans are performing somewhat better. We do believe, however, it is too early to 

make any final conclusions about it simply because these loans 

have not had much time to season at this point. 

Senator MENENDEZ. Well, it seems to me that so far they have 

probably strengthened FHA’s balance sheet by allowing larger, better performing loans. And there is a problem here. There are parts 

of the country in which those lower loan limits would make FHA 

virtually non as valuable to its core mission as it would in other 

parts of the country, which is why on a bipartisan basis we passed 

preserving the higher loan limits. So I am looking forward to seeVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS
22 

ing the continuing performance of them because I think it would 

make another case. And I am waiting for the private sector to come 

in. I mean, I keep hearing about the private sector ready to come 

in, but it just does not seem to be happening. 

Now, there are some who would suggest that Ms. Galante has 

not been performing well. Maybe my eyesight is not good, but I 

look at that second chart, and it seems to me in the time period 

that she has become the acting head, in fact, the performance of 

the portfolio under her watch has gone from the negative performance that existed before her watch to a positive performance, significantly positive performance during her watch. Is that a fair 

statement? 

Mr. DONOVAN. That is absolutely fair. I would add that the chart 

just to the left of it also shows that we have done that while reducing FHA’s market share. So we have taken steps to try to bring private capital back to shrink our market share, but still to have the 

performance improve substantially. 

Senator MENENDEZ. Do you have a different view than Moody’s 

data that shows that the FHA’s presence in the market prevented 

housing prices from dropping another 25 percent? 

Mr. DONOVAN. I think that is as good an analysis, as thorough 

an analysis as we have seen of the important impact that FHA had 

on the market and, frankly, what would have happened if we had 

not been there as you see—Congress intended FHA to be here 

when the country went through a crisis, either a regional crisis 

where there was not lending available or a national crisis. And that 

is exactly the role that FHA played with that increase in market 

share. We agree it is time, as the market is improving, to shrink 

that share, but not to do it in so precipitous a way to raise premiums or to take other steps that would hurt what is still a fragile 

recovery. 

Senator MENENDEZ. And I would simply say that in a time in 

which the housing market, although we see some indicators moving 

upward and prices, values moving upward, it is still a very significant challenge. And just like a doctor, I mean, I think the principle 

starts off with you do no harm, especially when you are in the 

midst of a challenging recovery. 

So I look forward to seeing how we move in this dual track of 

making sure the taxpayers are held whole, but at the same time 

preserving some of the core missions of FHA. 

I want to turn to hurricane recovery. This hurricane, Mr. Chairman, we are not used to hurricanes in the Northeast. We have 

been blessed not to have them. But when you have a superstorm 

that comes with a full moon, high tides, and a drawing-in of what 

was the hurricane because of a front that came from the west, you 

have a perfect storm in all of its iterations. 

I have lived in the State of New Jersey my whole life. I have 

never seen the type of devastation that exists in the State. The pictures that some of my colleagues have seen on television and whatnot do not do justice to the death and scope of devastation. We 

have thousands of people who do not have a home to go back to. 

I know that when people talk about the New Jersey shore because 

of some of these shows, they think of a certain thing. These are 

people’s homes. I am not talking about second homes. I am talking 

23 

about their lifetime homes, year-round communities that do not 

have a home to go back to. I am talking about a $35 billion tourism 

industry that is largely devastated. I am talking about the 

megaport of the east cost, the port of New York and New Jersey 

that suffered huge damages, 250,000 jobs, $30 billion of economic 

activity for the Nation, national security because we closed the only 

port in the Northeast in Bayonne, New Jersey, that was a military 

port, and now we use the commercial port for forward deployment 

when we need to in the case of emergencies. And I could go on and 

on. 

So, Mr. Secretary, in your other role here, I want to get a sense 

from you as to the commitment of this administration and the Federal Government to helping New Jersey, and certainly New York 

as well and the region, recover. Because, you know, when we had 

Hurricane Katrina on the gulf coast in Mississippi and Alabama 

and Louisiana, I was there; when we had tornadoes in Joplin, Missouri, I was there; when we had flooding along the Mississippi, I 

was there; when we had crop destructions in the Midwest, I have 

been there—because I believe this is the ‘‘United’’ States of America. And so I fully expect that now that for the first time we have 

the type of devastation that others have suffered and should understand, that we are going to have the type of response that others 

have received. 

And so I would like to get a sense of—I know we are working 

toward this goal, but I would like to get a sense from you as to the 

type of commitment that this administration has toward those 

goals. 

Mr. DONOVAN. Senator, thank you for the eloquent remarks 

about this. As you know, this is a region I, too, have deep roots in. 

I think, to use your term, I ‘‘married up,’’ married a Jersey girl, 

and have worked in New Jersey, grew up in New York. And besides the personal commitment I feel, I have also seen a President 

who was on the ground in New Jersey almost immediately, has 

done everything he can to help the short term, and has given me 

the responsibility to help make sure that this recovery is a full, 

complete recovery, not just to build back what was there but to 

build back smarter and stronger. 

So you have my commitment that we will do that. We will propose a supplemental this week that I hope you will see demonstrates that commitment. But we will also be committed to making sure that we get that supplemental passed in the next few 

weeks because, frankly, there are too many homeowners, too many 

small businesses, too many renters that have lives that are simply 

on hold until they know what resources will be available to them 

to rebuild. 

FEMA cannot by statute provide for a full recovery. They are a 

response organization. And we need to take further steps through 

a supplemental this month to be able to move toward a fuller recovery and give those families and those businesses some hope that 

there is a future for them in New Jersey and around the region. 

Senator MENENDEZ. Well, Mr. Chairman, let me close, if I may, 

with your indulgence, because of the nature of this issue, by saying, number one, we await what the supplemental looks like, and 

we will reserve judgment until them. 

24 

Number two, regardless of the size of the supplemental, we need 

flexibility in being able to seek the recovery that we all want. 

Number three, in addition to a perfect storm, there is another 

perfect storm here. We get this storm in the midst of the beginning 

of winter. Most of the hurricanes are in gulf seasons, in summer 

seasons, totally different in terms of the consequence to people— 

huge in terms of the impact, but still time to recover without the 

ravishing of the winter months. 

If we have a northeaster, our defenses are so far down that it 

would be like a person’s immune system being susceptible to any 

type of illness. And, third, we come with less than 30 days to the 

end of a Congress in which this has to be done. I feel like I have 

to be Houdini to accomplish this, so—but we are going to do this. 

We are going to do this. And so, Mr. Secretary, I look forward to 

your work and your help as we get there, and to our colleagues as 

well. 

Thank you, Mr. Chairman, for your indulgence. 

Chairman JOHNSON. I would note that Senator Menendez will 

chair our Subcommittee field hearing in New Jersey next Monday, 

December 10, on Superstorm Sandy. 

Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman, and thank you, Mr. 

Secretary, for joining us. 

I would like to understand better an aspect of the actuarial review, and the question that I have arises from the interest rate assumptions and the interest rate environment that is used to determine the prevailing view about the value of the Mutual Mortgage 

Insurance Fund, the single-family fund. 

More specifically, you observe on page 8 of your testimony the 

fact that the lower the interest rate environment, the worse shape 

the fund is, to simplify things. You walk through the mechanisms 

by which lower interest rates, while good for the economy overall, 

tend to have an adverse impact on the value of the fund. 

My understanding is that the actuarial review contemplates a 

low interest rate environment, and in the low interest rate environment, the value of the fund is negative $31 billion. 

Aren’t we in a low interest rate environment today? And aren’t 

we by virtue of what the Fed has said, which is to say, maintaining 

current policy at least through mid-2015—so 3 years or so, at 

least—isn’t it very likely that we are going to stay in a low interest 

rate environment? And shouldn’t that be the prevailing environment assumption? 

Mr. DONOVAN. You make a very important point in terms of the 

fact that the actuarial review was done not today but at a point 

with economic projections that are primarily in July, over the summer. 

Senator TOOMEY. Right. 

Mr. DONOVAN. And so it is accurate that interest rates have 

dropped further than were built into the primary actuarial view. 

There are two offsetting factors to that, though. 

One is that home prices have performed better than were used 

in the actuarial, and based on what we know today, even for this 

year, the actuarial would be significantly better if it were performed today just on that one variable. 

25 

And then the second point is that the actuarial review is a point 

in time that assumes that we do no further FHA business, and one 

of the things that is artificial about it, if I can use that term, is 

that when interest rates go lower, it assumes people pay off faster. 

That is accurate. What it does not take into account is that typically about half of those folks refinance into an FHA loan. So by 

the nature of the actuarial, taking a snapshot in time, assuming 

that you are closing down the fund, there are revenues that will 

come to the fund that are not built in. 

Senator TOOMEY. Right. 

