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50–352 2009

S. HRG. 110–926 

MODERNIZATION OF FEDERAL HOUSING 

ADMINISTRATION PROGRAMS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

A REVIEW OF PROCESSES AND PROPOSED STATUTORY CHANGES IN 

ORDER TO MODERNIZE THE FEDERAL HOUSING ADMINISTRATION 

WEDNESDAY, JULY 18, 2007 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


dcolon on DSK2BSOYB1PROD with HEARING
(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

JONATHAN MILLER, Professional Staff 

MARK A. CALABRIA, Republican Senior Professional Staff Member 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 


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C O N T E N T S 

WEDNESDAY, JULY 18, 2007 

Page 

Opening statement of Senator Carper ................................................................... 1 

Opening statements, comments, or prepared statements of: 

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

Senator Menendez ............................................................................................ 3 

Senator Crapo ................................................................................................... 4 

Senator Dole ...................................................................................................... 5 

Senator Schumer .............................................................................................. 6 

WITNESSES 

Brian Montgomery, Assistant Secretary for Housing and Federal Housing 

Commissioner, Department of Housing and Urban Development 

Prepared statement .......................................................................................... 11 

Kenneth M. Donohue, Inspector General, Department of Housing and Urban 

Development 

Prepared statement .......................................................................................... 17 

William Shear, Director of Financial Markets and Community Investment, 

Government Accountability Office 

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

John Anderson, Former Chair of the Federal Housing Policy Committee, 

National Association of REALTORS 

Prepared statement .......................................................................................... 51 

David Kittle, Vice Chairman, Mortgage Bankers Association 

Prepared statement .......................................................................................... 68 

Kenneth Wade, Chief Executive Officer, NeighborWorks America 

Prepared statement .......................................................................................... 83 

Response to written questions of: 

Senator Bunning ....................................................................................... 124 

David Crowe, Senior Staff Vice President of Regulatory and Housing Policy, 

National Association of Homebuilders 

Prepared statement .......................................................................................... 87 

Response to written questions of: 

Senator Dodd ............................................................................................. 126 

Basil Petrou, Managing Partner, Federal Financial Analytics 

Prepared statement .......................................................................................... 99 

George Hanzimanolis, President, National Association of Mortgage Brokers 

Prepared statement .......................................................................................... 114 


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MODERNIZATION OF FEDERAL HOUSING 

ADMINISTRATION PROGRAMS 

WEDNESDAY, JULY 18, 2007 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:33 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Thomas R. Carper presiding. 

OPENING STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. Good morning, everyone. The hearing will come 

to order. 

I am pleased to be here with my friends, Senator Shelby, my 

ranking member, Senator Crapo, Senator Menendez. These guys 

look fresher than I would have believed possible after the night 

that they have been through. Delighted you are here with us and 

this will wake us up, if nothing else. 

Today’s hearing, as you know, is to review the Administration’s 

proposals for the modernization of the Federal Housing Administration’s flagship program, and that’s the Single-Family Mortgage 

Insurance Program. 

I want to thank Chairman Dodd for calling this important hearing, for the participation of my colleagues, and the many distinguished witnesses we have, two panels. We are delighted that you 

have joined us. 

I want to point out that the Chairman has made clear that he 

is working closely with the Administration and colleagues on both 

sides of the aisle, as well as all of the groups that are representing 

here today in an effort to move legislation on the FHA program 

through the Committee prior to the August recess. 

This is a timely hearing, as a result. A recent article in the News 

Journal, which is a local Delaware paper, reports that foreclosures 

in my own home State of Delaware have reached a record high of 

almost 3,000, a 29.5 percent increase over the previous year. To the 

extent that FHA can serve as an alternative to these homebuyers, 

it is not only important to Delaware but I think to the entire Nation. 

It can be fairly said that our modern mortgage market owes its 

beginning to the Federal Housing Administration. FHA set many 

of the standards that we now take for granted in the mortgage 

market. For example, the low down payment 30-year fixed 

prepayable amortizing mortgage became the standard mortgage 

product largely because of FHA. For many years, FHA was the tool 


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by which working Americans, minorities and first-time buyers 

achieved the dream of homeownership. 

In recent years, however, we have seen a drastic decline in the 

FHA’s market share. Just 10 years ago, the FHA had about 19 percent of the purchase market. By the end of 2005, however, that 

share had dropped 13 percentage points to about 6 percent of the 

purchase market and 4 percent of the overall market. 

This raises a serious concern because the business that seems to 

be migrating away from the FHA seems to be moving to the 

subprime market, with its myriad abuses that we have documented 

through numerous hearings both this year and last. 

