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BAILOUT, BUST, OR MUCH ADO 

ABOUT NOTHING?: A LOOK AT THE 

FEDERAL HOUSING ADMINISTRATION’S 

2012 ACTUARIAL REPORT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 13, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–2 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

February 13, 2013 ............................................................................................ 1 

Appendix: 

February 13, 2013 ............................................................................................ 57 

WITNESSES 

WEDNESDAY, FEBRUARY 13, 2013 

Galante, Hon. Carol J., Commissioner and Assistant Secretary for Housing, 

Federal Housing Administration (FHA) ............................................................. 8 

APPENDIX 

Prepared statements: 

Hinojosa, Hon. Ruben ....................................................................................... 58 

Neugebauer, Hon. Randy ................................................................................. 59 

Ross, Hon. Dennis ............................................................................................ 61 

Galante, Hon. Carol J. ..................................................................................... 62 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Talking Points on Amendments to H.R. 5072, the FHA Reform Act of 

2010 ................................................................................................................ 80 

Huizenga, Hon. Bill: 

Letter to Chairman Jeb Hensarling and Ranking Member Maxine Waters 

from Fred R. Becker, Jr., President and CEO of the National Association of Federal Credit Unions (NAFCU), dated February 5, 2013 ............ 84 

Maloney, Hon. Carolyn: 

Letter to HUD Secretary Shaun Donovan, dated November 9, 2012 .......... 86 

Response letter from Elliot M. Mincberg, HUD General Deputy Assistant 

Secretary for Congressional and Intergovernmental Relations, dated 

February 11, 2013 ......................................................................................... 87 

Galante, Hon. Carol J.: 

Responses to questions for the record submitted by Representatives Foster, Hinojosa, Luetkemeyer, Ross, and Royce ............................................. 93 

(1) 

BAILOUT, BUST, OR MUCH ADO 

ABOUT NOTHING?: A LOOK AT THE 

FEDERAL HOUSING ADMINISTRATION’S 

2012 ACTUARIAL REPORT 

Wednesday, February 13, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Jeb Hensarling [chairman of 

the committee] presiding. 

Members present: Representatives Hensarling, Bachus, Royce, 

Lucas, Capito, Garrett, Neugebauer, McHenry, Campbell, 

Bachmann, Posey, Westmoreland, Luetkemeyer, Huizenga, Duffy, 

Hurt, Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 

Ross, Pittenger, Wagner, Barr, Cotton; Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, Hinojosa, Clay, Scott, Green, 

Cleaver, Ellison, Perlmutter, Himes, Carney, Sewell, Kildee, Murphy, Delaney, Sinema, Beatty, and Heck. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. The Chair will now recognize himself for 

5 minutes for an opening statement. 

The American people deserve and demand a healthy economy. 

They deserve it today. What they do not deserve is the anxiety of 

stagnant jobs and paychecks that shrink in the face of higher gas 

prices, health insurance premiums, and the list goes on. 

And they particularly do not deserve the anxiety of wondering 

whether their children and grandchildren will drown in a sea of 

debt. 

To my left and to my right, I have up the National Debt Clock. 

For those who are unfamiliar with it, this Nation has racked up 

more debt on a nominal basis in the last 4 years than in the previous 200 years. It stands at—at least before we turned it on, it 

stood at $136,178 per household. For many constituents in the 5th 

District of Texas, that is more than they will ever amass in savings 

in their lifetime, and they owe it as their share of the Federal debt. 

The spending-driven debt crisis that we have today is the great 

existential threat to our Nation of this generation. For us to have 

a healthy economy, we must put the Nation on a sustainable fiscal 

path, and to have a sustainable fiscal path, we must also have a 

sustainable housing finance system. 

2 

I have grave fears that FHA, as it is operating today, is an impediment to both, and that is why this committee is holding the 

second in what will be a series of hearings on the financial health, 

stability, and mission of the Federal Housing Administration. 

As was well established in last week’s hearing, the FHA is currently facing some tremendous financial challenges stemming from 

its dramatically increased market share and the dramatically deteriorating economic value of its insurance portfolio. I am very 

pleased that we have Carol Galante, the FHA Commissioner and 

Assistant Secretary for Housing at HUD, here today to help us sort 

through some of the issues that challenge and surround the status 

of the FHA. 

In response to the housing crisis of the late 2000s, the FHA has 

morphed into a mortgage insurer of last resort to a dominant component in our mortgage finance system. In fact, the FHA now controls more than 56 percent of the total mortgage insurance market 

in terms of new loan endorsements, crowding out its private competitors with extremely low downpayment requirements and expanding its insurance to higher-income individuals and houses in 

the upper end of the marketplace. 

The policy of cheap, up-front pricing and elevated maximum loan 

limits as high as $729,000 has allowed the total size of FHA’s insurance book of business to explode by more than 64 percent, up 

to $1.13 trillion in Fiscal Year 2012, making FHA the largest mortgage insurance company in the United States. 

And what is the result for the FHA and taxpayers of this unprecedented mission creep? The FHA is broke. The FHA is flat broke, 

and I fear soon the FHA will prove to be bailout broke. 

Now, that is not just my conclusion; it is the conclusion of the 

annual independent actuarial study of FHA’s Mutual Mortgage Insurance Fund—the government fund that insures the FHA singlefamily mortgages—that was released last November. 

I quote: ‘‘The economic value of the fund as of Fiscal Year 2012 

is negative $13.48 billion.’’ And the study did not even factor in the 

FHA’s money-losing book of home equity conversion mortgage, and 

I quote from the same report, ‘‘The economic value of the HECM 

portion of the Mutual Mortgage Insurance Fund to be negative $2.8 

billion.’’ 

Clearly, the FHA is in a dire financial predicament where its 

projected future insurance claims far exceed its current cash on 

hand, a situation that ought to concern both critics and proponents 

of the FHA. 

So the conclusions of the annual independent actuarial study 

give rise to several fundamental questions regarding the FHA that 

I hope Commissioner Galante can shed light upon. As I have said 

before, hardworking Americans demand a healthy economy, and we 

cannot have a healthy economy until we have a sustainable path 

to fiscal sustainability for our Nation, and until we have a sustainable housing finance system that is also competitive. 

I now recognize Ranking Member Waters for 2 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman, for holding 

this hearing this morning, which is the second in your series of 

hearings about the health of the Federal Housing Administration. 

3 

We all agree that we need to closely monitor the health of FHA 

in light of the 2012 report from the agency’s independent actuary, 

and we want to make sure that we remain focused on our longterm goals to help revive the mortgage market, bolster the economy, help qualified borrowers, and protect American taxpayers. 

As I said at the hearing last week, we must recognize the tremendous value that FHA has contributed to our economy, particularly since the financial crisis. And we must be cautious about moving too precipitously to constrain FHA’s role, being mindful of the 

fact that constricting credit too quickly could harm our housing recovery. 

Let’s be clear about what FHA is and what it is not. Emerging 

out of the foreclosure crisis that occurred during the Great Depression, the FHA was instrumental in creating the long-term, fixedrate mortgages that form the backbone of our housing finance system, and that millions of middle-class families have used to build 

their long-term economic security. In the wake of a 2008 financial 

crisis caused by poorly underwritten loans from the private sector, 

FHA was able to ramp up from its tiny pre-crisis market share and 

provide crucial liquidity. 

One estimate from Moody’s Analytics found that if FHA went out 

of business in October of 2010, housing construction would have 

plunged 60 percent, home prices would have dropped an additional 

25 percent, and our economy would have lost 3 million jobs and a 

half-trillion dollars of economic output. So with that in mind, I am 

eager to hear from Commissioner Galante on how FHA is fulfilling 

its statutory mission while also taking steps to boost its finances 

in the wake of the financial crisis. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, the chairman of the Housing and Insurance Subcommittee, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. I thank you, Mr. Chairman. 

Oversight is an important aspect of what people in America expect from Congress, and this committee has tried to do oversight 

on a number of agencies, including FHA. 

An important part of that oversight process is making sure that 

we have information that is factual and that we can count on. And 

when we look at FHA, what we notice is that over the last 2 or 

3 years, we have had people come and testify that things are okay 

at FHA, that they are getting better, and yet the facts don’t prove 

that out. And each year, in fact, the projections were missed. What 

we have now learned is that this agency is in much more terrible 

financial shape than we were told it was going to be. 

It kind of reminds me of the story about the doctor who called 

his patient and said, ‘‘I have some good news and I have some bad 

news.’’ The patient said, ‘‘Well, what is the bad news?’’ The doctor 

said, ‘‘Well, those tests that we did a few months ago, I misinterpreted them, and in fact, it turns out that you do have a terminal 

illness and you only have 6 months to live.’’ The patient asked, 

‘‘Well, if that is the good news, what is the bad news?’’ And the doctor said, ‘‘Well, the bad news is I should have called you 6 months 

ago.’’ 

4 

And I think where we are today is that it has been represented 

to us that FHA is on the course of recovery and being healthier, 

but in fact, it is not. If a CEO of a major company kept telling his 

shareholders that things were getting better, and they kept having 

poor earnings, that CEO would soon be removed. 