Mr. DONOVAN. All that being said, we will in the President’s 

budget include the lower interest rates that you describe; we will 

also include an updated projection of house prices; and at that 

point, we will have a clearer picture of how these offsetting factors 

play. But it would not be accurate to say that the right number is 

today the $30 or $31 billion because of that. 

Senator TOOMEY. Do you believe that the difference in home 

prices that prevail today versus at the time that this was done and 

the difference in the volume that you referred to would be enough 

to offset the lower value that is caused by the fact that we are in 

a lower interest rate environment? 

Mr. DONOVAN. The truth is, just to be honest, we have not finished those calculations. We are in the midst of doing that for the 

budget. What I will tell you is they are both large effects, and it 

is certainly conceivable that they could be offsetting or in the range 

of offsetting, but we simply do not have an answer to that. 

Senator TOOMEY. It is a pretty large effect that comes from the 

difference in the interest rate. Do you know what the low interest 

rate environment scenario assumes for the 10-year Treasury yield, 

by any chance? 

Mr. DONOVAN. Let me ask my crack team behind me to get that. 

We will have that for you in a moment. 

Senator TOOMEY. All right. My guess is—I am not sure even that 

assumption is as low as the rate is today. With an interest rate, 

10-year Treasury, of about 1.6 percent, it is shockingly low, and we 

have a Fed insisting that it is going to keep it this way for a long 

time. So I will be very interested in seeing what the net effect of 

these changes are because we know that the interest rate component will reflect a significant adverse valuation here. 

Mr. DONOVAN. Yes. But, again, I would just point out that there 

is an artificiality of the point in time because it presumes every one 

of the payoffs, we have no more revenue to FHA; whereas, in fact, 

we know a large number of those refinance—— 

Senator TOOMEY. So you are saying there is a flaw in the model. 

Mr. DONOVAN. No, no. Congress requires that the actuarial review be done in a way that is what we call a ‘‘runoff scenario.’’ 

Senator TOOMEY. OK. 

Mr. DONOVAN. We also in the actuarial look at what if we keep 

doing business, so we have those projections in the actuarial. That 

is not the 2-percent calculation, but it is something that we could 

sort of give you more detail on from the actuarial of what the net 

effect would be with the refinances. 

Senator TOOMEY. The other question is: Does the modeling assume any recession between now and 2017? 

26 

Mr. DONOVAN. The modeling does include a range of runs from 

a mild recession to a very severe recession, and through the kind 

of stochastic nature of the modeling, we do look at probabilities for 

those recessions—— 

Senator TOOMEY. But the model that comes up with a valuation of negative $13.5 billion, does that assume a recession? 

Mr. DONOVAN. It assigns probabilities to the potential for different types of recessions and builds those in. I am not sure if I 

am being clear, but it is not—— 

Senator TOOMEY. All right. Let me put it this way: What is the 

average economic growth rate that is implicit in or explicit in that 

valuation? 

Mr. DONOVAN. Again, I can get that for you momentarily. 

Senator TOOMEY. OK. 

And my last point, the Senator from New Jersey made a very important and impassioned argument about the effects of Hurricane 

Sandy. In Pennsylvania, we had very significant damage, but it 

was exclusively from wind, almost entirely from wind damage. Millions lost power. But the damage was not comparable to the damage that was compounded by the water damage, of course, that was 

done along the shore. I am looking forward to seeing a supplemental that is well crafted and, I hope, properly offset, because we 

also have a fiscal crisis of enormous magnitude. So the necessary 

spending to address emergencies is very real, but it is really important that that be offset. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. I would like to thank Secretary Donovan for 

his testimony and for being here with us today. 

The financial stability of the FHA is an issue that the Committee 

does not take lightly, and we will continue this dialog and take action where necessary to protect taxpayers. 

We appreciate your testimony, Mr. Secretary. This hearing is adjourned. 

Mr. DONOVAN. Thank you, Mr. Chairman. 

[Whereupon, at 11:36 a.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

27 

PREPARED STATEMENT OF SHAUN DONOVAN 

SECRETARY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

DECEMBER 6, 2012 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to testify today regarding the status of the Federal 

Housing Administration’s mortgage insurance programs. The testimony will cover 

the single family programs, for which we recently submitted a report on the Mutual 

Mortgage Insurance Fund (MMIF), as well as the multifamily and health care programs. 

I appear before you today at an important point in the recovery of the Nation’s 

housing markets. As 2012 draws to a close, a number of promising signs indicate 

that our economy is improving and that the recovery of the housing market is underway. The number of families falling into foreclosure is half what it was in the 

early days of 2009. Housing construction is growing faster than at any time since 

2008, and this has been the strongest year of home sales since the crisis began. Finally, rising home values have lifted 1.3 million families above water in the first 

half of 2012. All of these indicators point to a housing sector on the mend—a sector 

vital to the broader recovery of our economy. 

However, while there is cause for optimism, we must remain mindful that the recovery remains fragile, and that a broad array of factors could limit the progress 

we are now seeing. Therefore, we must remain diligent in our efforts to restore our 

housing markets, help families get back on their feet, and enter into a new era of 

housing finance in this country. 

I. Overview of Findings of the Independent Actuary With Regard to FHA’s 

Single Family Programs 

It is with this context in mind that I now want to turn to a discussion of FHA’s 

single family programs. Much of the progress that we are seeing in the housing sector has been possible because of the FHA, which has provided access to home ownership for millions of American families and without which the crisis would have been 

much deeper. In fact, Moody’s analytics estimates that were it not for FHA’s presence during the crisis, house prices would have fallen 25 percent further than they 

did already. 

FHA’s contribution has not been without stress, however. On November 16, 2012, 

HUD delivered its fiscal year (FY) 2012 Report to Congress on the Financial Status 

of the FHA Mutual Mortgage Insurance Fund, which is used for FHA’s single family 

programs. That report summarizes the results of the independent actuarial review 

conducted by Integrated Financial Engineering (IFE) and provides a status report 

on the fiscal health of the MMI Fund. Via its review, the actuary measures the economic net worth of FHA’s portfolio—essentially, the total value of the portfolio after 

FHA pays all expected claims for the next 30 years in a run off scenario where no 

new loans are insured. This economic value is then divided by the total value of the 

MMI Fund’s insurance in force to derive an estimated capital reserve ratio for the 

Fund. According to the latest findings of the independent actuary, in fiscal year 

2012 the capital reserve ratio of the Fund fell below zero to negative 1.44 percent, 

and the Fund’s economic value stands at negative $16.3 billion. Earlier books of 

business continue to be the prime source of stress to the Fund, with fully $70 billion 

in claims attributable to the 2007–2009 books of business alone. In contrast, the actuary attests once again to the high quality and profitability of books insured since 

2010. Thus, this year’s report shows that even though our books of business insured 

since 2010 are the strongest in agency history, there is still work to be done in mitigating the impacts to the Fund of losses stemming from older books of business 

which were most severely impacted by the recession and other risk factors, such as 

seller-funded downpayment policies. Toward this end, a series of aggressive measures FHA will take in this fiscal year is discussed later in this testimony. 

While the actuary’s finding regarding the economic net worth of FHA’s portfolio 

is obviously of very serious concern, it is not the determining factor for whether 

FHA will need to draw on permanent and indefinite budget authority from the 

Treasury. Any determination that such a draw is necessary will not be made until 

the end of FY2013, and in any event, does not affect the full faith and credit of the 

Federal Government to pay any claims. In the intervening period, the President’s 

budget will outline the Administration’s expectation of whether or not FHA will 

need assistance by the end of the fiscal year. However, the ultimate need will be 

borne out in the actual performance of the FHA single family program over the 

course of the fiscal year, and will be impacted by the steps FHA takes over the 

course of the year to increase revenue or reduce losses. 

28 

While the magnitude of the figures involved in this year’s budget reestimate are 

large, as an example, the President’s FY2013 budget submission, issued in February 

of this year, anticipated that FHA would need to draw nearly $700 million in assistance from the U.S. Treasury in order to satisfy the required transfer of funds from 

the Capital Reserve Account to the Financing Account to meet expected claim obligations. Instead, at the end of FY2012 the Capital Reserve Account held $3.3 billion—even after the transfer for these expected costs. The fact that the MMI Fund 

ended the year with this balance is due primarily to policy changes made during 

the fiscal year that substantially improved the value of the Fund. Likewise, the series of additional changes FHA has announced and which are described below are 

designed to reduce the likelihood that FHA will need to draw on Treasury assistance at the end of FY2013. 

We will continue, as we have throughout this Administration, to be diligent in 

taking every action appropriate to protect taxpayers while continuing to ensure that 

FHA supports the stabilization of the housing market, and that families have access 

to sustainable mortgage credit options. 