In fact, a June 2007 GAO report indicates that the drop in the 

FHA program is mirrored almost exactly by an increase in the 

subprime market which increased its share by 13 percentage 

points, exactly what FHA lost, from 2 percent to 15 percent of the 

market. Unfortunately, this is a trade-off that is a very bad one for 

the homebuyers and homeowners of America, as has been made 

abundantly clear in recent months. 

Indeed, data shows that the FHA borrowers have credit scores 

very close to subprime borrowers and on average substantially 

lower than subprime borrowers. Yet FHA borrowers pay interest 

rates much closer to those paid by prime borrowers and substantially less than those paid by subprime borrowers. 

Moreover, FHA loans do not have the same abusive characteristics that most subprime loans have. For example, FHA loans have 

no prepayment penalties. They require escrows for taxes and insurance. FHA ARMs are all underwritten at the fully indexed rate, a 

practice that was just finally embraced by the Federal regulators. 

Furthermore, FHA has a good record of providing loss mitigation 

though substantial improvements can still be made. That is why 

though FHA serves a very similar clientele as the subprime market, its foreclosure rates are half or less than seen in subprime 

markets. 

The conclusion all of this leads me to reach is that we need to 

find a way to make FHA a more viable and effective program in 

the many communities in which it has been made irrelevant either 

by overly restrictive loan limits or other problems. 

I look forward to working with Chairman Dodd, with this man 

right here, our ranking member, Mr. Shelby, who I called Mr. 

Chairman for many years, and other members of the Committee to 

achieve his goal. 

With that having been said, I recognize our ranking member, 

Senator Shelby, for whatever comments he would like to make. 

Thank you. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Mr. Chairman, for calling today’s 

hearing on the Federal Housing Administration. 

Over the years, FHA loan guarantees have helped millions of 

Americans become homeowners. We all know that. Because the 

American taxpayer stands behind the FHA’s guarantees, I believe 

this Committee should not only examine closely the status of the 

FHA programs but also any effort to expand it. 


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According to the President’s budget submission, the FHA, for the 

first time in its history, will lose money this fiscal year, becoming 

a net loss to the taxpayer, the first time. Mr. Chairman, before the 

taxpayers are faced with greater losses, I believe we must determine how the FHA got into this position and how it intends to get 

out. Some would suggest however, Mr. Chairman, that we allow 

the FHA to grow its way out of insolvency with new products and 

expanded powers. This is a road we have been down, right here in 

this Committee. 

For instance, as the S&L crisis was beginning the response right 

here was to allow S&Ls to offer new products and to expand their 

business. Because we failed to address the underlying fundamental 

weakness, the result of that expansion was a much larger bill for 

the American taxpayer. 

Over the last several months, this Committee has been watching 

the growing problems in the subprime mortgage market that you 

alluded to. According to GAO, part of the growth of the subprime 

market came at the expense of FHA. As liquidity in the subprime 

market declines, however, we can expect FHA activity to expand as 

more homeowners look to FHA-insured products to meet their 

needs. 

As this happens, Mr. Chairman, I think this Committee must 

make sure that the FHA expands in a responsible way. 

While the subprime market has witnessed considerable stress, 

the losses in that market are being borne by investors, and I hope 

will always be. Were these same losses, Mr. Chairman, to occur in 

FHA programs it is likely they would be borne by the taxpayer, 

something we should try to prevent. 

One lesson learned from the current pattern of defaults and delinquencies in the subprime market is that those borrowers with 

little or no activity in their home will be the most likely to fail. 

That is just plain common sense. 

As we are already witnessing delinquency rates in the FHA’s 

portfolio that mirror the subprime market, I believe we must approach any attempt to expand the program or lower the program’s 

standards with great caution. 

I want to welcome all of today’s witnesses and look forward to 

the program here today. 

Thank you, Mr. Chairman. 

Senator CARPER. Thank you, Senator Shelby. Senator Menendez, 

you are recognized. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Let me thank Chairman Dodd for calling the hearing, for you for 

presiding today and your interest in this, as well as our ranking 

member, for holding what I think is an incredibly important hearing today. 

I have been a long-time supporter of FHA reform and I believe 

the debate is especially important in the context of the current 

subprime crisis that we face. 

In March, when this Committee held its first hearing to address 

the subprime crisis, I spoke then about the need to raise the FHA 

loan limit in order to give borrowers more options. I knew then 


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what I believe to be the case now, that raising the FHA loan limit 

is long overdue. I appreciate that the Administration seeks to do 

so, as well. 