I think what is a cause of concern and hope that we will gain 

from this hearing today is, what is the true condition of FHA? But 

more importantly, what steps are being taken to remedy this so 

that we can put this entity back on track and take the taxpayers 

off the hook for having to fund another bailout. 

With that, Mr. Chairman, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Missouri, Mr. Cleaver, for 2 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I am extremely pleased that we have the Commissioner here 

today. I was a bit concerned last week because, whether intentionally done or not, there were those who at least suggested that 

in part the recession was caused by FHA or that FHA played a 

major role. And I always think we ought to laud loudly and allege 

lightly. 

My concern today is that when you look at the facts, when the 

recession began we, FHA had almost 4 percent of the market, and 

I don’t know how 4 percent of the market could essentially ransack 

the entire housing market. But the issue is that FHA, as Mr. 

Neugebauer said, does come before this committee and we have a 

responsibility for oversight. And I think we ought to do that. I 

think that it is important for the best information to be brought 

forward. 

And I will just suggest to everybody on the committee that if we 

eliminate FHA and CRA, we won’t have anybody to blame. So let’s 

at least get FHA healthy so that we can blame FHA in order to 

have somebody to blame. We need a scapegoat, and I think we can 

probably lay it on FHA. 

If we give up our power to change things, we do so because we 

are blaming instead of fixing. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Minnesota, Mrs. Bachmann, for 2 minutes. 

Mrs. BACHMANN. Thank you so much, Mr. Chairman. 

I think it is important for us to know where we are going, and 

for us to know where we are going, it seems to me prudent to know 

where we have been. And if there is anything that the years 2006, 

2008 forward has shown us is that it isn’t a very good idea for government to be forcing mortgage lenders to make loans to people 

who either: (a) can’t pay the loan back; or (b) aren’t willing to pay 

the loan back. 

One thing that is very concerning about FHA and its process of 

insuring loans is that loans that are being made to people who either have bad credit or have nearly no downpayment or nearly no 

income. And my question is, who is being helped by this situation? 

Especially when in 2008, FHA had something like 28 percent of all 

of the mortgage insurance market, now they have doubled that to 

about 56 percent, and we are seeing that we could be on the hook— 

the taxpayers—for something like $16 billion at a time when we 

5 

are the brokest nation in the history of the world. And so it seems 

to me that we have to get a grip on this because it is deja vu all 

over again if we are going to continue this practice that could keep 

putting us back into bailout broke status. 

It is a good thing to have people at all income levels be able to 

get into a house, but it is only a good thing if they can keep that 

house, if they can pay for that house. So it is important for us to 

look at strategies. Maybe it would make more sense for people to 

have a little bit more skin in the game when they put money down; 

maybe it would make a little bit more sense to make sure that 

their income is stable; maybe it would make a little more sense to 

make sure that they have a good credit score. 

We want this industry to absolutely succeed wildly, but what 

government is doing right now is hurting the housing industry, and 

let’s see how we can turn it around. 

Ms. WATERS. Is it appropriate for me to ask for—to clear up the 

record on the statement of the gentlelady? Did she say we are the 

brokest nation in the history of the world? 

Chairman HENSARLING. We could pull the record at a later time 

for the ranking member, but otherwise that question is not in order 

unless you want to take it out of the time of your— 

Mrs. BACHMANN. And, Mr. Chairman, I would love to— 

Chairman HENSARLING. I understand. I am sure you two could 

have a wonderful conversation after we get through opening statements— 

Mrs. BACHMANN. I will be happy to offer substantiation for the 

record. 

Chairman HENSARLING. —but we do want to get to the Commissioner in due time. 

The gentleman from Colorado, Mr. Perlmutter, is recognized for 

2 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

I think we need to have a little lesson in history here, and I 

thank the Commissioner for being here, and really I want to thank 

the FHA for keeping the housing market alive from 2008 until 

2011, when the private sector has finally decided to get back into 

the housing market business. But the abuses under the Bush Administration from 2003 to 2007, when there was zero down, and no 

income showing, and the private sector was buying these kinds of 

loans and then we have the crash at the end of 2007, 2008, where 

the whole housing market shrunk, and the only game in town was 

to get an FHA loan for most Americans. Without that, there would 

have been no housing market, and the recession would have been 

deeper than it was. 

And so clearly, the book of business between 2003 and 2007 for 

the private sector or the public sector was bad. In Colorado, we see 

our housing market coming back pretty substantially. 

But the private sector still wants the best credit. I don’t blame 

them. They want to make sure that everybody has a 750 or 800 

FICO score. I don’t blame them. 

Most Americans don’t have a lot of cash to be able to buy that 

home but they do have an income, and if we don’t abuse the system, as we saw in the Bush Administration during those years of 

2003, 2007, where people were getting loans that they never should 

6 

have gotten, then we will have a strong housing market and the 

FHA needs to play a substantial role. The private sector will grow 

as the economy stabilizes. 

But thank goodness loans were being made during the time 

when the market fell apart. So clearly, like any government agency 

or any institution, it isn’t perfect and there are things that can be 

fixed, but I just want to thank you for your testimony today in advance of what you have to say. 

Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Georgia, Mr. Scott, for 2 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

First of all, the American people are pretty much sick and tired 

of this antigovernment, antigovernment. We need FHA today more 

than we ever needed it. 

When this economy went through the turmoil that we went 

through over the last 4 or 5 years, it was due to the downturn in 

the real estate market, the downturn in housing. No sector of our 

economy was affected more than housing. That is what dragged it 

down. 

But it was because we had an FHA that we were able to turn 

this thing around. If we have an example of where government 

works, FHA is at the center of this. The soundness of FHA is particularly vital to our national housing market. 

Why? Because it plays a critical role as a backstop to lenders if 

borrowers are unable to pay their mortgages through no fault of 

their own. We went through an extraordinary downturn in the employment. Thank God we had an FHA there. 

The guarantee that FHA offers enables banks to offer mortgages 

to potential borrowers with less desirable credit scores or lower incomes. This is America. We have a variety of income stratas. 

In 2010, FHA had a 19.1 percent share of the mortgage market, 

representing a substantial portion of the housing sector. And FHA 

is especially critical to minority homebuyers. Listen: No sector of 

our population was hit as hard as the African-American market, 

and through no fault of their own. They were steered into abusive 

lending practices, primarily because they were Black. 

Now, let me tell you something. In my State of Georgia, we 

ranked fourth in foreclosure in 2012. Each year in the last 4 years, 

we gave foreclosure prevention programs. Without FHA, we would 

not— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Westmoreland, for 1 minute. 

Mr. WESTMORELAND. Thank you for having this hearing, and I 

hope that we can get FHA back to the original intent that it was 

created for: to help the first-time homebuyer and people who might 

not otherwise be able to attain a mortgage. But at the same time, 

I hope that we can also get the private sector—private mortgage 

insurance writers—into the game because if they ran their business like the FHA has run their business, they would be out of 

business. 

And so, while we are trying to make sure that we keep a secondary market or availability for certain homebuyers, I think we 

7 

need to do more to turn it back over. And I think if you look at 

what Secretary Donovan said in 2009: ‘‘Based on current projections in absence of any catastrophic home price decline, FHA will 

not need to ask Congress and the American taxpayer for any bailout. Indeed, because of the quality of loans FHA is making today, 

the independent actuary expects this drop to be temporary and return about 2 percent within the next 2 to 3 years.’’ 

And I hope there will be an explanation of why it said minus— 

Chairman HENSARLING. The time— 

Mr. WESTMORELAND. —44— 

Chairman HENSARLING. —of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, for 2 minutes. 

Mrs. MALONEY. Thank you. 

And welcome Commissioner Galante, and congratulations on 

your confirmation. 

As one who represents one of the hardest hit areas by Hurricane 

Sandy, I want to thank you for the steps that you took to help the 

victims of the hurricane, including moratoriums on foreclosures, 

rental assistance to those who were displaced, and other significant 

assistance. We know that FHA was established after the Great Depression to be a backstop to housing, and it was designed to act as 

a countercyclical force in the market, ballooning in times of economic stress and contracting in times of economic prosperity. 

And we have seen a great flux in their market share. It has been 

as low as 3 percent of the market and it is currently 14.6 percent 

of the market, but very importantly, it is down from 21 percent in 

2009. 

So there is no question that it plays a critical role in our housing 

finance system. We have a bipartisan, strong support that—and 

know that FHA fills a very important role for first-time homebuyers. 

Now, some have expressed some concern about the health of the 

fund. I share that concern and I wrote the Commissioner in November. I received her response of the steps that they are taking. 

I would like permission to place my letter and her response into 

the record and to note that they have taken important steps, specifically: raising the insurance premium 5 times; selling distressed 

assets at an increased pace; implementing new downpayment and 

credit score requirements; and making changes to its reverse mortgage program. 

I would like to note and place into the record a Moody’s analysis 

that has said that if FHA had closed its doors in October of 2010, 

home prices would have dropped an additional 25 percent, and we 

would have lost an additional 3 million jobs. No one is keeping the 

private sector from coming in and helping, but if they are not 

there, FHA is there to help the housing and first-time homebuyers. 