II. The Role of FHA’s Programs in the Nation’s Housing Finance System 

As we discuss the current status of FHA’s programs and finances, it is important 

to frame this discussion within the context of the role FHA has played historically 

in the Nation’s housing finance system. Throughout its history, FHA has supported 

access to affordable, sustainable mortgage financing to persons and entities underserved by the conventional market. Through its single family, multifamily and 

health care loan guarantee programs, FHA has acted as a stabilizing force in the 

housing market during times of economic distress. At no time has this countercyclical influence been more pronounced than during the recent housing crisis. In 

the face of ongoing challenges in these sectors, FHA has continued to provide access 

to mortgage finance opportunities during a period of severe constriction in conventional markets. As a result, FHA has played a central role in bringing the housing 

market from the brink of collapse to a place where the outlook is positive and improving. 

Since its inception in 1934, FHA has provided access to home ownership through 

its single family programs for credit-worthy lower wealth or otherwise underserved 

borrowers, enabling more than 40 million families who might otherwise have been 

prevented from doing so to realize the American dream of home ownership. In addition to providing access to financing for credit-worthy borrowers by insuring mortgage lenders against losses on defaulted loans, FHA’s single family programs have 

also offered crucial liquidity in the mortgage finance system during periods of market stress. Whether providing ongoing credit availability in areas experiencing regional recessions, or ensuring nationwide liquidity during broader economic crises 

such as we have recently experienced, FHA has repeatedly acted as a vital stabilizing force in the single family mortgage market when constriction in conventional 

lending threatens effective functioning of the market. 

Likewise, FHA’s multifamily and health care programs have been very important 

to facilitating credit availability in their respective sectors. These programs provide 

critical mortgage financing opportunities that strengthen communities by addressing specialized financing needs including insurance for loans to develop, rehabilitate, and refinance multifamily rental housing, nursing home facilities, and hospitals. These sectors faced a severe contraction in the availability of conventional 

financing, as well as a near collapse of the tax exempt bond market, making FHA’s 

programs essential. FHA multifamily and health care mortgage insurance programs 

operate under FHA’s General Insurance-Special Risk Insurance (GI–SRI) Fund, 

which is separate and distinct from the MMI Fund used for single family programs. 

III. FHA Single Family Programs 

Created in the aftermath of the Great Depression and designed to expand access 

to home ownership that would in turn stimulate the ailing residential housing markets, FHA played a central role in developing today’s mortgage finance system. It 

redefined mortgage underwriting practices so that qualified borrowers could obtain 

mortgage financing, and it standardized construction and appraisal requirements so 

that mortgage contracts could be tradable across the country. Even more important 

than FHA’s contribution to developing modern mortgage standards and practices, 

however, has been its role as a countercyclical force that ensured continued liquidity 

throughout the mortgage finance system during periods of economic stress. This has 

been true on a number of occasions at the regional level as FHA has offered support 

for mortgage financing in specific geographies experiencing localized recessions, and 

much more so as FHA has played a prominent role in stabilizing the market and 

averting a total collapse of the housing market during the recent crisis. By design, 

29 

FHA’s programs are meant to complement, not supplant, private capital. It is there 

to combat a lack of available mortgage credit when private capital retreats or underserves markets, and to step back when private capital returns or expands to serve 

previously underserved populations. And because of this unique role, its business 

cannot and should not be evaluated on the same terms as a private firm, as such 

a requirement would force FHA to act as a private firm and therefore eliminate its 

value in providing countercyclical liquidity and credit to underserved markets. 

A. FHA Single Family Activity in FY2012 

In 2012, FHA continued to play an important part in the ongoing recovery of the 

Nation’s housing market and broader economy. FHA insured nearly 1.2 million single-family forward mortgage loans during the year, with a total dollar value of approximately $213 billion. Of the over 700,000 homepurchase mortgages endorsed 

during the year, 78 percent were for first-time homebuyers, reaffirming FHA’s role 

in providing access to new entrants to the home ownership market. Indeed, over the 

past four fiscal years, FHA has insured mortgages for over 2.8 million first-time 

buyers. 

FHA has also continued to be a vital source of home financing for minority borrowers. While FHA insurance was used for approximately 27 percent of all home 

purchase mortgages in 2011, FHA accounted for 50 percent of home purchase mortgages for African American borrowers and 49 percent for Latino borrowers. 

Clearly, FHA has played a very crucial role in facilitating continued liquidity in 

the single family mortgage finance market, preventing even more severe economic 

circumstances during the recession. As Moody’s Analytics Chief Economist Mark 

Zandi said in a Washington Post article, ‘‘If FHA lending had not expanded after 

private mortgage lending collapsed, the housing market would have cratered, taking 

the economy with it.’’ Moody’s estimates that were it not for FHA’s presence during 

the recent crisis, house prices would have fallen an additional 25 percent, resulting 

in 3 million more job losses and a reduction of economic output of $500 billion. 

Although FHA continues to be an important source of access to credit for American families, its market share continues to decrease as the economy recovers and 

private capital begins to return to the market. New insurance endorsement activity 

in FY2012 fell once again from that of the prior year, continuing its decline from 

the peak levels seen in FY2009. In terms of dollars of single-family loans insured, 

2012 is the lowest volume since the start of the crisis. Home Equity Conversion 

Mortgage (HECM) insurance endorsements in FY2012 were also down by 25 percent 

from FY2011 levels, to 54,591 loans. FY2012 marks the third consecutive year in 

which HECM volume declined, as the combined effects of policy revisions to the 

product and changes within the industry have reduced participation in the program. 

30 

1There are two additional sets of accounts that are independent of the insurance operations, 

and for which funds are directly appropriated by the Congress each year. The first is the set 

of Program Accounts which cover all personnel and administrative expenses for FHA operations. 

The other is the Liquidating Account, which represents remaining cash flows each year on pre1992 insurance endorsements. The year 1992 marks implementation of the Federal Credit Reform Act of 1990 and introduction of the Financing Accounts. 

FHA has served an important and necessary role in the Nation’s housing finance 

system throughout the past year. Because of the agency’s importance to the overall 

health of the housing market and its responsibility to American taxpayers, FHA 

constantly seeks to balance efforts to provide access to credit for underserved borrowers and ensure continued liquidity in the system with its responsibility to prudently protect the health of the MMI Fund. Throughout the current Administration, 

we have continually sought such balance in establishing policies and practices for 

FHA. 

B. The Mutual Mortgage Insurance Fund 

The important services FHA single family programs provide to the Nation’s housing sector are made possible through FHA’s Mutual Mortgage Insurance Fund. The 

MMI Fund operates with two primary sets of financial accounts: 1 a Financing Account, which reflects the business transactions related to insurance operations, and 

a Capital Reserve Account, which reflects secondary reserves for unexpected claim 

expenses. Both of these accounts are held at the U.S. Treasury. The Capital Reserve 

Account is unique to MMI Fund operations. It was established to assist in managing 

to the 2-percent capital ratio requirement enacted by Congress in 1990. FHA’s MMI 

Fund programs, however, are backed by the full faith and credit of the U.S. Government, and like all Federal Government direct-loan and loan-guarantee programs, its 

financing account operates with what is called ‘‘permanent and indefinite budget authority.’’ This authority provides access to the U.S. Treasury for any funds needed 

to pay claim obligations, and provides assurance to lenders and investors that FHA 

programs are never in jeopardy of lacking sufficient funds to pay insurance claims. 

That would be true even in the absence of a Capital Reserve Account. 

The Fund is subject to two distinct portfolio valuations each year. Both project 

all future revenues and expenses based upon a forecast of loan performance under 

defined economic conditions. One is performed by an independent actuary in accordance with requirements of the National Housing Act, and the other is the annual 

31 

subsidy reestimate performed by the Administration under the terms of the Federal 

Credit Reform Act and published in the President’s Budget. 

The independent actuarial study uses statistical models to develop 30-year projections of default, claim, loss-on-claim, and prepayment rates on current and future 

books of business. Those models are estimated using historical patterns of FHA-insured loan performance under a wide variety of economic conditions. They are applied to active loans, and they use commercially available forecasts of home prices 

and interest rates to predict loan performance in the future. The resulting projections determine business-operation cash flows needed to estimate the economic 

value of the Fund. 

This year, the actuarial study applied a stochastic method to estimate the net 

present value (NPV) of future cash flows. The move to a stochastic method represents one of the advancements that have been made to the actuarial modeling 

process this year and is implementing recommendations by the GAO and the HUD 

OIG. In previous studies, the net present value of cash flows was computed along 

a single path of house prices and interest rates. This year, 100 equally likely paths 

were generated to develop a wide variety of possible economic conditions, creating 

what is known in mathematical terms as a Monte Carlo simulation. The discounted, 

net present value (NPV) of cash flows was computed for each path. They were then 

averaged to obtain an overall estimate of the expected NPV that provides the basecase estimate. 