If Congress had modernized the FHA years ago I do not think 

we would be in such a serious detrimental subprime crisis. Right 

now many borrowers have no alternatives to a subprime loan and 

the FHA has no tools with which to help these borrowers. Homebuyers need more options than just the subprime market. But if we 

do not raise the FHA loan limit, they do not have a real alternative. 

In my home State of New Jersey 13 out of the 21 counties are at the FHA ceiling of $362,790. In eight of these 13 counties the 

median home price is over $40,000. These numbers simply do not 

add up. 75 percent of New Jerseyans live in those 13 counties and 

they deserve better, more affordable options. 

By the way, in the context of New Jersey—and I am sure this 

exists in many housing markets across the country—this is not 

about luxury housing. This is about the housing you get to afford 

for the essence of trying to achieve homeownership and the beginning of a middle-class existence. 

Borrowers in New Jersey and across the country have largely nowhere to turn. Right now we are basically asking them to choose 

between either a zero down payment mortgage with all the risks 

that go with that or an adjustable rate mortgage that will possibly 

push them into foreclosure or an FHA loan for an insufficient 

amount. This is an unfair deal for borrowers in New Jersey and in 

America and I am glad that we are addressing these concerns 

today. 

I believe the housing situation in many parts of our country is 

in a crisis. And it is not just the subprime market. I believe the 

Administration is drastically underfunding programs. Congress has 

yet to provide alternative solutions and borrowers are simply crying out for help. 

In closing, Mr. Chairman, I also want to ask my colleagues to remember that many of the borrowers that we are talking about 

today are often minority, low income, first-time homebuyers who 

simply dream of owning a home. Our job is to do everything we can 

to make that dream come true. Unfortunately, FHA has had a dramatic downturn in covering that part of our American family. So 

I look forward to working with my colleagues on these issues, from 

hearing our witnesses today, and hopefully moving to an FHA reform bill, Mr. Chairman. 

Senator CARPER. Senator Menendez, thank you for that statement. 

Let me recognize now Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. 

I appreciate your holding this hearing on the modernization of 

the Federal Housing Ministration programs. 

I look forward to learning more about HUD’s proposed legislation 

and how it will affect the demand for FHA’s loans, the cost and 

availability of insurance to borrowers and the risks to the insurance program and ultimately to the taxpayers. 


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There is one program in particular that I hope we as a Committee can get a lot more information about and pay a lot more attention to, and that is the reverse mortgage program. I understand 

that HUD’s proposal proposes eliminating the cap on reverse mortgages and I commend that aspect of the proposal. I am a strong 

supporter of HUD’s reverse mortgage program, known as the 

HECM or Home Equity Conversion Program. 

This program is an important example of a successful public-private partnership. It allows our elderly citizens the opportunity to 

age in place by spending their own equity and retaining their own 

integrity. And predictions are being made that in the future 

HECMs will be a common financial planning tool for retirees. 

So it is this kind of new innovation and advanced thinking that 

I think we need to pay attention to as we move forward with FHA 

modernization. 

I also want to commend Commissioner Montgomery’s administrative efforts that have led to significantly reduced processing times 

for FHA loans, reduced the cost of its FHA business, and shortened 

the time that it takes to close an FHA loan. These are very positive 

changes and I am hopeful that the process that we are now going 

through can also result in new improvements that can, as I indicated, not only be innovative and help us to move into new tools 

that will help those who—particularly the elderly and others who 

need support in their homes, as well as new tools to improve the 

overall operation of the FHA. 

Thank you, Mr. Chairman. 

Senator CARPER. Thank you very much. 

Senator Dole, you are recognized at this time. 

STATEMENT OF SENATOR ELIZABETH DOLE 

Senator DOLE. Thank you, Mr. Chairman, ranking member Shelby, delighted that we are holding this hearing on the modernization of the Federal Housing Administration. And I want to thank 

our witnesses and look forward to hearing from you. 

Commissioner Montgomery, let me say what a privilege it was to 

have you in North Carolina last month as we hosted a workshop 

on making homeownership a reality. This event was designed to 

help potential homeowners maneuver through the often stressful 

home buying process and also to provide information to Realtors 

and to local organizations that do so much important work to help 

assist people in purchasing and renovating homes. 

We had great success with that workshop. We are already planning another across the state. So Commissioner Montgomery, 

heartfelt thanks for your continued efforts and those of your staff 

in helping us with these programs. 

Today approximately 70 percent of Americans own their own 

homes and minority homeownership has now eclipsed 50 percent. 

While this is very good news, we must continue to focus our efforts 

on further increasing homeownership, particularly for minorities. 