Thank you. 

Chairman HENSARLING. This morning, we welcome Carol 

Galante as our sole witness. She is the Commissioner of the Federal Housing Administration and the Assistant Secretary for Housing of the U.S. Department of Housing and Urban Development. 

She first joined HUD in May of 2009 as the Deputy Assistant Secretary for Multifamily Housing. Among other things, the CommisVerDate Nov 24 2008 18:16 Nov 04, 2013 Jkt 080868 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\80868.TXT TERRI
8 

sioner has direct responsibility for oversight and administration of 

the FHA’s trillion dollar insurance portfolio. 

The witness will be here until 1 p.m.; thus, I will be very strict 

with the gavel for all Members. 

Commissioner Galante, you will be recognized for your requested 

7 minutes to give an oral presentation of your testimony. And without objection, your full written statement will be made a part of the 

record. 

Commissioner Galante, you are now recognized. 

STATEMENT OF THE HONORABLE CAROL J. GALANTE, COMMISSIONER AND ASSISTANT SECRETARY FOR HOUSING, 

FEDERAL HOUSING ADMINISTRATION (FHA) 

Ms. GALANTE. Thank you. 

Good morning, Chairman Hensarling, Ranking Member Waters, 

and members of the committee. I appreciate the opportunity to appear before you to discuss the FHA and the critical role it has 

played in our Nation’s housing finance system as well as policy 

changes enacted and needed to further strengthen the Mutual 

Mortgage Insurance (MMI) Fund. 

This is an important moment for our housing market and our 

Nation’s economic recovery. There are encouraging signs: housing 

construction growing faster than it has since 2008, the strongest 

year of home sales since the economic crisis began, and rising home 

values lifting 1.4 million families above water in 2012. 

FHA’s programs have been a critical component of this recovery. 

That should come as no surprise, given the program’s goals and 

history. With the dual mission of providing access to homeownership to underserved and low-wealth populations, and acting as a 

stabilizing force during periods of economic stress, the FHA is designed to fill gaps in the market. 

It is clear that FHA has done just that. By ensuring 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 

homeownership possible for 3.5 million families, including 2.8 million first-time homebuyers, and for 50 percent of all African-American and Latino homebuyers in the last year. And Moody’s Analytics estimates that were it not for the FHA’s presence during the 

crisis, home prices would have fallen another 25 percent. 

While FHA has acted as a critical support, it was not immune 

to the stresses of falling home values and rising unemployment. According to the independent actuary’s annual report on the MMI 

Fund, in 2012 the capital reserve ratio fell below zero to negative 

1.44 percent, representing a value of negative $16.3 billion. 

Now, we 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 action discussed in our annual report to Congress as well as additional changes announced last month. 

It is important to understand, as well, that the actuary’s report 

does not in and of itself mean that it will be necessary for FHA to 

use its authority to draw from Treasury to reserve for projected 

9 

losses over the next 30 years. While this is a possibility, it is dependent on several factors, including the estimates in the President’s upcoming budget submission and the actions and activities 

of FHA throughout the remainder of the fiscal year. 

And let me assure you that: one, FHA has $31 billion in current 

reserves; and two, we remain committed to 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. 

With the help of Congress, this Administration has already taken 

significant actions to protect and strengthen the fund, including: 

five separate premium increases; changes to credit policies such as 

increasing downpayments for certain borrowers, and ending sellerfinanced downpayment assistance; and better oversight and enforcement of FHA lenders. 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 $2 billion— 

I am sorry, $10 billion lower than it is today. 

Additionally, Congress paved the way for us to establish FHA’s 

first ever office of risk management, which has been instrumental 

in strengthening oversight and implementing policies to better protect the fund. Together, our efforts to strengthen and protect FHA 

have added well over $32 billion to the fund, to date. 

As attested to by the actuary in its report and which can be seen 

in the slide shown here, the strong efforts of FHA to improve the 

quality of new FHA-insured loans have worked, as loans insured 

since 2010 are expected to be the most profitable and strongest in 

the agency’s history. The reason for this is that we have made substantial progress in reducing losses from defaulted loans while simultaneously increasing revenues through premium increases and 

policy changes. 

These improvements are visible on the next slide, as you see 

here, as a result of loans insured since 2010 are projected to generate $20 billion in additional value for FHA. 

However, as the actuarial further protests, with fully $70 billion 

in claims attributable to the 2007, 2009 books of business, there remains substantial additional work to be done to mitigate the impact of legacy loans insured during that time. That is why we have 

devoted significant attention to addressing the severe stresses 

placed on the fund by these loans, employing a number of innovative approaches to enhance the effectiveness of FHA’s loss mitigation policies and reduce FHA’s losses resulting from nonperforming 

assets. 

Under our existing authority, we have confronted FHA stresses 

at every point in the lending cycle, and in doing so, we have both 

strengthened FHA for the long term and set the stage for the return of private capital to the market. And in fact, our market share 

has been declining steadily since its peak in 2009 from a level of 

nearly 30 percent at that time to less than 15 percent today. At the 

same time, we recognize that this housing recovery is fragile, that 

access to credit remains critical to solidifying the recovery, and that 

FHA must balance these important goals as we proceed with 

changes that protect the fund. 

10 

That said, with your help we could do even more to protect the 

fund while not damaging access to credit for responsible borrowers. 

We have developed a comprehensive list of additional risk management and lender enforcement authorities that will further enhance 

FHA’s risk management and fiscal health. Many of these were included in the bipartisan reform legislation initiated by this committee and passed by the full House in the last Congress. 

I sincerely hope that we will once again be able to work together 

with Congress on efforts that protect FHA and strengthen its programs. 

Mr. Chairman, in addition to strengthening FHA’s financial picture, there does remain a broader question as to FHA’s role over 

the long term as we begin to look to a new system of housing finance in this country. As we work to create a safer, stronger, and 

more robust system of housing finance, where private capital plays 

a primary role and taxpayers are protected from unnecessary losses 

arising from the activities of private lenders, we must consider the 

place of FHA in that system. It is critically important that this 

work be done in a coordinated and comprehensive way where all 

components of the system are addressed in an interrelated manner. 

I believe that just as it has for nearly 80 years, FHA’s mission 

will continue to remain relevant and important in providing a 

pathway to the middle class and quality, affordable housing opportunities for American families. And I look forward to working with 

this committee to strengthen, protect, and equip FHA to play this 

important role. 

I thank you very much, and I am happy to answer your questions. 

[The prepared statement of Commissioner Galante can be found 

on page 62 of the appendix.] 

Chairman HENSARLING. Thank you, Commissioner. 

The Chair will yield himself 5 minutes at this time. 

Commissioner Galante, as bad as the picture appears from the 

independent actuary report, I fear that the true finances could potentially be even worse. Last week, we had testimony from Mr. Ed 

Pinto, a resident fellow at the AEI, who said, ‘‘Under Generally Accepted Accounting Principles, FHA has a current net worth today 

estimated at a negative $26 billion, meaning it has a total capital 

shortfall today of $47 billion, based on its 2 percent capital requirement.’’ 

Professor Joe Gyourko, who is a professor of real estate finance 

and business and public policy at the Wharton School of Business 

says, ‘‘The FHA’s main insurance program is materially undercapitalized with the likely amount of capital infusion required 

being in the $50 billion to $100 billion range.’’ 

Dr. Mark Calabria, who is the director of financial regulation 

studies at the Cato Institute, said, ‘‘Relatively small changes in the 

performance of FHA’s portfolio could result in significant losses to 

the taxpayer. Reasonably foreseeable changes to the FHA’s performance could easily cost the taxpayer tens of billions of dollars, 

surpassing the ultimate cost of the Troubled Asset Relief Program 

bailouts, otherwise known as TARP.’’ 

Are you familiar with the studies and analysis of these economists? 

11 

Ms. GALANTE. Some of them, yes. 

Chairman HENSARLING. And do you have a critical analysis of 

them? Do you find them accurate or inaccurate? 

Ms. GALANTE. Mr. Chairman, what I would say is that the FHA 

is accounting for its projected losses over a 30-year period of time, 

and that is done under the Federal Credit Reform Act, put in place 

in 1990, which is when the first capital reserve ratio was also instituted for FHA. So— 

Chairman HENSARLING. No, I understand that. But do you find 

the analysis correct or incorrect? 

Ms. GALANTE. I would say that they are trying to interpolate, 

from my understanding, how you would project losses under a totally different accounting system, so— 

Chairman HENSARLING. Okay. If I could move on, can I have the 

chart I requested, please? 

With respect to projections, Commissioner Galante, my concern 

here is that for over a 4-year period the projections—and one of 

these days this committee room will get larger screens—but this is 

not the first time that we have heard similar testimony. And in 

fact, last year the HUD Inspector General testified that FHA continues to project that current and future year books of business will 

be profitable and make up for these past year losses. But we have 

seen in the past 3 years, it is a troubling trend whereby the point 

at which the fund is expected to reach its mandated capital level 

is pushed further into the future. 