The outcome of the complete actuarial study modeling effort is the estimated ‘‘economic net worth’’ of the MMI Fund, which is defined by the National Housing Act 

as capital resources plus the present value of future cash flows of the MMI Fund. 

The calculation of economic net worth is repeated for each of the next 7 years by 

adding projected endorsements each year, forecasting their cash flows and adding 

them to those of the current portfolio, and then reassessing economic net worth on 

the updated portfolio at the end of each fiscal year. 

Economic net worth represents additional resources directly available to FHA for 

absorbing claim expenses above-and-beyond those already anticipated in the 

present-value-of-future-cash-flow calculations. Those calculations are for the remaining life of all outstanding loan guarantees and can extend for more than 30 years 

on HECM loans. Economic net worth is the numerator of the statutory capital ratio 

measure. The denominator is the outstanding dollar volume of active insurance contracts. 

The credit subsidy reestimate is performed each year as part of the Federal budget process in accordance with the budget valuation of all Federal direct loan and 

guarantee programs. For FHA single-family programs, this evaluation uses a modified version of the actuarial study forecasting model, applying the economic assumptions common to the President’s Budget. The estimate is used to determine any necessary transfers between the MMI Fund Financing and Capital Reserve accounts, 

based on projections of expected claims and premium revenue on outstanding loan 

cohorts over their remaining lifetimes (up to 30 years). It is this estimate that establishes any expected need to draw on support from the Treasury to ensure possession 

of sufficient capital resources to meet all future expected claim costs. Permanent 

and indefinite authority from Treasury is only necessary if FHA is unable to satisfy 

the budget reestimate requirements from the funds in the Capital Reserve at the 

end of the fiscal year. 

C. The FY2012 Actuarial Review 

This fiscal year, as noted above, the MMI Fund capital reserve ratio fell below 

zero to negative 1.44 percent. The actuarial assessments estimate that the economic 

value of the Fund as of the end of FY2012 is negative $16.3 billion against an active 

portfolio of $1.13 trillion. The economic value of the forward portfolio was estimated 

at negative $13.5 billion, the HECM portfolio at negative $2.8 billion. These economic values represent capital reserve ratios of negative 1.28 percent and negative 

3.58 percent respectively. The actuary projects that the MMI Fund capital reserve 

ratio will be positive by FY2014 and reach 2.0 percent during FY2017 under its 

base-case estimate. These forecasts assume no changes in policy or other actions by 

FHA, including those that were announced when the actuarial report was released 

last month that might accelerate the time to recovery. 

The low capital ratio today reflects an expectation that FHA’s current pool of insured loans still has significant foreclosure and claim activity yet to occur. Projected 

losses are particularly large for the fiscal year 2007–2009 loans. Those loan cohorts 

were impacted by the severe recession and accompanying increases in unemployment, and by large volumes of seller-funded downpayment loans. Indeed, loans insured from 2007–2009 are projected to yield more than $70 billion in claims for 

FHA. 

32 

Loans using seller-funded downpayment assistance have proven to place substantial stress on the Fund. Those loans are projected to cost the Fund $15 billion as 

they continue to experience elevated rates of insurance claim. In fact, the Actuary 

estimates that, if FHA had not insured any seller-funded-downpayment loans, the 

net economic value of the MMI Fund would be positive $1.77 billion today. Thus, 

we are very grateful for the action by Congress in 2008 to eliminate seller-funded 

downpayment loans from the FHA program, avoiding substantial additional losses 

from these loans. 

In contrast to the drain caused by those older loans, the actuary expects endorsements in fiscal years 2010 through 2012 to produce significant net revenues that 

can be used to partially offset losses from earlier books of business. The contrast 

in quality between these two vintage eras—pre- and post-2009—is demonstrated by 

the following table. 

While the general trends revealed in this year’s actuarial report are consistent 

with those reported in the reports of the past few years—books of business insured 

through 2009 are placing a great amount of stress on the MMI Fund while those 

insured since 2010 are adding substantial value to the Fund—the overall results in 

this year’s actuarial report differ substantially from last year’s projections on the 

status of the Fund at the end of this fiscal year. There are three factors driving the 

change in the estimated economic value of the MMI Fund compared to what was 

projected last year: 

First, the Moody’s July 2012 house price appreciation forecast, which was used 

in this year’s actuarial study, predicted significantly lower levels of appreciation in 

the near term than the forecast used in last year’s actuarial study. This results in 

a cumulative difference in projected house price appreciation of 8 percentage points 

over the first 5 years. Thus, this downward revision in house price forecasts from 

last year to this year accounted for an estimated $10.5 billion in reduced economic 

value compared to the actuary’s 2011 projection of what the Fund’s economic value 

would be as of the end of FY2012. Further, near-term house-price movements in the 

index used by the actuaries were depressed by high levels of refinance activity in 

2012, and therefore, they do not reflect improvements seen this year to home prices 

in other measures of housing market strength. Additionally, because the forecast 

utilized only covers the period through June 2012, it does not include substantial 

improvements to home prices seen since that time. Second, the continued decline 

in interest rates since last year, while good for the overall economy, causes a subVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00036 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS 12061202.eps
33 

stantial loss of revenue. The reasons for this are two-fold. First, because of the higher interest rates being paid by borrowers on loans made before 2009, the actuary 

projects that these borrowers will default at marginally higher rates than would 

otherwise be expected. Second, the actuary projects that FHA loans would be paid 

off earlier than expected through refinances that take advantage of the lower rates, 

and because the methodology required by statute that the actuary utilizes assumes 

that none of these loans will refinance back into FHA. The effect of these two assumptions by the actuaries resulting from a prolonged period of low interest rates 

is a reduction of $8 billion in estimated economic value for the Fund from what was 

anticipated in last year’s report. 

Third, based on recommendations made by the GAO, HUD’s Inspector General, 

at FHA’s direction, the actuary employed a refined methodology this year to adjust 

the way losses from defaulted loans and reverse mortgages are reflected in the economic value of the MMI Fund, resulting in an estimated $13 billion in reduced economic value compared to last year’s projections. Specifically, shares of Pre-foreclosure sale (PFS or short sales) and REO in claim predictions are now explicitly 

modeled, and each has its own loss rate forecast. PFS share of claims is now less 

than half of what was implied in past models. Also, model structure changes removed an artificial cap on the effect of declining home prices on REO loss rates. 

It should be noted that while the shift in value from what was projected last year 

to what was calculated in this year’s review is substantial, last year’s actuarial report did indicate that should house price appreciation or interest rates deviate from 

the base case scenario used for the actuary’s projections, such deviations would impact the Fund’s value in FY2012. Furthermore, last year’s report stated explicitly 

that there was an approximately 50 percent chance that if economic forecasts differed from those used in the FY2011 report the Fund would have a negative value. 

These findings were the result of stress testing requested by HUD. While stress 

tests are not required by statute, FHA directs the actuary to perform them annually 

to provide greater insight into what may be expected if conditions deviate from 

those envisioned in the base case scenario. This year, FHA asked the Actuary to 

estimate the value of the Fund based upon those economic paths that yield the 10th 

best, 25th best, 25th worst, 10th worst, and the singular worst projected economic 

values. Additionally, the Actuary was also asked to evaluate two additional scenarios which represent singular, deterministic economic paths with no random fluctuations. First was the Moody’s Protracted Slump Scenario, the most stressful alternative scenario forecasted by Moody’s Analytics in July 2012. Second was a Low Interest Rate Scenario, representing a continuation of the historically low interest rate 

environment prevailing at the end of FY2012. 

The significant shift in dollar value this year from what was expected in last 

year’s report highlights the volatility associated with 30 year projections of economic 

conditions. Additionally, they are indicative of what occurs when underlying factors 

change for a portfolio the size of FHA’s. The $23 billion difference between the estimated value of the Fund in this year’s actuarial review versus that projected in last 

year’s represents only a 2 percent shift in value. 

D. Actions Taken to Date To Protect the Fund 

Throughout the tenure of this Administration, FHA has taken aggressive and decisive actions to improve the health and trajectory of the MMI Fund, while ensuring 

continued access to mortgage credit for American families. The changes made to 

FHA policy since 2009 are projected to have improved the economic value of the 

Fund by at least $20 billion. That FHA’s capital ratio has remained positive until 

this year is primarily due to the reforms to risk management, credit policy, lender 

enforcement, and consumer protections made over the past 4 years—the most 

sweeping changes to policy in FHA’s nearly 80 year history. Our efforts to date to 

strengthen FHA have been focused on eliminating unnecessary risks and ensuring 

sufficient revenue generation from new endorsements while continuing to learn from 

what is working in our efforts to improve FHA’s asset management and loss mitigation approaches. 