The FHA is critical in this regard as it assists many first-time 

homebuyers by providing affordable mortgage insurance. In fact, 79 

percent of FHA-insured home purchase loans in 2006 went to firsttime buyers, 31 percent of whom were minorities. 


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According to a 2006 GAO report the FHA’s share of the private 

mortgage insurance market is only 6 percent, down from 19 percent a decade ago. In North Carolina, the number of FHA singlefamily purchase mortgage endorsements has fallen 33 percent from 

the year 2000 to 2006. This signals that it is time to consider the 

responsible modernization of the organization so that the FHA can 

remain a positive force for the housing sector. 

As we examine FHA reform, this Committee must take into account today’s real estate environment. In North Carolina and 

around the country a sharp rise in foreclosures is hurting homeowners and neighborhoods, as we have all heard and know. 

In recent years more Americans have turned to unconventional 

lending products such as interest only, balloon payment, and option 

adjustable rate mortgages. While these products have made it easier for people to get into homes, we are seeing the dangers associated with their usage as borrowers are pushed beyond their means. 

Any changes to the FHA should support the ability of buyers not 

only to get into homes but also to afford to remain in their homes. 

In addition, whatever authority Congress grants to the FHA, this 

Committee must be confident that the agency can both implement 

it and manage risks appropriately. In the past, FHA has not had 

a perfect track record. For example, FHA has not used pilot programs to test some products before they are marketed. As is the 

case with certain no down payment products, FHA does not plan 

to first test a program that will provide mortgage insurance for 

zero percent down loans which can pose significant risks. 

In addition, I am concerned about the so-called score-based pricing proposals and their impact on minorities. Among African Americans alone, 40 percent would pay more in mortgage premiums 

under this plan and 32 percent would be shut out of the market 

entirely. No question we should be promoting homeownership opportunities for these families, not shutting them out. 

Furthermore, I appreciate FHA’s desire to improve its assessment of mortgage risk. That being said, in addition to relying on 

credit scores as the principal determinant of borrower loan eligibility I would encourage FHA to consider other factors, including 

the amount of the down payment or the type of loan such as fixed 

or adjustable interest rate. 

Mr. Chairman, ensuring to continued success of our Nation’s 

housing programs will enable millions more families to own their 

own homes and achieve the American dream. I look forward to 

working with this Committee as FHA modernization efforts move 

forward. 

Thank you very much. 

Senator CARPER. Senator Dole, thank you very much. Senator 

Schumer, you are recognized. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you and ranking member Shelby for holding this hearing on modernization of FHA, which is needed so badly. 

The FHA provides an invaluable service to millions of Americans 

every year by giving them the resources and protections needed to 

purchase a new home and truly live out the American dream. To 


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most of my constituents and most Americans, their home is their 

piece of the rock. It is their largest and most important asset that 

they work very hard to gain and maintain. 

However, as home prices continue to surge, those same resources 

and protections are needed now more than ever as the price of purchasing a single-family home moves farther out of reach for many 

average Americans. 

Nowhere is this problem more apparent than in my home State 

of New York, particularly in the suburbs surrounding New York 

City. The price of housing in Nassau, Suffolk, Westchester, Rockland Counties has soared in recent years. And while no one wants 

to wag a finger at rising property values, we need to make sure 

that first-time homebuyers still have access to quality homes for 

their family. 

Middle-class families are the fabric of these communities. But 

unfortunately they have been driven out of the market. Over the 

long term this can have a calamitous effect on these areas, not only 

in terms of housing but basic social services and the overall economy. Teachers, firefighters, nurses, librarians, small business owners must be able to live in the communities they serve, plain and 

simple. Suburbs cannot be havens only for the upper middle class 

and the very rich. 

One of the primary mechanisms for keeping middle-class families 

in the home-buying market and still be able to afford homes in suburban communities is the FHA loan guarantee. However, this 

mechanism is no longer available to homebuyers in high cost communities because of the FHA loan limits. 

For example, in Long Island the median home price, right in the 

middle and not even the average pulled up by those mansions, 

megamansions, the median home price is currently $479,000. That 

is almost $120,000 more than FHA loan limits currently allow. So 

unlike just about every other part of the country, fewer than half 

of all Long Islanders can get an FHA loan. It is as high as 80 or 

90 percent in other parts of the country where home prices are 

lower. 

And this happens, I know my colleague, in New Jersey and California and Massachusetts and many other places. As we all know, 

FHA mortgage insurance protects the lender against default which 

allows the lender to offer a competitively priced prime loan to lower 

income, to minority, and to first-time homebuyers, three groups of 

homebuyers that are often unable to obtain prime loans in the market. 