So, if you look at the slope that goes down, that is the actual 

ratio in the fund, and the four lines that move upward are the predictions. And unfortunately, Commissioner Galante, not only has 

FHA been wrong, it has been wrong for 4 years in a row, and I 

started this hearing showing our National Debt Clock. It reminds 

me of the book written by Professors Reinhart and Rogoff entitled, 

‘‘This Time is Different’’ about nations who encounter financial crises. 

And so I guess the question is, after 4 years of being wrong, why 

is this testimony different? 

Ms. GALANTE. Thank you, Mr. Chairman, for your question. Let 

me be clear about the actuarial projections. First of all, these are 

independent—it is an independent actuary and they rely on independent economic forecasts that are predicting—forecasting—30 

years’ worth of house price appreciation, trends in interest rates, 

and how those economic forecasts will impact— 

Chairman HENSARLING. But do you find fault with the audit? 

Ms. GALANTE. I would say this: projecting, you could ask 100 different economists in 2008 what the house price projections were 

going to be and you would get 100 different answers. There are a 

couple—when you are projecting over 30 years and you are projecting over 30 years at the depth of a crisis, being able to make 

those— 

Chairman HENSARLING. I understand that, but it has been 4 

years in a row, and I am going to attempt to set a good example. 

I only have 30 seconds left. 

The Housing Act of 1934 says that the FHA ‘‘shall ensure that 

the Mutual Mortgage Insurance Fund maintains a 2 percent capital ratio at all times.’’ It doesn’t say ‘‘may,’’ it doesn’t say ‘‘might,’’ 

12 

it doesn’t say ‘‘try;’’ it says ‘‘shall.’’ What should the consequences 

be that for 4 years running the agency has violated the law? 

Ms. GALANTE. Again, Mr. Chairman, the 2 percent capital ratio 

is a—not meeting it is a finding in our audit. We take that seriously. We have been working as hard as we can to make policy 

changes so that we can get back to that capital ratio. 

Chairman HENSARLING. I thank you. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much. 

Ms. Galante, I am very pleased that you are here today because 

this is one of the subjects on which we have had so much misleading information. For example: the FHA is crowding out competing with the private market; the FHA has an unfair advantage 

over the private market. It was suggested in the last hearing that 

FHA represents 56 percent of the market, but I understand and I 

think your testimony just a moment ago said it is closer to 15 percent. Is that correct? 

Ms. GALANTE. Yes, Ranking Member Waters. Let me just say 

this: There is the total housing market, which is the refinance and 

home purchase market, so we have gone from the peak of 30 percent down to less than 15 percent of the total market. On the purchase market, we have also receded—we were higher. We have also 

receded significantly. 

And of the private mortgage—of the mortgage insurance market, 

I think the number quoted of 56 percent, we are now more like— 

and there is a slide in your deck—slides four and five—that clearly 

demonstrate that we have been coming down even as a share of the 

mortgage insurance market down to more like 42 percent, and you 

can see that the private mortgage insurers are on their way back 

up. 

Ms. WATERS. Thank you. I think it is important to get that into 

the record. 

The other statements we have heard basically—and as our chairman just pursued this discussion—the FHA, and specifically the 

Mutual Mortgage Insurance Fund, is broke. Now, according to data 

from the FHA actuarial report in fiscal year 2012, the capital reserve ratio of the agency’s primary insurance fund fell below zero 

to negative 1.44 percent and the fund’s economic value stands at 

negative $16.3 billion. 

The economic value refers to the amount that would be needed 

for FHA to meet all its expected claims over the next 30 years if 

FHA closed its doors tomorrow and had no business to offset those 

claims. The FHA still has—I will let you say it. How much money 

does the FHA still have to settle insurance claims as they come in? 

Ms. GALANTE. A couple of points on that, Congresswoman. First, 

we have $31 billion in reserves against those projected losses. And 

as you stated, there is additional revenue coming in every year 

from these very profitable books of business from 2010 on. So on 

an ongoing basis, on a cash flow basis, there is certainly money 

there to pay the claims. 

Ms. WATERS. And is it true that in addition to the $30.4 billion 

to settle insurance claims as they come in, you basically have 

enough cash for at least 7 to 10 years? 

13 

Ms. GALANTE. Yes. Again, we have ongoing business and the actuarial, by the design of the way the capital ratio is calculated, 

does not include any future revenue from future business. 

Ms. WATERS. And finally, the FHA is essentially a subprime 

lender. That is what some of my friends on the opposite side of the 

aisle have been saying, that it gives risky loans to low FICO score 

borrowers. Would you comment on that, please? 

Ms. GALANTE. I would just say this: FHA has always been 30- 

year, fixed-rate, fully documented, serving a broad range of borrowers with a focus on lower-wealth individuals. These are sustainable mortgages for the families who are taking them out. Now, during the— 

Ms. WATERS. Madam, in the few minutes that you have, where 

you are being accused of being subprime lender, did you do-no documentation loans? 

Ms. GALANTE. No, we did not. 

Ms. WATERS. Do you do resets with teaser loans? 

Ms. GALANTE. No, we do not. 

Ms. WATERS. Do you do all of your loans going to jumbos, or 

how—would you explain exactly what the mission is and what you 

are trying to do? 

Ms. GALANTE. Yes. Again, our mission is dual, both to be a countercyclical force when needed in the market, and also to serve 

lower-wealth borrowers to access credit and be able to purchase or 

refinance a home. 

Ms. WATERS. What would you ask this Congress to do legislatively that would make your job easier, to help you fulfill the mission? 

Ms. GALANTE. Yes. We have put forth a number of items in our 

report to Congress, including additional authority to enforce 

against lenders on a wider geographic basis. There is a whole class 

of lenders for which we do not have indemnification authority. And 

I would also add, in particular, we have not talked a lot about the 

reverse mortgage program, but it has some serious challenges, and 

we are asking for some emergency authority there. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. I thank the chairman. Mr. Chairman, just for 

the record, I wanted to clear that there have been some numbers 

thrown around. According to GAO, this is the third quarter 2012 

FHA’s market share of insured market in terms of numbers of 

loans: the Federal Housing Administration, 56.4 percent; private 

mortgage insurance, 19.7 percent; and Department of Veterans Affairs, 23.9 percent. So obviously, the taxpayers are the big insurers 

of mortgages in this country. 

Ms. Galante, thank you for coming. I enjoyed our visit the other 

day. 

I really don’t know where to start other than in my opening 

statement, I think the point I tried to make is, do you actually 

know where you all are? When we see the numbers that the chairman put up there where we see projections, we come back next 

year and it turns out those weren’t the numbers, and you have an 

entity that, according to the study, actually has a negative net 

worth, but you reported that you have about $38 billion in reVerDate Nov 24 2008 18:16 Nov 04, 2013 Jkt 080868 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\80868.TXT TERRI
14 

serves, but you are running a $1.1 trillion entity, so you are running an entity that is leveraged 36 to one, and so that is a 2.7 percent capital ratio. 

Any kind of financial institution in this country that had those 

numbers would be under some sort of cease-and-desist order. And 

then you look at the numbers currently right now of your delinquency rates. For example, in 2012: first quarter, it was 12 percent; 

second quarter, it was 11.89 percent; and third quarter, it was 

11.14 percent. So an entity that is making financial transactions 

with those kinds of delinquencies with, according to the study that 

was done, has a negative net worth but according to you has a 2 

percent net worth. 

The question is—and I think the other point I would make is, 

you don’t even pay your operating expenses out of that fund. The 

taxpayers pay the operating expenses. So does the accounting that 

we are using now allow you to actually manage this entity? 

Ms. GALANTE. There are a number of different questions embedded there, Congressman. Let me just talk about the delinquency 

rates. To be clear, you have to divide this by cohort year, because 

we have serious—if you look, again, back at that original chart— 

we have some serious stress from older books of business, and 

those delinquencies are much higher. The delinquencies in our new 

book that we are writing insurance on now are extremely low. 

Mr. NEUGEBAUER. But, Ms. Galante, I don’t—I have a limited 

amount of time. A delinquency is a delinquency. Just because it is 

not as bad as it used to be, but it is bad over here, I have to look 

at—my oversight is the entire entity, and so you have some problems here. And the question is, do you have enough reserves to 

carry that? Some people say that you don’t. I question whether you 

even know what reserves you need, so how do you then price your 

product if you don’t know where you are? 

Ms. GALANTE. That is a very good question. Let me just be clear. 

These long-term economic projections have volatility. That does not 

mean that we are not monitoring the portfolio for the delinquency 

rates and getting rid of policies like the seller-assisted finance program that cost $14 billion. We would be above zero. We would have 

an economic value of almost $2 billion if it weren’t for that sellerfinanced program. So, we got rid of it. 

We are monitoring the portfolio for that kind of activity all the 

time. One of our actions that we just took was to ensure that we 

did not cancel the mortgage insurance premium prematurely, that 

again was a policy that was being done in the past that negatively 

affected economic values. 

So we are, with our new risk management activities, clearly 

monitoring this portfolio on an ongoing basis. 