1. Counterparty Risk Management and Lender Enforcement 

Toward these ends, one of the first things this Administration did upon taking 

office was to take strong actions to improve FHA’s monitoring and oversight of lenders. This has included substantial improvements to risk analysis systems and procedures, and policy changes to focus resources on the areas of FHA’s business which 

pose the greatest potential risk to the MMI Fund. These efforts have resulted in 

record numbers of lenders being withdrawn from FHA programs, substantial improvements in lender compliance with FHA requirements, and a number of settleVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00037 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS
34 

ments with lenders and servicers for violations of FHA origination or servicing requirements. 

2. Credit Policy 

We have also worked to strengthen our credit policies for FHA borrowers. First 

and foremost, FHA implemented Congress’s elimination of seller-funded downpayment assistance programs which cost the MMI Fund more than $15 billion in economic value. Further, we enacted increased downpayment requirements for borrowers with credit scores below 580. The long-term positive impact of these two 

credit policy changes cannot be overstated. The 2005—2008 vintages, accounting for 

less than 15 percent of total originations over the last 30 years, are projected by 

the Actuary to contribute more than one-third of total credit losses of the Fund. 

Loans with credit scores below 580 and/or seller-funded downpayment assistance 

will have accounted for 44 percent of those losses. Additionally, we have worked to 

reduce the amount of allowable seller concessions that increase risks to FHA arising 

from inflated appraisals. Together, these measures will better ensure that home 

buyers using FHA-insured financing are capable of meeting their mortgage obligations and won’t put undue stress on the Fund. 

3. Increased Revenue 

In addition to the improvements made to the quality of new endorsements, we 

have also made the difficult choice to increase mortgage insurance premiums for 

FHA-insured loans multiple times in the past 4 years. Since 2009, FHA has increased premiums four times—the most recent increase coming in response to the 

FY2011 actuarial review. Combined, the premium increases made since 2009 have 

yielded more than $10 billion in additional economic value for the Fund. These increases have not been undertaken lightly, and FHA has been careful to balance 

changes to pricing to improve the outlook of the Fund with its countercyclical role 

of providing liquidity and access to credit in the midst of the recent crisis and ongoing recovery. 

4. Loss Mitigation and Asset Management 

FHA has not just addressed issues associated with the origination of new loans, 

but has also taken decisive steps to control costs and limit losses on the back end 

of its business through improvements to its REO disposition processes and loss mitigation strategies. First, we changed our strategy and approach with regard to the 

REO management and marketing contracts through which FHA’s REO property inventory is managed and sold. Enhancements to the oversight of contractors and better monitoring of their compliance with FHA guidelines, as well as measures which 

promote competition and continuity within specific markets, have resulted in notable improvements to FHA’s REO processes. As a result of the changes HUD has 

made, the gap between appraised values of REO properties and their sales prices 

has decreased by 62 percent and the time in inventory for FHA properties has reduced by 45 percent, decreasing losses on the REO portfolio and improving recoveries for the Fund. 

Finally, in FY2012, FHA implemented a significant expansion of its note sales 

program whereby nonperforming loans are sold in pools at a market-determined 

price via auction to investors, who are then able to explore options for homeowners 

to either remain in their homes or obtain a viable nonretention solution. This initiative, known as the Distressed Asset Stabilization Program (DASP), exponentially expands the number of loans sold in each sale while introducing innovations designed 

to promote stability in hard hit geographies. In addition to the sale of pools comprised of properties located throughout the Nation, FHA also created Neighborhood 

Stabilization Pools of loans concentrated in specific Metropolitan Statistical Areas 

(MSAs). For the first sale in this expanded program, the MSAs of Newark, Tampa, 

Chicago, and Phoenix were selected for inclusion in the program. These pools included additional requirements targeted at reducing the inventory of vacant foreclosed properties in these communities and providing enhanced options for homeowners and community members to benefit from these properties that would otherwise end up in FHA’s REO inventory. The initial results from the first DASP sale 

were positive, resulting in the Actuary’s estimate of improved economic value for the 

Fund from this initiative of more than $1 billion over the next 2 years. 

The effectiveness of these changes can be seen in the stark contrast between 

books of business insured prior to 2010 and those insured since that time, which 

is clear in the graph below. 

35 

E. Actions To Be Taken in FY2013 

While FHA has enacted substantial reforms under the current Administration, 

this year’s actuarial review makes clear that loans made prior to and at the outset 

of the recent crisis continue to weigh heavily on the health of the MMI Fund. Therefore, building upon the significant efforts already undertaken to protect and preserve the MMI Fund, FHA is implementing a series of additional actions to continue 

improving the Fund’s trajectory over both the short and long term. Using the Actuary’s model, collectively, these changes are projected to provide billions of economic 

value for the MMI Fund in FY2013. 

1. Reduce Losses From Legacy Books of Business 

The changes made since 2009 to FHA’s lender oversight, credit policies, and premium pricing have yielded substantial improvements in the quality of new loans endorsed by FHA. But significant opportunity remains to reduce the impact on the 

Fund of poorly performing legacy loans severely impacted by the recession, and to 

provide greater assistance for distressed borrowers as they seek to recover and find 

meaningful assistance in dealing with their delinquent loans. With a majority of 

FHA’s projected losses attributable to loans insured from 2007–2009, FHA will take 

several additional steps to maximize recovery in the areas of loss mitigation and 

asset management. 

The Actuary projects nearly $60 billion in claims costs for FHA from seriously delinquent loans that will go to claim by the end of FY2014, largely arising from loans 

insured between 2007 and 2009. As a result, reducing the severity of losses derived 

from these loans will exert a demonstrable positive impact to Fund performance 

over the next few years. Throughout the past fiscal year, FHA has been executing 

on an overall asset management strategy aimed at ramping up REO alternatives. 

REO alternatives (primarily short sales) comprised about 15 percent–20 percent of 

total dispositions since 2010, yielding average loss severities about 20 percent lower 

than REO. In recent months, as noted, FHA also unveiled its Distressed Asset Stabilization Program (DASP), another REO alternative that improves Fund performance. These and other actions have had a measurable effect, as loss severities have 

already fallen by 9 percent in the last year A further reduction in loss severities 

will further improve fund performance. 

36 

• Redesign of FHA Modification Treatments to Better Assist Delinquent Homeowners 

FHA issued a Mortgagee Letter on November 16, 2012, that established revised 

standards for repayment plans, standard modifications, and FHA–HAMP loss mitigation products, which are expected better assist distressed borrowers and reduce 

losses to the Fund from foreclosures. FHA loss mitigation policies will be geared towards greater payment relief for borrowers, targeting payment reductions of at least 

20 percent for FHA–HAMP modifications, which will result in more sustainable payment outcomes for borrowers over the long term. This approach will yield lower 

claim costs for FHA while also reducing prepayment speeds for insured loans, both 

of which will positively impact the MMI Fund. 

• Streamlining of the FHA Short-sale Policy 

Although FHA is deeply committed to providing loss mitigation alternatives to 

borrowers which permit them to retain their homes, home retention is simply not 

an option for some borrowers. For these borrowers, preforeclosure sales (short-sales) 

offer an opportunity to transition out of their homes. This enables both FHA and 

the borrowers to avoid the costs and damages of the foreclosure process. FHA will 

introduce a streamlined preforeclosure sale policy which removes certain barriers for 

borrowers in obtaining a short sale on their FHA-insured mortgage. This change is 

expected to increase the number of defaulted loans that end in short sales rather 

than foreclosures. Because losses from short-sales are substantially lower than from 

the traditional FHA REO process, the shift of greater numbers of distressed homeowners to short-sale dispositions rather than foreclosures will yield better results for 

the MMI Fund while allowing distressed borrowers to start anew without having 

to go through the difficult and costly foreclosure process. 

• Claim Without Conveyance Pilot Program 

FHA is conducting a pilot whereby properties secured by nonperforming FHA-insured loans are offered for sale by the lender who has completed the foreclosure 

process. At a reserve price slightly below the outstanding unpaid principal balance 

of the loan, the properties are sold to third party purchasers without ever being conveyed to FHA. This method of disposing of these properties may yield lower losses 

for the MMI Fund than selling them through FHA’s normal REO disposition process, as carrying costs associated with preserving, managing, and marketing an REO 

property were eliminated. • Proactive Strategies to Further Improve Recoveries 

In addition to the policy and programmatic changes outlined above, FHA will also 

take several innovative and proactive steps to increase utilization of loss mitigation 

options and reduce unnecessary asset disposition losses. First, beginning in 2013, 

FHA will launch a large-scale proactive marketing campaign to promote modification and short-sale strategies for delinquent borrowers. This effort is expected to increase utilization of these programs, which will permit more borrowers to become 

aware of and take advantage of these opportunities, while reducing foreclosures and 

decreasing associated losses for FHA. In addition, FHA will also pursue more creative strategies to dispose of REO properties in geographies where traditional asset 

disposition methods yield net negative recoveries for FHA. This approach will both 

save money for FHA on unnecessary losses as well as contribute to community stabilization initiatives in cities hit hard by the recession. 