In recent years, we have seen a sharp decline in the number of 

safe and affordable FHA-insured loans sold. Why? The answer is 

simple, according to FHA, the GAO, and other experts. It is because the FHA has not adapted to the realities of the changing real 

estate markets. Median housing prices in suburban communities 

throughout America far exceed the limits imposed under current 

FHA rules. This ideology is unfair. 

And so we are here today to discuss changes we can make in 

Congress, a long-overdue change. The most important change is 

one that was suggested by the FHA itself, raising the FHA loan 

limits to reflect the reality of rising home prices. We all know that 

home prices have dramatically increased but FHA loan limits have 


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not been raised to reflect these increases. Because FHA loan limits 

have not been revised upward, FHA-insured mortgages are virtually nonexistent in higher cost communities. And in my home 

State of New York this is acute. 

That is why I am introducing the FHA Loan Limit Adjustment 

Act of 2007. I just introduced it late last night. My bill will raise 

the FHA limits so that more homebuyers, especially those living in 

high-cost areas, will have the opportunity to purchase safe and affordable FHA-insured prime mortgages. In high cost communities 

like Long Island the bill would raise the upper limit from $362,000 

to $417,000. 

This is a needed change. I look forward to working with the Committee to improve FHA’s ability to provide services to many more 

Americans. Raising the limits will have a positive effect on the 

growing crisis in our country, that of subprime mortgages, as well. 

I recently chaired a Housing Subcommittee hearing that focused on 

subprime and we found a whole lot of terrible practices. We have 

a large and growing body of data that suggests that the decline in 

FHA mortgages and the corresponding increase in subprime loans 

has been extremely detrimental and has helped cause—the inability to get FHA loans has helped cause or exacerbate the subprime 

crisis. 

I believe that access to FHA-insured loans provides a sound alternative for some borrowers in the subprime market. It has been 

estimated that about 40 percent of subprime borrowers could actually qualify for prime loans under an FHA guaranty. And so I look 

forward to hearing your opinions today on the issue of loan limit 

increases. 

And thank you, Mr. Chairman, for having this hearing and hope 

we can get support for the bill. 

One other thing, I have discussed this with Chairman Frank on 

our House side and he is supportive of this type of proposal. 

Senator CARPER. Thank you, Senator Schumer. 

For our witnesses, let me just say there is a rule in the Senate 

that committees may not meet while the Senate is in session. That 

rule is routinely waived by unanimous consent, someone asks 

unanimous consent that committees be allowed to meet during the 

Senate’s session. It is routinely agreed to so he can hold our committee meetings. 

I have just learned from Sean Maher, our Legislative Staff Director on the majority side, that there has been an objection by minority in the Senate to committees meeting today while the Senate is 

in session. As a result, we are in an awkward position where, 

under the Senate rules, we are not allowed to meet. 

I regret that and I apologize for the inconvenience this has probably caused for a number of our witnesses and, frankly, for many 

of us. But I am informed that we are not able to proceed to the 

rules of the Senate, at least at this time. 

I am going to ask our witnesses, if you will, just to take a few 

minutes and to meet immediately after we adjourn here in a moment, to meet with Sean Maher and his staff and our minority 

staff as well to talk about how we are going to proceed. 


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This is the first time, I would say to my colleagues, the first time 

I have been privileged to chair a full Committee hearing. I have a 

feeling—— 

[Laughter.] 

Senator MENENDEZ. Mr. Chairman. 

Senator CARPER. This is a bad omen. 

Senator MENENDEZ. Mr. Chairman, I have a parliamentary inquiry. 

Senator CARPER. Go ahead. 

Senator MENENDEZ. Even though this meeting had been scheduled before the present debate, and had been noticed as such, with 

both sides of course agreeing to it, there is an ability to proceed 

now? 

Senator CARPER. That is correct. I have talked on the side here 

with Senator Shelby who said there has been any number of times 

when he was Chairman and when Paul Sarbanes was Chairman of 

the Committee that they have had to adjourn in a similar situation. It is not just this Committee, I think probably all the committees in the Senate—— 

Senator MENENDEZ. Mr. Chairman, I was looking forward to your 

excellent leadership. 

Senator CARPER. You know what I was looking forward to? I will 

say this with a little bit of humor here. The second panel, the first 

witness on the second panel is William Shear, William Shear. It is 

too bad Chuck Schumer has left because he and I are great music 

aficionados. 