Mr. NEUGEBAUER. Thank you. And I think the question is, the 

reason accounting is so important—and I am an old bean counter; 

I have an accounting degree—is that knowing what your product 

costs is an important part of pricing it. And you have some tools 

that are available to you that you are not necessarily using. I know 

you just raised the G.P. about 10 basis points but you actually 

could have raised it 30 basis points. The up-front premiums—you 

still have some room to charge additional premium there. 

15 

I just question, if you don’t know where you are, then how can 

you utilize those tools effectively, and shouldn’t—given the financial picture that is painted before you today, shouldn’t you be more 

aggressive in trying to restore this fund to at least the congressionally requested levels? 

Chairman HENSARLING. The time of the gentleman has expired, 

so an incredibly brief answer, Ms. Galante? 

Ms. GALANTE. My answer on the premiums is that we have 

raised premiums 5 times, and we think that is the right place for 

the pricing of the risk that we are taking on for these new loans. 

And we have to be careful about pricing new borrowers to pay for 

the challenges of the past. We will clearly damage access to credit 

if we do that. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you. 

I know that FHA worked very hard in response to the devastating effects of Superstorm Sandy, which hurt New York and 

my district particularly hard, as well as 23 other States, primarily 

New Jersey and Connecticut. Can you talk about some of the actions that FHA took to respond to help people? Specifically, what 

did you do to help homeowners who were affected? 

Ms. GALANTE. Yes, thank you. You know that Secretary Donovan 

leads the Sandy Rebuilding Task Force and he is very concerned 

that we help homeowners and renters alike during this crisis. And 

FHA, in conjunction with Fannie Mae and Freddie Mac, extended 

moratoriums another 90 days on both evictions as well as foreclosures that were already in process. 

And today, I am pleased to say that we are expediting—we are 

putting out guidance that we are going to expedite processing for 

multifamily properties that would like to come in for FHA multifamily insurance. So we are doing everything that we can to help 

the storm victims. 

Mrs. MALONEY. Earlier, you responded to some questions from 

the ranking member on really abusive practices—predatory practices that came from the private sector and cost many homeowners 

their homes, which ended up in foreclosures. Another predatory 

practice that I am hearing complaints about from my constituents 

is the practice of a—when they do try to pay down their loan, they 

are getting a prepayment penalty. What is the policy of FHA on 

prepayment penalties? Do you have— 

Ms. GALANTE. I don’t believe we have prepayment penalties. 

Mrs. MALONEY. That is another example of how FHA is really 

helping first-time homeowners and homebuyers by not practicing 

these abusive practices. It was not FHA that came out with the nodoc loans; it was not FHA that said you didn’t have to put anything 

down; it wasn’t FHA that came out with the predatory practices 

that contributed so heavily to the financial crisis that FHA is helping us respond to and helping homeowners to stay in their homes. 

Can you go over some of the steps that you have taken in terms 

of improving risk management that some of my colleagues seem 

tremendously concerned about? 

Ms. GALANTE. Yes. As I have said, we have increased premiums 

5 times. We have revised downpayment requirements for borrowers 

16 

with 580 FICO scores or below to 10 percent. We recently have 

tightened on borrowers with credit scores of 620 and under that 

they need to have a demonstrated no greater than 43 percent what 

we call debt-to-income ratio without additional compensating factors. So, we have looked at areas where the credit box needs to be 

tightened a bit. 

We have also looked at increasing premiums to ensure that we 

are paying for or compensating for any risks that we are taking. 

Those are just a few of the actions that we have taken over the 

past couple of years. 

Mrs. MALONEY. Both the chairman and the ranking member 

have placed GSE reform as one of the top priorities for this committee to address and try to settle and to make a priority of our 

work on the committee. Many have said that you can’t have GSE 

reform without a strong FHA program. Could you elaborate on 

that? 

Ms. GALANTE. I— 

Mrs. MALONEY. What role— 

Ms. GALANTE. I think it is critically important as we go into looking at GSE reform, broader housing finance reform, that we look 

at the role of FHA simultaneously, and moves that might be made 

relative to restructuring the housing finance system with respect to 

the GSEs, that we also ensure that we understand what the role 

of FHA is as part of that entire system, as opposed to trying to 

take this in piecemeal. 

Mrs. MALONEY. Thank you. I think your comments are very relevant to the task that we have with GSE reform. 

Thank you for your service. 

Ms. GALANTE. Thank you. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from North Caroline, 

Mr. McHenry, for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Ms. Galante, I certainly appreciate your testimony and thank 

you for your service to your government. 

Now, in looking at the FHA delinquency rate, your delinquency 

rate was 11.14 percent and the seriously delinquent rate was 8.54 

percent. Together, that is almost 20 percent. 

Your delinquency rate is 21⁄2 times that of the whole mortgage 

industry, and so added together, that 20 percent delinquency rate 

means that nearly one in five FHA-insured loans goes into default. 

In looking at this statistic, I look at something that Senator Elizabeth Warren once said to justify the creation of the Consumer Financial Protection Bureau: ‘‘It is impossible to buy a toaster that 

has a one-in-five chance of bursting into flames and burning down 

your house, but it is possible to refinance an existing home with 

a mortgage that has that same one-in-five chance of putting the 

family out on the street.’’ 

Now, since FHA performs no better than that one-in-five chance 

that Senator Warren references, that unacceptable default rate, 

how can you justify that FHA is actually helping rather than hurting average homebuyers? 

Ms. GALANTE. Congressman, just to be clear about these numbers, because I think we are conflating a couple of different things, 

17 

our seriously delinquent rate is a little over 9 percent—9.5 percent— 

Mr. MCHENRY. I am sorry. I referenced 8.54 percent, so that is 

higher. I am sorry. 

Ms. GALANTE. But you are adding to that people who are not seriously delinquent, they may be 30 days delinquent, and adding 

those together to get to your numbers. We have one in 10 who actually fail and go into some kind of foreclosure. So you can be seriously delinquent, you can be 30 days delinquent, and we have loss 

mitigation programs for folks, we have modification programs. We 

work with borrowers to get them out of delinquency, and that—just 

because you have missed a payment and you are ‘‘30 days delinquent,’’ does not mean that you have failed in making— 

Mr. MCHENRY. I certainly appreciate your response, but your 

rate is 21⁄2 times that of the rest of the industry. That is my comparison. 

Ms. GALANTE. I would like to address that. Let’s be clear. We 

don’t have as good a delinquency rate as the lenders who will only 

lend to people at an 800 FICO score and who have lots of wealth 

to put down—20, 30 percent downpayment, who don’t need our 

help. We do generally focus on a borrower population that still can 

be very successful but— 

Mr. MCHENRY. I appreciate the fact you don’t have the numbers 

in front of you. But my point of reference here is that for your 

prime loans—that portfolio of prime loans—and I appreciate getting the message; perhaps you can give more flesh to what you just 

said—but the comparison for FHA prime loans to the mortgage industry’s prime loans, your default—your delinquency rate is 21⁄2

times that. Is that acceptable? 

Ms. GALANTE. Again, FHA is designed to fill in market gaps. We 

are designed to provide access to credit and— 

Mr. MCHENRY. I understand your design. I have read the law. 

Ms. GALANTE. Yes. 

Mr. MCHENRY. With all due respect, I have read the law. I am 

giving you statistics from the DBA Delinquency Survey for the 

third quarter of 2012. So I understand you are quibbling with my 

statistics. Tell me what the acceptable delinquency rate is for FHA. 

Ms. GALANTE. I would just say this: We have borrowers who ultimately, on average, over time are not successful, so they are subject to foreclosure is a 10 percent number. 

Mr. MCHENRY. And is that acceptable? 

Ms. GALANTE. I believe that on average, across 40 years, across 

all different kinds of borrowers—if 90 percent of our borrowers are 

going to be successful, a 10 percent rate is—we would like to get 

it lower. It is certainly lower for our new populations moving forward. But I don’t think that is unacceptable, no. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

And, Commissioner, thank you for your testimony. I would like 

to give you an opportunity to once and for all discuss whether or 

not FHA forces lenders to make loans or make loans to unqualified 

borrowers. 

18 

Ms. GALANTE. Thank you. Certainly, FHA does not force lenders 

to make any loans. We make insurance available to lenders who 

are willing and able to underwrite loans to our standards. I would 

actually say that one of the biggest challenges that we haven’t 

talked about here today is that we have lenders who won’t lend 

even to the FHA standards, that they are creating lender overlays 

on top of that because of concerns that they have. 

Ms. VELAZQUEZ. Thank you. 

The Fiscal Year 2012 actuarial report emphasized that the predicted default within FHA’s portfolio was focused on loans endorsed 

between 2007 and 2009. Would you please explain the characteristics of these loans and the borrowers? 

Ms. GALANTE. The characteristics of those borrowers? 

Ms. VELAZQUEZ. Yes. 

Ms. GALANTE. So the characteristics of those— 

Ms. VELAZQUEZ. At risk of default. 

Ms. GALANTE. At a risk of default? 

Ms. VELAZQUEZ. Yes. 