2. Further Strengthen the Quality and Impact of New Endorsements 

While much has been done under the current Administration to improve the performance and revenue of new FHA endorsements, we believe it is vital to take additional steps to strengthen new books to ensure the long term health of the MMI 

Fund. Accordingly, in the second quarter of FY2013, FHA will implement the following policies for new originations. 

• Revised Premium Cancellation Policy 

Under a policy change made in 2001, FHA has been canceling required mortgage 

insurance premiums (MIPs) on loans for which the outstanding principal balance 

reaches less than 78 percent of the original principal balance. However, FHA remains responsible for insuring 100 percent of the unpaid principal balance of a loan 

for the entire life of the loan, such loan life often extending far beyond the cessation 

of MIP payments. As written, the timing of MIP cancellation is directly tied to the 

contract mortgage rate, not to the actual loan LTV. The current policy was put in 

place at a time when it was assumed that home price values would not decline, but 

today we know that LTV measured by appraised value in a declining market can 

mean that actual LTVs are far lower than amortized mortgage LTV, resulting in 

37 

2 HUD conducted a review of prepurchase counseling that was published in 2012, which also 

found that the program was serving its intended population. The study tracked 573 participants 

at 12 to 18 months after receiving prepurchase counseling services. Only one of the purchasers 

had fallen at least 30 days behind on his or her mortgage payments and none had a major derogatory event on a mortgage account. A report on the study’s findings can be found at: http:// 

www.huduser.org/portal/publications/hsgfin/prelpurchaselcounseling.html. 

higher losses for FHA on defaulted loans. Analyses conducted by FHA’s Office of 

Risk Management projects lost revenue of approximately $10 billion in the 2010– 

2012 vintages as a result of the current cancellation policy. The same analyses also 

suggest that 10 percent–12 percent of all claims losses will occur after MIP cancellation. Therefore, beginning with new loans endorsed after the policy change becomes 

effective later in FY2013, FHA plans to once again collect premiums based upon the 

unpaid principal balance of FHA loans for the entire period during which they are 

insured, permitting FHA to retain significant revenue that is currently being forfeited prematurely. 

• MIP Increase 

We are very grateful for the flexibility Congress granted us in 2010 to adjust 

FHA’s premium pricing. And we have utilized that flexibility three times already. 

This fiscal year, we plan to use it once again as, consistent with FHA’s continued 

efforts to balance its countercyclical role in the Nation’s mortgage market with its 

responsibility to manage the Fund, FHA plans to increase annual mortgage insurance premiums by an additional 10 basis points. While the new loans being made 

today are profitable to FHA and we do not want to over-burden or constrict access 

to credit as the housing market continues to mend, we also must ensure that we 

are (1) rebuilding adequate reserves for the future and (2) phasing out of our countercyclical role by reducing FHA’s footprint in the marketplace and helping to facilitate the return of private capital. FHA has played a vital part in ensuring access 

to credit for borrowers and liquidity in the market, yet its current outsized role 

should and will decrease. Indeed, its market share has declined yearly since a peak 

in 2009. This premium increase—$13 per month for the average FHA borrower— 

which FHA plans to implement in 2013 will add significant revenue to the Fund 

and ensure that FHA does not take on additional market share, while at the same 

time being modest enough that it doesn’t impact borrower access to credit or threaten our emerging housing recovery. 

• Future Credit Policy and Pricing Changes 

While much has already been done to improve the quality of new FHA endorsements, the effectiveness of which are clear in the performance and projected value 

of loan cohorts insured since 2010, FHA is continually evaluating its portfolio to 

identify and mitigate risks, and to provide enhancements that benefit both consumers and the Fund. Based upon these evaluations, FHA is also developing additional proposals which will further assist in strengthening the MMI Fund. 

• Housing Counseling Incentive Policy 

Significant evidence has shown that housing counseling improves the success of 

home buyers—particularly first time homebuyers. 2 FHA intends to develop new 

policies which incentivize, or in some cases require, borrowers to complete a 

prepurchase housing counseling program prior to the purchase of a home using 

FHA-insured financing. We will work during this fiscal year to craft and receive 

feedback on the precise contours of this initiative. This endeavor is expected to ultimately improve outcomes for both borrowers and FHA, reducing losses to the Fund 

as higher numbers of new borrowers attain successful home purchases. 

3. Stabilize and Strengthen the HECM Program 

Changes in borrower utilization of the HECM program and the modeling changes 

employed by the actuary this year show substantial stress in the HECM program. 

In order to mitigate the negative impact of the 2013 and future HECM books on 

the MMI Fund, FHA is taking aggressive actions in both the near and long terms 

to ensure that consumers are better protected and able to sustain their reverse 

mortgage, while also protecting the Fund. 

• Immediate Steps to Reduce Losses in the Near Term 

Given current regulatory authority, FHA has limited ability to address root cause 

issues and will, therefore, be forced to make blunt changes to the program on an 

interim basis. FHA will take immediate action to better align the program with its 

objective of enabling seniors to age-in-place. These changes will protect FHA from 

38 

losses and reduce the likelihood of borrower defaults due to nonpayment of property 

taxes and insurance. 

In addition, FHA will consolidate the Fixed Rate Standard program with the 

Fixed Rate HECM Saver product, resulting in a reduction of the maximum amount 

of funds available to a HECM borrower. Further, the principal limit factors that are 

used to determine the maximum amount a homeowner may borrow using the remaining HECM products will be reduced across the board (i.e., Fixed/ARM Saver, 

ARM Standard). 

Additionally, in an effort to reduce losses associated with the conveyance and disposition of properties mortgaged with a HECM, FHA will issue new incentives for 

estate executors of HECM borrowers to dispose of properties themselves rather than 

conveying them to HUD. Executors are permitted to either sell such properties or 

convey them to HUD. Reversing the historical trend, over the past few years, larger 

numbers of executors have been choosing to convey these properties to FHA rather 

than sell them, adding costs and reducing recoveries for FHA. By incentivizing the 

sale of properties by executors, FHA is able to avoid property management, maintenance, and marketing costs associated with the REO disposition process, thereby reducing losses to the Fund on these properties. 

• Longer-term Changes to Permanently Strengthen the Program 

Over a longer term, either through the granting of the legislative authority described below or via the much longer rule making process, FHA will also pursue 

other material changes to ensure the long-term viability of the HECM program. 

These measures include: 

• Limiting the draw at origination to mandatory obligations (i.e., closing costs, 

mortgage liens, and Federal debt), providing greater flexibility in addressing 

the individual needs of borrowers than the across-the-board reductions to 

principal limit factors described above, while still protecting the Fund from 

losses on loans where the maximum loan amount is drawn up-front; 

• Performing a financial assessment of borrowers as a basis for loan approval 

and determining the suitability of various HECM products to protect consumers from acquiring loans not fit for their situation; and 

• Establishing a tax and insurance set-aside to ensure sufficient equity or an 

annuity is available to pay taxes and insurance on the mortgaged property 

so that defaults resulting from nonpayment of taxes and insurance can be 

avoided. 

F. Legislative Requests to Further Strengthen the Fund 

Throughout the past 4 years, Congress has moved in important ways to strengthen and protect FHA, and for that we are very grateful. Indeed, were it not for the 

flexibility granted by Congress to FHA in 2010 in setting premium pricing, the current economic value of the MMI Fund would be more than $10 billion lower than 

it is today. And the work this body has done to establish FHA’s first ever Office 

of Risk Management has been instrumental to our improved ability to identify risks 

in FHA programs and take action to mitigate them. So thank you for your commitment to making FHA stronger and more secure over the long term. 

But today, we are asking for your help once again so that FHA is better able to 

protect the Fund while continuing to execute its mission. The proposals outlined 

below will enhance FHA’s ability to hold lenders accountable for noncompliance with 

FHA policy and provide greater flexibility for FHA to make changes to policies and 

procedures as emerging needs and trends are identified. As a result, FHA will better 

be able to avoid unnecessary losses before they occur. 

1. Indemnification Authority for Direct Endorsement Lenders: This provision, 

which FHA has been seeking since 2010, would allow FHA to seek indemnification from Direct Endorsement lenders, which represent 70 percent of all FHA 

approved lenders. Currently FHA only has authority to require indemnification 

for lenders with Lender Insurance (LI) approval. In granting this authority, 

FHA will be able to obtain indemnification from all of its approved lenders for 

loans that do not comply with its guidelines. 