I was listening this past week or so to NPR radio and they were 

doing an interview previously recorded with a guy named George 

Martin, who some of you will recall was the legendary producer of 

all of those Beatles’ records for many, many years. One of which 

began with the words, ‘‘It was 20 years ago today that Sergeant 

Pepper taught the band to play. It’s been going in and out of style, 

but they are guaranteed to raise a smile. So let me introduce to you 

the one and only Bill Shear.’’ 

Bill Shear. Think about that one for a while, folks. Where is Mr. 

Shear? You are guaranteed to raise a smile. But unfortunately we 

are smiling through our tears today. We are just not going to be 

able to proceed. 

Senator Martinez, we are out of luck today. There has been an 

objection to our proceeding, and frankly to all committees proceeding. So we are going to break it off. Did you have something 

you would like to say before we call it—— 

Senator MARTINEZ. There is a lot I would like to say but not if 

it is not going to be a meeting. I will do it the next time. 

But I wanted to always welcome FHA Administrator, Mr. Montgomery, who does a terrific job and to express my strong support 

for an FHA modernization bill, which I think is so desperately necessary, given the current situation with subprime lending and foreclosures and so forth. 

So I look forward to an opportunity when we can meet and have 

a full discussion on this important legislation. 

Senator CARPER. Again, to Secretary Montgomery and Mr. 

Donohue, to Billy Shear, and the full panel, second panel of witnesses, we regret this has happened. We hope that you will work 


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with us so that we will have an opportunity to reschedule this 

promptly because we hope to mark up the bill before the beginning 

of the August recess. 

Senator MARTINEZ. Mr. Chairman, if I may, because of the late 

night, I think I forgot to also include Mr. Donohue in my regards, 

having worked with him in the past. I consider him a great American and a great servant. 

Senator CARPER. Do you want to say anything to Billy Shear out 

in the audience? 

[Laughter.] 

Senator MARTINEZ. I do not know Billy Shear but I am sure he 

is also a fine American and I am glad he is here. 

Senator CARPER. He is guaranteed to raise a smile. 

All right, ladies and gentlemen, let us get back together in a few 

days, I hope, and be able to get this show on the road. 

Thank you all. 

[Whereupon, at 10:02 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM KENNETH WADE 

Q.1. Despite the decline in writing F.H.A. loans, has homeownership increased or decreased over the last few years? What about 

minority homeownership in particular? 

A.1. Since 1994, the homeownership rate for all households in the 

United States has increased by nearly 5%, from 64% in 1994— 

reaching a historic high of 69% in 2004, before falling slightly, to 

68.8%, in 2005. As of the second quarter of 2007, the homeownership rate had slipped to 68.2 percent. 

The homeownership rate for White households has increased 

from 70% in 1994 to 75.8% in 2005. 

The homeownership rate for African-American households has 

increased from 42.3% in 1994 to 48.1% in 2005. 

During this same time frame, the homeownership rate for Hispanic/Latino households has increased from 41.2% in 1994 to 49.5% 

in 2005. 

Homeownership rates have risen for all racial groups over the 

past decade, but a persistent homeownership gap between Whites 

and Minorities has remained. 

See chart below. 

Q.2. What borrowers should F.H.A. programs help? 

A.2. FHA’s purpose is to serve low to moderate income homebuyers, including those who have less-than-perfect credit and little 

savings for a downpayment. FHA’s focus should be primarily on 

providing mortgage insurance for first-time homebuyers and on 

serving communities and/or populations that have been underserved by the conventional mortgage markets. 

Q.3. What kind of profits do lenders and brokers make on F.H.A. 

insured loans? How does the taxpayer backstop affect market discipline? 

A.3. I am not at all familiar with the profits that lenders and brokers make on FHA insured loans, other than to know that they are 

reportedly competitive with industry norms. 


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In terms of whether the taxpayer backstop affects market discipline: 

Lenders are able to offer homebuyers an FHA-insured loan at a 

prime interest rate, knowing that the loan is backed by the full 

faith and credit of the U.S. government, thereby providing an affordable alternative to some of the subprime mortgage products 

that have contributed to the current rise in foreclosures. Since FHA 

underwriting is aimed at offering mortgage insurance only to qualifying borrowers that can repay both the mortgage itself and the 

FHA insurance premiums, the FHA program should operate entirely from self-generated income—at little or no cost to the taxpayer. 

Q.4. Are there any mortgage products that FHA should not be allowed to insure? 

A.4. FHA should not be allowed to insure ‘‘teaser rate’’ mortgages, 

or high-cost/predatory loans. They should also not insure mortgages 

for non-resident owners (meaning speculators, investors, or vacation homes), nor should they insure ‘‘cash-out’’ mortgages. 