Ms. GALANTE. I would just say that these borrowers are often in 

places that have been subject to the greatest economic distress that 

has occurred in this country, so areas of high unemployment that 

they were impacted by, where jobs have left and they lost jobs. 

They are concentrated in areas where there has been the most serious economic distress. 

Ms. VELAZQUEZ. Can we discuss the loans that FHA insured from 

2010 onward that have been performing extremely well? Why have 

these loans insured between 2010 to 2012 been so successful? 

Ms. GALANTE. They have been successful for a number of reasons. One, we have increased our premiums so we have more revenue coming in to protect ourselves from the risk. The other reason 

they have been successful is they are fully underwritten and they 

are being underwritten at a time when economic circumstances are 

better, and they are successful for those reasons. 

Ms. VELAZQUEZ. And do you believe that the success of these 

types of loans between 2010, 2012 insured by FHA can be replicated in future business? 

Ms. GALANTE. Yes, I do. And again, I would just go back to say 

one other element, which is, to some extent we would like to see 

lenders lend to a broader range than they are currently lending to 

in terms of the overall FHA population of loans. 

Ms. VELAZQUEZ. Many critics of FHA believe the private sector 

can effectively duplicate the agency’s mortgage insurance services 

when it returns to the market. Do you believe that this is the case, 

particularly for low-income, minority, and first-time homebuyers? 

Ms. GALANTE. I do not believe that the private market can fully 

take care of all the borrowers that FHA takes care of, and I think 

you are going to witness that at the height of the crisis. That private capital fled and it really was FHA that was there for minority 

homebuyers. 

Home purchase mortgages dropped 50 percent for the entire 

White population. It dropped 65 percent for African Americans and 

Latinos. Those borrowers were even more negatively impacted than 

the broader market. 

19 

Ms. VELAZQUEZ. During the hearing last week, some of the witnesses argued that FHA is crowding out private investors. Do you 

believe that is the case? Is the private sector in fact ready to return 

to the market? 

Ms. GALANTE. I think that the private market is starting to return and they are starting to return because they are seeing some 

economic recovery. They are seeing some strength in the housing 

market and that is a positive sign. And I think the charts that I 

have showed indicate that is continuing to come back. 

But one point that I think is really important here is that the 

total market shrunk during this crisis and it has not come close to 

coming back. So while FHA went up a little bit and now it has 

come down, there is a whole area we didn’t step into but no one 

else has either. 

Ms. VELAZQUEZ. Thank you. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Minnesota, Mrs. Bachmann. 

Mrs. BACHMANN. Thank you so much. 

I really was troubled by these delinquency rate numbers that Mr. 

McHenry brought up, because it really concerns me when I am 

reading that the MBA Delinquency Survey for all loans nationwide 

is 7.4 percent, and then you look at the FHA and it is over 11 percent, 21⁄2 times the rate of prime loans, and the seriously delinquent rate is 8.54 percent. 

Delinquency is a big deal, because in my home State of Minnesota, we had 13 private banks that fell below their capital requirements, and when that happened the FDIC came in, and they 

were put in receivership. But when the FHA has fallen below their 

capital requirements, their market share has only grown. 

So this makes me very, very nervous and I think it is making 

taxpayers very, very nervous. And so my question is, is the FHA 

meant to be funded by the taxpayers? 

Ms. GALANTE. Thank you, Congresswoman. 

FHA is intended to, again, price its risk and be able to— 

Mrs. BACHMANN. But your funding. Are you intended to be funded by the taxpayers? 

Ms. GALANTE. Over the long term, we are intended on a day in, 

day out basis to be able to be self-sustaining. 

Mrs. BACHMANN. But you would agree that you are not self-sustaining right now? 

Ms. GALANTE. What I would say is that we have a negative capital ratio, right— 

Mrs. BACHMANN. And that is what makes me nervous. 

Ms. GALANTE. Yes. 

Mrs. BACHMANN. So what I want to know is, what percentage 

chance do you think that taxpayers will have to bail out the FHA 

sometime in the next 15 years if this trend continues on defaults? 

Ms. GALANTE. First of all, again, we have been—we have talked 

about this. The trend is much, much better than it was as a result 

of the economic crisis, and now that we are in recovery those 

trends are— 

Mrs. BACHMANN. But the trend on default isn’t good. The trend 

on default is over 11 percent. 

20 

Now, let me ask you this: The FHA does have risk assessment 

practices, right? 

Ms. GALANTE. That is correct. 

Mrs. BACHMANN. You have them. That would include things like 

credit scores, downpayments, people’s income. I would assume 

those are things that you take into account? 

Ms. GALANTE. Yes. Again, lenders make these loans under our 

requirements. 

Mrs. BACHMANN. Right. And you said that you changed these 

risk requirements about 5 times, I think you said. You increased 

premiums and you talked about the FICO score, if they are below 

580, they have to have a 10 percent downpayment; if they are 

620—so you are talking about those scores. But when you look at 

conventional lending, usually your credit score has to be above 700, 

a minimum 650, usually with 20 percent down. 

So if the FHA is going to keep on taking risks by insuring so 

many people who have low credit scores, almost no downpayment, 

and almost no income to pay for a mortgage, how does the FHA 

differ from predatory lending practices? 

Ms. GALANTE. Again, Congresswoman, FHA is designed to deal 

with lower-wealth borrowers and it is appropriate for us to be taking different kinds of risks than the private market in and of itself 

would do. That is the point of having an FHA. 

Mrs. BACHMANN. But wouldn’t you agree that poor people are 

better off if they could be able to hold onto their home and stay 

there and live there? And wouldn’t you agree that it would be far 

better practice for our government if we would want to help people 

to own the assets that they put in their home so that we are rewarding people who are able to pay their bills? Because wouldn’t 

you agree that it really hurts a person to lose their home and it 

hurts their credit? 

Ms. GALANTE. It is devastating for a person to lose their home, 

and I just want to be clear: Again, 90 percent of our FHA borrowers are ultimately successful. You cannot look at what FHA 

does and who it helps and not see that we have really helped millions of families— 

Mrs. BACHMANN. But your default rate is 21⁄2 times worse. That 

is really what the problem is, isn’t it? Because it is devastating 

right now and we are looking at putting the taxpayers on the hook 

for that unconscionable level of default. That is what we are nervous about is this trend and trajectory that it seems like you want 

to continue because your lending practices are in the realm of predatory lending that we have been trying to mitigate against. 

Ms. GALANTE. You really—I am sorry, but you have this backwards, okay? We have had higher defaults through the economically distressed books of business where default rates are higher. 

You trend those forward, you blend those with now what are very, 

very low delinquencies, and our borrowers are going to be even 

more successful moving forward because we got rid of— 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognized the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. Thank you. 

Just a couple of opening statement remarks. 

21 

Yes, but, my colleague in Minnesota, you can close down this or 

that bank because it doesn’t have the capital. The depositors are 

insured and people needing banking services can just walk down 

the block and go to a different bank. 

If we shut down the FHA—if we had done that, we would have 

had a 25 percent further decline in home values, a cost to American families of well over $3 trillion, a double-dip recession, and the 

effect on our debt would have been so big that when the chairman 

put up the debt on the screen, we would need to equip this room 

with bigger television sets, if you imagine what our debt would be 

if there was no FHA, if there was an additional 25 percent decline 

in home values. 

You have indicated to us that you would like additional tools to 

manage the risk of the Mutual Mortgage Insurance Fund, but 

many of those tools were in legislation passed by this committee 

and passed by the House. Could you just quickly outline what are 

the tools that you need and were most or all of them in that bill? 

Ms. GALANTE. Yes, thank you. Most of them were in that bill, 

and again, that includes indemnification authority for certain lenders so that we can hold lenders accountable if they don’t follow our 

underwriting standards, a greater ability to terminate FHA approval of lenders on a larger geographic basis than just individual 

areas, more flexibility in how we deal with our compare ratio, so 

again, we can hold lenders accountable. 

So those are the actions that we are asking for, and then to deal 

with the reverse mortgage program. Those are the actions we are 

asking for moving forward. The reverse mortgage program one was 

not in the prior reform bill but is something that we are asking for 

today. 

Mr. SHERMAN. This recession is something beyond what most 

Americans have lived through in the past, but in the 1980s, in the 

big oil-producing States, we had a big downturn in the 1980s, not 

for the whole country but for Texas, Oklahoma, and Louisiana. And 

isn’t it true that at that time the FHA was the primary lender in 

those States? The FHA helped stabilize prices and over time the 

private market returned on its own? 

Ms. GALANTE. Yes. My understanding is that is correct and it is 

a perfect example of FHA staying in a market when others leave 

and receding as appropriate. 

Mr. SHERMAN. So, like the gunslinger—like the hero of western 

movies, you came into town—a place like Texas or Oklahoma—restored order, and pretty much left town. 

Ms. GALANTE. I like the image. 

Mr. SHERMAN. Now, some say that the FHA has gone beyond its 

mission, but aren’t you actually serving exactly what your mission 

is designed for, and that is to serve private market when the private market is unable or unwilling to participate? 