2. Revised Indemnification Authority: This change would eliminate the ‘‘knew or 

should have known’’ standard with regard to fraud or misrepresentation. While 

the Government-Sponsored Enterprises require lenders to retain all fraud related risk, FHA only holds lenders accountable for fraudulent activity if they 

‘‘knew or should have known’’ of its occurrence. Providing proof to meet this 

standard limits FHA’s ability to require lenders to be accountable for fraud in 

39 

FHA-insured loans, and its removal would significantly improve FHA’s ability 

to avoid unnecessary losses arising from fraudulent activity. 

3. Authority to Terminate Origination and Underwriting Approval: This legislation would give FHA enhanced ability to review lender performance and, if a 

lender is found to have an excessive rate of early defaults or claims, would provide greater flexibility in terminating the approval of the lender to originate 

or underwrite single family mortgages for FHA insurance. FHA has been seeking this authority since 2010. 

4. Revised Compare Ratio Requirement: This provision would revise the statute 

governing the Credit Watch Termination Initiative to provide greater flexibility 

in establishing the metric by which FHA compares lender performance so that 

it more effectively captures the true performance of a lender during all market 

conditions, minimizing further poor performance by FHA lenders while reducing uncertainty for them. Specifically, this legislation would allow the Secretary to compare the rate of early defaults and claims for insured single family mortgage loans originated or underwritten by a lender with those same 

rates for other lenders on any basis the Secretary determines appropriate, such 

as geographic area, varying underwriting standards, or populations served. 

Further, the provision would permit the Secretary to implement such comparisons via regulations, notice, or Mortgagee Letter. This will allow FHA to tailor 

the compare ratio such that it provides meaningful comparisons of lenders in 

varying market conditions, providing greater clarity for lenders and a more refined understanding of their performance for FHA. 

5. Authority to Transfer Servicing: In order to facilitate more effective loss mitigation, this change would give FHA the authority to require any of the following 

actions when a servicer is at or below a servicer tier ranking score (TRS) of 

III, or when the Secretary deems the action necessary to protect the interests 

of the MMI Fund: (1) transfer servicing from the current servicer to a specialty 

servicer designated by FHA; (2) require a servicer to enter into a subservicing 

arrangement with an entity identified by FHA; and/or (3) require a servicer to 

engage a third-party contractor to assist in some aspect of loss mitigation (e.g., 

borrower outreach). Such authority would permit FHA to better avoid losses 

arising from poor servicing of FHA-insured loans, yielding better results for 

both borrowers and FHA. 

6. Authority to Manage the HECM Program by Mortgagee Letter: This provision 

would allow FHA to take specific actions via Mortgagee Letter to more effectively manage the HECM program. In light of the HECM portfolio’s sensitivity 

to changing market conditions, this change would provide FHA with the flexibility to make necessary changes as soon as trends or issues are identified 

within the HECM program. 

IV. FHA Multifamily Programs 

The use of FHA MF programs increased exponentially during the crisis, providing 

needed liquidity in the market for MF residential and affordable mixed use buildings despite general constriction in credit markets. FHA has steadily provided liquidity in the market over the past several years in which conventional financing 

has not been readily available. With historically low interest rates, FHA has seen 

exponential growth in this area. 

40 

Today, as the market recovers, we are beginning to see private capital return to 

the market and expect to see a reduction in our share of new market rate units. 

FHA will continue to play a vital role in the creation and preservation of affordable 

housing and will continue to implement policies that balance risk and improve processes. 

A. Risk Management for FHA Multifamily Programs 

1. MIP Increase 

As part of the broader efforts in the Office of Housing since the start of this Administration, FHA has taken a number of comprehensive steps to improve its risk 

management capabilities and processes. These actions were carefully crafted to balance the mission of FHA and its role in the broader credit marketplace. FHA Multifamily provided critical liquidity to the marketplace during the recession and during 

that time (from 2008 to 2011) FHA volume increased five-fold. The GI/SRI funds 

provide financing for the FHA multifamily and health care loan guarantee programs, as well as several very small specialized loan products. These accounts also 

continue to hold a sizable portfolio of single family loan guarantees (HECM, condominium, and rehabilitation loans) insured prior to FY2009 when responsibility for 

new lending under these programs was transferred to the Mutual Mortgage Insurance Fund. Given the unprecedented increase in the number and dollar volume of 

loans insured under the GI/SRI, particularly with respect to market rate loans, the 

Department implemented premium increases for programs in the GI/SRI. This was 

the first premium increase in 10 years for these programs. Also, private capital is 

returning to the multifamily lending marketplace. We want to encourage this private capital to continue to return. In order to do this we need to be sure that our 

FHA products are not underpriced relative to what is available in the private market. 

The MIP increases range from 5 basis points for 223(a)(7) refinancing to 20 basis 

points for 221(d)(4) new construction or rehabilitation activity. The increase premiums will have no impact on either development costs or rents. And, as the Department monitors the programs, the impact of implementing the proposal, and the 

interest rate environment, the Department will consider adjusting the premiums as 

appropriate. Also worth noting is that premiums for affordable housing projects 

(such as those with HUD rental subsidies and low income housing tax credits, as 

well as those insured under FHA risk-sharing programs) were not increased. 

41 

It is important to note that the elevated role FHA is currently playing in the market is temporary. The new premium structure in these programs brings FHA’s pricing more in-line with the private mortgage insurance industry and enables more robust private competition while continuing to ensure sufficient levels of available capital in these sectors. The increase in premiums also reflect new realities—the Multifamily annual book of business is five times greater than it was just 3 years ago, 

and the risk profile has changed dramatically. FHA’s multifamily apartment portfolio is now more than 50 percent market rate by unit count and 70 percent by unpaid principal balance (UPB), which adds a new component of risk, and a need to 

take steps to ensure the future viability of the portfolio. These risks are not yet fully 

captured by historical claim and default trends because they are too new to have 

matured as risks to the portfolio. Further, because of historically low rates, it is 

likely that we will own these risks for an extended period of time given the unlikelihood that borrowers will refinance out of historically low rates and may have difficulty refinancing when interest rates rise over time. 

2. Loan Committees 

FHA Multifamily has also implemented a new loan committee approval process, 

aligning Hub and Program Center commitment authority and practice to ensure 

consistency in underwriting throughout the regional offices, as well as to provide a 

platform to share best practices. Loan committees at the Hub and National levels 

provide oversight for high risk transactions in the multifamily insurance program, 

based on loan size and a project’s number of units. Loan committee approval processes are standard practice in the lending community and are an important tool to 

prudently manage credit risks and ensure the integrity and stability of the GI/SRI 

insurance fund. The Loan Committee has also proven to be an effective tool for increasing communication and a more consistent FHA platform. 

3. Large Loan Policy 

The Department has implemented more stringent underwriting and owner experience requirements for large loans, generally over $40 million for new construction 

and $50 million for existing refinances. This policy addresses the risk of ‘‘single 

point failure’’ by more conservative loan ratios for large market rate loans and a 

higher threshold of owner experience and financial strength. The Department’s 

Large Loan Policy mirrors other industry best practices but still provides attractive 

leverage and terms. Our volume after implementation of this policy has seen a modVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS 12061205.eps
42 

est decline in the number of market rate new construction loan requests, and an 

overall safer book of business for loans underwritten to its requirements. 

4. Revisions to Loan Documents: Increasing Accountability For Borrowers and 

Lenders 

The Multifamily documents have been revised for the first time in decades to reflect modern day lending practices and to provide more accountability for both Borrowers and Lenders participating in Multifamily FHA programs. The documents 

now more clearly set forth contractual responsibilities and obligations of all parties 

and will enhance the Departments ability to enforce against parties in violation of 

business agreements. This will improve the ability of the Department to intervene 

more effectively to execute workouts for projects in contractual or financial violation, 

thereby mitigating the potential risk of claim and further protecting FHA exposure 

to loss. 

5. Project Capital Needs Assessments (PCNA) Enhanced Guidance 

The Department has published guidance incorporating industry feedback on how 

owners should conduct capital needs assessments for projects insured under FHA 

programs. The guidance aligns physical inspection standards for various programs 

and offices within HUD; ensures sufficient funding for replacement of building components, particularly for older properties; and addresses FHEO Accessibility issues. 