Q.5. Are there better options other than a guarantee program to 

help appropriate borrowers who are unable to find financing? 

A.5. I’m not sure. There are other/additional options that include 

things like direct subsidies, low-intrest loan programs, and tax 

credits, among others. Consumers and affordable housing practitioners have tended to use a range of approaches, depending on the 

specific needs of the borrower. 

Q.6. If we were to increase the loan limits to G.S.E. levels, why do 

we need both GSE’s and FHA? Will that make it harder for Fannie 

and Freddie to meet their affordable housing goals? 

A.6. In my view, the roles of the GSEs and FHA are quite different, 

and aren’t either duplicative or competitive. Lifting the FHA loan 

limits shouldn’t make it harder for Fannie Mae and Freddie Mac 

to meet their affordable housing goals. 

But an increase in the FHA loan limits would enable FHA to 

serve as an important refinance vehicle—making it possible for 

homeowners who are facing high mortgage payments as their adjustable-rate mortgages reset, to refinance into a more affordable 

FHA mortgage. Also, because of current FHA loan limits soem deserving borrowers in high cost areas of the country are not currently being served by FHA and have had to get their financing 

from the subprime market. 

Q.7. Will expanding FHA programs drive up housing prices? 

A.7. I don’t believe so. Although FHA its niche in serving homebuyers, its portion of the overall mortgage market, even in its high 

volume periods, has only been about 15 percent of the market. 

Q.8. How can financial education for reverse mortgage borrowers 

be improved? 

A.8. NeighborWorks America has minimal experience with reverse 

annuity mortgages, since we focus primarily on pre-purchase homebuyer education and counseling, and post-purchase counseling, including foreclosure intervention and counseling. But my underVerDate Nov 24 2008 04:31 Dec 18, 2009 Jkt 050352 PO 00000 Frm 00129 Fmt 6621 Sfmt 6602 E:\HR\OC\A352.XXX A352

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standing is that the reverse mortgage counseling that is provided 

is quite good. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM DAVID CROWE 

Q.1. Despite the decline in writing FHA loans, has homeownership 

increased or decreased over the last few years? What about minority homeownership in particular? 

A.1. According to information that has been compiled by the U.S. 

Department of Commerce, Bureau of the Census, since the beginning of the current decade, the national homeownership rate for 

the entire population has ranged from a low of 67.1 percent during 

the first quarter of 2000 to a high of 69.2 percent during the fourth 

quarter of 2004. In the second quarter of 2007, the latest period for 

which these data are available, the national homeownership rate 

stood at 68.2 percent. 

During the same time frame, the homeownership rate for all minorities ranged from 47.6 percent during the second quarter of 

2000 to a high of 51.7 percent during the third quarter of 2006 and 

stood at 50.3 percent during the second quarter of 2007. By comparison, the rate for white homeowners ranged from a low of 73.4 

percent in the first quarter of 2000 to a high of 76.2 in the fourth 

quarter of 2004 and presently stands at 75.4 percent. NAHB views 

narrowing and, eventually, eliminating the gap in homeownership 

rates for minorities as a key mission of a revitalized FHA. 

Q.2. What borrowers should FHA programs help? 

A.2. The single family mortgage insurance programs of the Federal 

Housing Administration were created by Congress in 1934 to help 

those who could not afford the short term, high downpayment loans 

that were the norm for home buyers at the time. For several decades after its creation, FHA was the driving force for innovations 

in residential mortgage lending. A few examples of such innovations are 30-year repayment terms, downpayments as low as three 

percent, and the 1-year adjustable rate mortgage loan, all of which 

have been adopted by conventional mortgage lenders and mortgage 

investors. 

Because of the private sector’s successful adaptation of FHA’s innovations, the majority of borrowers who are currently being 

served by FHA are those whose credit experiences are not as positive as those who would qualify for conventional mortgages. In addition, FHA borrowers, who are more typically first-time homebuyers, frequently lack the cash reserves necessary to make 

downpayments greater than three percent, which conventional 

mortgage programs require for borrowers with even the slightest 

tarnishes on their credit histories. 

Because FHA is a self-sustaining mutual mortgage insurance 

fund, it is important for FHA to insure better performing mortgages as well as higher-risk, low downpayment loans to more credit-challenged individuals. Allowing FHA to vary mortgage insurance premiums according to risk is an important tool in maintaining the financial health of FHA. 


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Q.3. What kind of profits do lenders and brokers make on FHA-insured loans? How does the taxpayer backstop affect market discipline? 