Ms. GALANTE. Absolutely. And I think if you were to look at slide 

5 on the deck that I handed out, if you look at how private capital 

literally precipitously just fell off in 2007 through 2008 and FHA 

was there to pick up as much of the volume as we could in that 

very short period of time, and that is exactly what we were designed to do. 

22 

Mr. SHERMAN. I represent an area that the statisticians would 

say is a little wealthier than the rest of the country. It is really just 

our—the home prices are higher, and one of the 12 high-cost areas 

in the country where your limit is at $729,000. If it wasn’t for your 

limit being that high, all the nicer homes in my area would have 

dropped precipitously in value and then the homes a few blocks or 

miles away would have also dropped as well. 

Are you pricing your current guarantees, and particularly for 

those up between $625,000 and $729,000, high enough so that you 

are charging a bit more than the risk you are taking and making 

a profit for the Federal Government? 

Ms. GALANTE. Yes, sir, we are. And, again, we—it is a bit of an 

aberration that FHA has those high limits but it was necessary 

during the crisis. And we have instituted both higher premiums 

than the rest of our book of business for those higher loans, and 

we also just recently increased downpayment requirements for 

those loans as well. 

Mr. SHERMAN. So you are making money for the Federal Government that— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Alabama, the 

chairman emeritus, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. In the first 20 years of FHA’s existence, there were 

5,000 claims made. In other words, 5,000 mortgages fell into default or foreclosure, and that was out of almost 3 million that were 

made. Today, you are making—there are over 7 million mortgages 

outstanding and yet you are having 12,000 claims every month. 

You had 5,000 in the first 20 years of existence of FHA, so you 

are actually having more about every 10 or 12 days than you had 

in the first 20 years. And let me show you—I don’t know if you can 

see—you have in front of you two charts. One shows that the default rate—now, this is on the 2010—that families with FHA mortgages are defaulting at about what appears to be over 10 times the 

amount of Fannie mortgages and the same for MGIC. 

Does that greatly disturb you—that foreclosure rate? 

Ms. GALANTE. Again, I am not sure which chart we are referring 

to. On this one with the large spike, one thing that troubles me 

about this chart is it is not to a reasonable scale. You have left off 

1967 through 2006— 

Mr. BACHUS. No, 1967 is—this is all in there. Didn’t it start 

going up in—when did it start—when did you take this chart increase? 

Ms. GALANTE. I think that if you put this on a proper scale, it 

is not as sharp an increase as it would otherwise appear— 

Mr. BACHUS. Let me ask you this: From 1954 to 2003, it was less 

than two. Now on any scale it is above—it is above 18 today. Is 

that not correct? 

Ms. GALANTE. I am not sure that is correct. 

Mr. BACHUS. So you are saying— 

Ms. GALANTE. Again, I am just looking at this for the first time 

so it is a little hard to look at these numbers— 

Mr. BACHUS. So you are saying there has not been a great increase in foreclosures? 

23 

Ms. GALANTE. Again, you have to look at this over time. Were 

there significant— 

Mr. BACHUS. I am trying to do that. 

Ms. GALANTE. —increases in foreclosures at the height of the economic crisis? Absolutely. 

Mr. BACHUS. Let’s go to the second one, then, okay? Let’s just 

take 2000—let’s just take the 2010 book. Now, you don’t have a 

problem with this chart, do you? And it shows a delinquency rate 

of above 5 percent. 

Ms. GALANTE. Yes. Again, I don’t know the definition of the seriously delinquent in this chart compared to the way we do seriously 

delinquent— 

Mr. BACHUS. If you will see up there, it defines it. It is 5 percent. 

Do you consider that 5 percent of the insured loans in the 2010 

book is a serious delinquency? If it is not above 5 percent, it used 

to be almost, as you can see from this first chart, even in 1954, it 

was almost nonexistent. But what is the delinquency rate today of 

the 2010 book? And that is the last one I think we have any 

records of. Can you— 

Ms. GALANTE. So again, our overall seriously delinquent rate is 

9.4 percent— 

Mr. BACHUS. 9.4? 

Ms. GALANTE. —today. ‘‘Seriously’’ means 90 days. But I do 

want— 

Mr. BACHUS. So the way I computed it, actually it is greater 

than—and I was trying to be conservative. 

Ms. GALANTE. I am just—I am trying to be direct with you here. 

Again, I will go back to the point I made to Congresswoman 

Bachmann. Seriously delinquent, 90 days late, does not—is not a 

failed loan. It is not a loan that ultimately goes into foreclosure. 

That is a different rate. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks, for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Commissioner, it is good to see you. And I am walking in and 

this is the second hearing that we have had, and I know if it wasn’t 

for FHA, I might not even be sitting here, because my experience 

was with my parents when they first bought their home if it wasn’t 

for FHA—their mission was to get individuals. We were in public 

housing and it was the dream of my parents to own a home, and 

they could not get a conventional loan or anything of that nature. 

The only way that they were able to own a home was through an 

FHA loan. 

And I understood that was the mission of FHA, to help individuals who may otherwise not be able to enjoy or live the American 

dream, help make that happen. And so they did that and my parents never missed a mortgage payment and going forward. 

So just listening back and forth sometimes I get confused. Has 

the historical role of FHA—has that changed or is that still the 

same today? 

Ms. GALANTE. It has not changed. 

Mr. MEEKS. So it is still today, and could you give us an idea of 

what the housing market would look like today, particularly for a 

24 

family like mine, an African American who comes from public 

housing, or a Hispanic who—their parents are working hard every 

day trying to make a living—what would that market look like 

today? Would my parents have a chance today to get a mortgage 

or something of that nature without an FHA? 

Ms. GALANTE. Again, today 50 percent of all African-American 

and Latino families are using FHA in order to purchase a home, 

so we are a very large share of credit availability for the minority 

community. 

Mr. MEEKS. And what about individuals, no matter what their 

ethnicity is, this is their first time they want to buy a house? They 

have been struggling and they just got out of college, and just got 

married or something, and the first time they want to buy a 

house—is the FHA—will they—is that part of their mission, too? 

Can they be helpful in that? 

Ms. GALANTE. Absolutely. First-time homebuyers are very much 

a part of our mission. Close to 80 percent of the mortgages we 

make in the purchase area are for first-time homebuyers. 

Mr. MEEKS. So, and that also, then, stimulates the economy, 

wouldn’t you say? That, in fact, I think that there was a Mark 

Zandi from Moody’s who said that in 2010, without the FHA, we 

would have had 3 million fewer jobs and a 2 percent decrease in 

GDP, and that in 2011, approximately half of all African Americans 

and Latinos who purchased homes did so, as you have indicated, 

through FHA. 

So it is clear, I think, then, that FHA has been playing a positive 

and supporting role in helping and moving the economy forward 

and making—I think you just testified that the Federal Government, at least while President Obama has been President, has been 

making a pretty good return on its rate to the taxpayers and to the 

Federal Government. Is that not correct? 

Ms. GALANTE. Yes. Again, the loans we have been making and 

the premiums that we have been charging for those loans since 

2010—again, with the help of Congress, in order to be able to increase those premiums, are extremely profitable and are projected 

to be extremely profitable for the Federal Government moving forward. And we really just have this challenge of dealing with the 

crisis and the challenges that remain from there. 

And just to go back to Congressman Bachus’ point for a minute, 

our seriously delinquent rate overall is 9.5 percent. It is now much 

lower. For 2010, it was 5 percent; it is even lower for 2011 and 

2012. 

Mr. MEEKS. Let me ask—at last week’s hearing also, one of the 

witnesses questioned the necessity of having FHA provide a 100 

percent insurance guarantee and suggested that Congress reduce 

the guarantee to 25 or 50 percent, which is currently the policy 

used by the V.A. Could you discuss some of the key factors for why 

it is important for the FHA to provide a 100 percent guarantee and 

some of the key differences between the FHA and the V.A. programs? 

Ms. GALANTE. Yes. So the V.A. program obviously is limited to 

eligible applicants from the—from Federal service in the military 

and so they are a smaller population of people who are eligible for 

the V.A. I think the idea of how much a government guarantee 

25 

should be on any particular loan, there is a reasonable conversation 

to have there in terms of the pros and cons, right? And I do believe 

that the V.A. has a totally different structure for how they underwrite their population. 

Mr. MEEKS. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Westmoreland, for 5 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman. 

And, ma’am, my first two questions are just simple yes or nos. 

Are you familiar with the GAO high-risk list? 

Ms. GALANTE. Yes. 

Mr. WESTMORELAND. Is FHA on that list? Are they included in 

the high-risk category? 

Ms. GALANTE. Not today, no. 

Mr. WESTMORELAND. Let me say that there is some type of misconception that maybe this side wants to do away with FHA. We 

do not want to do away with FHA. 

We really agree with your statements about phasing out the 

countercyclical role of reducing FHA’s footprint in the marketplace. 

We agree with the President when he says that going forward, we 

will coordinate reforms of Fannie Mae and Freddie Mac with 

changes at FHA to help insure the private market, not FHA fills 

the market opportunities created by reform. 