6. Breaking Ground: Complete in all Multifamily Office and Delivering Results 

Breaking Ground created extensive tools to monitor and access credit for Multifamily insured loans. Tools include a stronger credit review of borrowers; an early 

warning system that targets loans early in the process that do not meet FHA underwriting criteria; and a dashboard monitoring tool that monitors accountability of 

field offices; and establishment of a queue in order to more efficiently manage workload and provide greater transparency to lenders. Breaking Ground has produced 

results. Survey results demonstrate that staff morale has improved in the majority 

of field offices, with over 83 percent of HUD multifamily staff believing that the program helped their office become more effective and efficient. Almost 90 percent of 

staff now feel encouraged to come up with new and better ways of doing things. In 

terms of processing efficiency improvements, offices that had large application backlogs prior to Breaking Ground have begun to methodically clear out older applications, evidenced by the number of applications in process for over 90 days dropping 

from 191 to 50 in just seven months. In addition, offices that began Breaking 

Ground without a large backlog have begun to meet aggressive application processing time cycles established by the Office of Multifamily Housing. The Department will continue to track these metrics and look forward to reporting on these 

results. 

7. Sustaining Our Investments: A Multifamily Asset Management Sister Initiative to Breaking Ground 

The Department has launched Sustaining Our Investments, an initiative that focuses on Risk Based Management of the portfolio allowing project managers at both 

the Headquarters and field level to focus day to day operations on managing at-risk 

loans in the portfolio. Risk based reports keyed on financial and physical risk triggers direct project managers to act early on potential problems with particular assets. The first step in this initiative is completing a full ranking of FHA’s entire 

multifamily market rate portfolio. 

8. Low Income Housing Tax Credit Pilot 

The Department launched a new program to facilitate the underwriting of FHA 

insured loans on transactions that include Low Income Housing Tax Credit equity. 

The pilot provides a more efficient delivery system for affordable housing by focusing on training Senior Underwriters to process loans that meet specific qualifying 

criteria and risk characteristics. The Tax Credit Pilot program will enable HUD to 

better meet our goals to finance affordable rental housing. Focusing on refinance 

and repair of existing properties, the Tax Credit Pilot offers a streamlined process 

and a staffing structure that meets industry best practices and allows HUD to focus 

on critical risk-based underwriting. In September, the program was expanded from 

a limited pilot geography to nationwide. I am pleased to report that we will endorse 

the first two loans under the program within the next month. These two loans were 

completed in less than half the processing time of our conventional program structure. With nearly two dozen loans in the pipeline under the Pilot program, we expect to see similar outstanding results using this new tool for financing and preserving affordable housing. 

43 

B. Legislative Requests 

As part of the Fiscal Year 2013 Budget, HUD is seeking legislation to facilitate 

lending to small multifamily properties which are an important provider of affordable, but unsubsidized, housing for low and moderate-income families. According to 

the 2010 American Community Survey, nearly one-third of renters live in 5 to 49 

unit buildings. These buildings also tend to have lower median rents than do larger 

properties: $400 per month for 5 to 49 unit properties as compared to $549 per 

month for properties with 50 or more units. Because they are expensive to finance, 

particularly in this environment, these properties are at risk of divestment. 

HUD is proposing two legislative changes: first, changes to the Section 542(b) 

Risk Share program that would allow the Department to explore flexibility with the 

542(b) Risk Share program to work with experienced affordable housing lenders to 

make Risk Share loans to small properties; and second, changes that would allow 

Ginnie Mae to securitize risk share loans under Section 542(b).These changes would 

allow HUD to enter into Risk Share agreements with qualified lenders—such as 

well-capitalized Housing Finance Agencies or Community Development Financial 

Institutions—that have demonstrated experience making loans to support affordable 

housing and neighborhood stabilization. Under these Risk Share agreements, qualified lenders could make refinance, acquisition or rehab loans available to small (5 

to 49 unit) properties. Lenders approved by Ginnie Mae could then securitize those 

loans on the secondary market, increasing the availability of capital for more multifamily lending. HUD’s proposal to improve the resources available to small building 

owners is part of the Department’s broader commitment to rebalance the Nation’s 

housing policy to support rental housing and neighborhood revitalization. These 

changes will provide small property owners with the same access to our Risk Share 

program as other multifamily property owners currently have. As Federal and State 

budgets shrink and the need for quality, affordable rental housing is on the rise, 

it’s critical that we support small businesses who are finding solutions that work 

for families and for local economies. We look forward to working with Congress to 

ensure the availability of these unsubsidized, affordable housing units. 

HUD is also pursuing legislative authority to allow Ginnie Mae securitization for 

542(c) Risk Share loans. The 542(c) program currently serves State and local housing financing agencies whereby FHA ‘‘shares the risk’’ but allows the HFA to set 

the underwriting standards and monitor the loan. This proposal is strongly supported by the HFAs because of the long-term structural collapse of the municipal 

bond market that has severely constrained HFAs’ access to capital and substantially 

increased HFAs’ cost of capital. 

V. FHA Health Care Programs 

FHA has steadily provided liquidity in the market during times of economic constriction. Combined with historically low interest rates, FHA has seen exponential 

growth in this area. FHA issued a record number of $6.5 billion in commitments 

in Fiscal Year 2012. FHA’s health care programs for hospitals and residential care 

facilities (nursing homes, assisted living facilities, and board and care homes) have 

helped private lenders fill the gap left with the shrinkage of the conventional finance resources. And while this market seems to be rebounding, we continue to expect high levels of mortgage insurance activity for Fiscal Year 2013. As of September 2012, the FHA’s portfolio of health care loan guarantees had an unpaid principal balance of $29.0 billion on 2,957 loans and counting. 

A. Evolution of FHA HC Programs—Balancing Risk and Improving Processes 

The increased activity within FHA’s health care programs have brought in positive risk management changes to both balance risk and improve processes. Given 

the unprecedented increase in the number and dollar volume of loans insured under 

GI–SRI, in Fiscal Year 2013, premium increases for FHA’s General Insurance and 

Special Risk Insurance health care programs were instituted to protect capital reserves and increase the stability of the insurance fund. With the premium increases, 

FHA Health Care loans are priced more appropriately to encourage the return of 

private capital while, at the same time, continuing to ensure sufficient levels of 

available capital in these sectors. 

In FHA’s Office of Health Care Programs, weekly loan committees are held to review and approve loan submissions and to monitor health care industry trends and 

risks. By implementing proactive asset management using early intervention monitoring tools, the Office of Health Care Programs succeeded in maintaining very low 

claim rates in both health care facility mortgage insurance programs in Fiscal Year 

2012. 

LEAN Business Process Reengineering has also played an integral part in streamlining business operations within FHA’s health care programs. Despite volume inVerDate Nov 24 2008 16:05 Apr 26, 2013 Jkt 048080 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\12-06 OVERSIGHT OF FHA -- EXAMINING HUD S RESPONSE TO FIS
44 

creases, LEAN Processing improvements reduced loan processing times while increasing risk management efforts. Revised program requirements and documents 

were established to enhance accountability for borrowers, operators, and lenders. To 

further manage risk in the health care portfolio, in areas of large risk concentrations, such as insuring portfolios of multiple health care facilities, reviews are conducted at both the corporate and individual loan levels. In the residential care facility mortgage insurance program, implementation of a Master Lease Structure to 

cross-collateralize properties not only works to improve the overall risk profile of 

FHA’s health care portfolio, but ultimately reduces claims. 

The Office of Health Care Programs is in ongoing collaboration with HHS, CMS, 

and State public health departments to support efforts to ensure quality of care for 

the most vulnerable populations. Also, by incorporating State survey inspection results, cost reports, and data from other Federal and State agencies into FHA’s underwriting and asset management procedures, the shared utilization of data and 

cross-collaboration has been instrumental in keeping health care claim rates low 

within FHA. 

B. Legislative Request 

As part of the efforts of FHA’s Health Care programs to strengthen communities 

by addressing specialized financing needs, HUD is seeking passage of the language 

in the THUD Appropriations Bill to permit rural Critical Access Hospitals to be eligible for FHA insurance. 

We are appreciative of the Congress’ long standing support for Critical Access 

Hospitals by amending Section 242 to permit these important facilities to be eligible 

for FHA insurance, and hope that this language will be approved to allow Critical 

Access Hospitals to continue to be eligible for FHA insurance. 

The efforts of FHA’s Health Care programs are essential in achieving the Department’s mission of strong, sustainable, inclusive communities and quality, affordable 

housing and services for all Americans. 

VI. Conclusion 

Mr. Chairman, there are real signs of recovery in the Nation’s housing market. 

Given the progress we’ve seen—and FHA’s central role in that progress—it’s clear 

that FHA has fulfilled its intended role in the Nation’s housing finance system. It 

has allowed millions of American families to benefit from home ownership and affordable rental options. It has ensured much needed liquidity in the Nation’s mortgage finance markets. And it has acted as a vital stabilizing force when an economic 

crisis precipitated by the housing market could have resulted in this country’s second Great Depression. Our job now is to be good stewards of taxpayer dollars and 

ensure FHA can continue be a source of opportunity and access to home ownership 

for future generations. We are committed to that goal, and we look forward to working with you to achieve it.