A.3. A specific assessment of profits received by lenders and brokers is beyond the purview of the National Association of Home 

Builders. In general, however, NAHB has found the mortgage marketplace to be a highly competitive arena, and such vigorous competition tends to enforce market discipline. In addition, FHA has 

implemented measures in recent years that hold loan servicers 

more accountable to ensure that FHA-insured loans are properly 

serviced. For example, FHA has implemented programs that track 

the early performance of FHA-insured loans. Lenders whose loans 

suffer excessively high early defaults are subject to revocation of 

their authority to submit loans for FHA insurance. 

Q.4. Are there any mortgage products that FHA should not be allowed to insure? 

A.4. Some of the mortgage products that have led to the current 

meltdown in the subprime markets, such as loans that have prepayment penalties, loans that reset to significantly higher interest 

rates after a brief fixed-rate period, and loans on which the loan 

originators receive compensation that far exceeds the norm should 

not be insured by the FHA or any other government-affiliated 

mortgage loan program. The FHA single family mortgage insurance 

program operates, and should remain, within the bounds of prudent mortgage lending standards established by the federal banking regulators. 

Q.5. Are there better options other than a guarantee program to 

help borrowers who are unable to find financing? 

A.5. For nearly eight decades, the FHA’s single family mortgage insurance program has provided an efficient mechanism for insuring 

single family mortgage loans without a cost to the taxpayers. The 

100 percent insurance coverage that is provided for FHA-insured 

mortgage loans ensures that borrowers who use this program pay 

interest rates that are comparable to prime quality borrowers who 

receive conventional financing. 

Other models exist for providing government guaranteed loans or 

loans made directly by government agencies to home buyers. However, these programs have carried a cost to taxpayers and have not 

functioned as well as FHA’s. 

Q.6. If we were to increase the loan limits to GSE levels, why do 

we need both GSEs and FHA? Will it make it harder for Fannie 

and Freddie to meet their affordable housing goals? 

A.6. There is a key difference between the loan limits for Fannie 

Mae/Freddie Mac (the conforming loan limit) and the ceiling for 

FHA. The conforming loan limit is a national maximum that is the 

same in all areas of the country (with the exception of Alaska, Hawaii, Guam and the Virgin Islands where higher limits are allowed). FHA’s ceilings are established based on the median home 

price in each locality. The FHA ceiling only applies in the very limited number of high-costs areas where the median home price approaches or exceeds the conforming loan limit. Even in the few 

markets where the proposed limit increase would bring FHA to the 


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conforming loan level, FHA and the GSEs would serve distinctly 

different borrowers, with FHA focusing on the credit needs of those 

with less than outstanding credit backgrounds and other borrowing 

challenges. On that basis, increasing the FHA maximum to the 

conforming loan limit should not present a measurable impediment 

to the GSEs in meeting their affordable housing goals. 

Q.7. Will expanding FHA programs drive up housing prices? 

A.7. The expansion of FHA programs will have little, if any, impact 

on housing prices, but will significantly benefit home buyers. The 

key factors contributing to the rise in home prices during the 2003 

2005 housing boom were extremely low interest rates, heightened 

demand by investors/speculators, lax mortgage underwriting and 

rising land prices. It is noteworthy that FHA experienced a sharp 

decline in market share during this period. All of these have largely been reversed during the current housing slump. In particular, 

it was the lax lending standards during the housing boom that 

lured some home buyers into the more risky mortgage products, 

taking customers away from FHA. 

As noted previously, FHA’s more prudent lending standards, and 

the additional flexibilities Congress has proposed to grant the FHA, 

would make it possible for more families to purchase homes. FHA’s 

ability to offer alternatives to conventional subprime loans that 

often carry onerous terms will greatly benefit home buyers during 

times when mortgage credit is tight. FHA’s business is heavily 

weighted toward existing home transactions and a more vibrant 

FHA program, in addition to generating more demand for homes, 

will also boost the supply as more owners are incented to sell their 

homes. Moreover, the FHA program is restricted to only owner-occupied mortgages, which ameliorates any concerns about heavy investor use of FHA mortgages putting upward pressure on home 

prices. 

Q.8. How can financial education for reverse mortgage borrowers 

be improved? 

A.8. I have not surveyed the educational programs that are currently offered for seniors who are considering a reverse mortgage. 

However, it stands to reason that each potential borrower should 

fully understand the costs and terms of the loan being contemplated. In addition, there should be sincere efforts to determine 

that the reverse mortgage is the best means of addressing the financial needs of the borrower. NAHB supports reasonable requirements for mortgage disclosures and counseling for reverse mortgage borrowers. 


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