But for some reason, the other side seems to think we want to 

do away with FHA. We want to strengthen FHA. We want to make 

sure FHA is there. I am a builder by trade. I want FHA there. I 

want people to buy homes. 

And so, that is some type of misconception. We just want it to 

be on good, sound footing, just like you do and just like the President does. 

The other comment that the President made in the White Paper 

that he issued on GSEs in 2011 says the Administration will make 

sure that creditworthy borrowers who have incomes up to the medium level for their area have access to these mortgages, but we 

will do so in a way that does not allow FHA to expand during normal economic times to a share of the market that is unhealthy and 

unsustainable. Now, last night in his speech, he said that today our 

housing market is finally healing from the collapse of 2007. Home 

prices are rising at the fastest pace in 6 years, home purchases are 

up nearly 50 percent, and construction is expanding again. 

Do you think that was what he was saying last night, that we 

are getting back to normal economic times? 

Ms. GALANTE. I do. I think we are clearly on a path of recovery, 

both in the housing market and the economy overall, but it is fragile and we do need to ensure that we understand that and manage 

to that fragility at this moment as we proceed. 

Mr. WESTMORELAND. So your goal is to get back to where typical 

FHA has been in the private mortgage insurance. Is that correct? 

Ms. GALANTE. We are looking forward to receding over time here, 

and we have—we—as I have mentioned in my testimony now several times, we have done that. But we do need to do it in a careful 

way, given where the economy is going. There are still risks to the 

26 

economy, including something like sequestration, which would 

clearly be a risk to the economy and a risk to FHA. 

Mr. WESTMORELAND. So you agree that FHA having 56.4 percent 

of the market share private mortgage insurance outsized the role 

of FHA and should be decreased, right? 

Ms. GALANTE. I do, and it has declined. I think it is about 42 percent today. It was higher than 56 percent at the peak, so we are 

steadily declining. 

Mr. WESTMORELAND. Now, let me ask you another question. Supposedly in 2013, FHA—the President had put in his budget a bailout of $688 million, but according to the DOJ settlement, you were 

put in for $1 billion. So you are not projecting a shortfall for 2014? 

Ms. GALANTE. The President’s budget is not out for 2014, so I— 

Mr. WESTMORELAND. It was due last week, wasn’t it? 

Ms. GALANTE. I am not in charge of putting out the President’s 

budget. But I would just say, back to your comment about last 

year, yes, we did get settlement dollars that helped offset what 

would have been a potential draw from the budget, but that was 

not what really impacted us. We made premium changes, we made 

policy changes, we ended up actually having $3 billion more. 

Mr. WESTMORELAND. Okay. So you haven’t requested a—FHA 

hasn’t requested anything in the President’s budget? 

Ms. GALANTE. The President’s budget is not out— 

Mr. WESTMORELAND. But you have made your request to the 

budget, right? 

Ms. GALANTE. We have made—direct appropriations requests are 

part of the budget— 

Mr. WESTMORELAND. Mr. Chairman, one final question. 

Do you believe that FHA should be considered on the high-risk 

list? 

Chairman HENSARLING. The time of the gentleman has expired. 

The gentleman from Massachusetts, Mr. Capuano, is recognized 

for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Thank you, Madam Commissioner, for being here. I think you actually answered all the questions pretty clearly and pretty fairly 

and openly, and I will tell you that the questions I have really are 

more repetitious, to clarify a few things more than anything else. 

First of all, the delinquency rate. Everybody—not everybody, but 

some people are pointing out this 9.4 percent rate. Am I wrong to 

think that most of that rate is made up of loans made in the 2007 

and 2008 years and that since that time the delinquency rate is 

well below that number? 

Ms. GALANTE. That is correct, and thank you for saying that. I 

think I got a little jumbled there earlier, but yes, that is the overall 

seriously delinquent rate, which takes into account the whole book 

of business— 

Mr. CAPUANO. I guess I want to be clear, too, about FHA’s mission, or what they have historically done, not necessarily even what 

they are doing now countercyclical. In the normal course of events, 

before the current crisis, did FHA compete with prime lending entities? If I was able to—if I had a score of 800 and had a gazillion 

dollars in the bank would FHA take me on or would I just go to 

a private entity? 

27 

Ms. GALANTE. Theoretically, we could take you on, but from a 

price perspective and from an underwriting perspective it was 

much better for you to go somewhere else. That is right. 

Mr. CAPUANO. The mission of FHA, as I understand it, has always been to the more moderate-income people who might have 

difficulty getting into the housing market or are maybe on the 

cusp, not necessarily the most difficult because those people can’t 

afford to buy a home no matter what; that is what public housing 

is for. But the people on the cusp is where FHA has been at the 

sweet spot for historical purposes. Is that a fair statement? 

Ms. GALANTE. Yes. That is a fair statement. And again, our loan 

limits are one of the things pre-2008 that would—which keeps FHA 

in that sweet spot. 

Mr. CAPUANO. At any given time, your delinquency rates or your 

seriously delinquency rates, or whatever term you want to use, 

have always been and will always be higher than prime lenders. 

Is that a fair statement? 

Ms. GALANTE. I think that is a fair statement. 

Mr. CAPUANO. Because you are dealing with different clientele. 

You are dealing with people who are working-class people as opposed to people who are clipping coupons—well, Wall Street coupons, different kinds of coupons. And that is my understanding of 

it as well. 

I guess I also want to talk about the $30.4 billion or $31 billion 

you have. It is my understanding that if you were to close your 

doors today, which, of course, I think is a ridiculous assumption— 

if I lost my job today, I couldn’t afford to pay my bills either, but 

I guess for the purposes of discussion, for a nice, aesthetic discussion, we will presume that you close your doors—it is my understanding that $31 billion would still last for about 7 years to pay 

off the normally expected bills if nothing else were happening. Is 

that a rough estimate? 

Ms. GALANTE. That is correct. And again, we do ongoing business, so we pay out claims but we have new money coming in— 

Mr. CAPUANO. I have always thought that was a ridiculous assumption at all levels to presume any government entity is going 

to shut down because we have to have fully funded pensions, we 

have to—we are not shutting down, period, so therefore it is a ridiculous assumption, but I also know that we have to make it for 

the purposes of making our accounting friends happy. 

At the same time, it is my understanding that the current Federal budget rules might require you to access certain Treasury 

funds at some point, as opposed to actually needing and using the 

money. Is that the right assumption? 

Ms. GALANTE. Yes. Again, under the Federal credit reform accounting, we would potentially need to draw from Treasury to put 

money in reserves to add to that— 

Mr. CAPUANO. Money that you would not use—you would not 

need to use? 

Ms. GALANTE. We would not need to use, again, if we are continuing to have ongoing business. 

Mr. CAPUANO. So the current Federal budget rules are kind of 

like the original bailout where we forced certain people to take 

some money. And therefore, why don’t we just change some of 

28 

these rules to make it so that—it is one thing to have the full faith 

and credit of the Federal Government behind you, which I think is 

a good idea. It is another thing to make you access money that you 

don’t need. 

I actually think that is a stupid rule, and whoever put that rule 

together should change it. You should be able to access money 

when you need it, not before you need it. 

Who do I talk to about that? 

[laughter] 

Ms. GALANTE. Maybe yourself, I guess. 

[laughter] 

Mr. CAPUANO. Jeb and I will have a long discussion. If that is 

the case, certainly I think it is something we should be considering, 

because again, I believe in the full faith and credit of the United 

States Government being behind the FHA; I don’t believe in forcing 

people to take loans that they don’t need. And my fear is that at 

some point if you are required by our budget rules to access money, 

some will call that a bailout. I call it ridiculous because you don’t 

need the money. 

If you need a bailout we will have our debate and we will—some 

of us will support it, and some of us won’t. But if you don’t need 

a bailout, you shouldn’t be accessing taxpayer dollars, and you 

shouldn’t be required to do so by some ridiculous accounting rule. 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, and asks that he yield to the chairman for a brief 

moment? 

Mr. LUETKEMEYER. I will yield to the chairman for a brief moment. 

Chairman HENSARLING. Ms. Galante, quickly, you were asked 

the question about whether or not FHA qualifies for GAO’s highrisk series. You said, ‘‘Not currently.’’ Do you believe, as you understand the definition, that it should? Yes or no, or do you have any 

knowledge of that? 

Ms. GALANTE. Pardon me? 

Chairman HENSARLING. Does FHA qualify for GAO’s high-risk 

series? Yes or no, or do you not know? 

Ms. GALANTE. I am not sure what you mean by, do we qualify? 

I understand the GAO is releasing a report tomorrow— 

Chairman HENSARLING. Okay, so you have no knowledge that 

GAO considers you a high-risk agency? 

Let me move on to the second question, then: In the President’s 

last budget request, he did request a taxpayer bailout. I understand you do not write the President’s budget. You have no knowledge that the President in his next budget submission will request 

a taxpayer bailout for FHA, or do you have any knowledge? 

Ms. GALANTE. I do not. 

Chairman HENSARLING. Okay. Thank you. 

I yield back to the gentleman from Missouri. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Ms. Galante, I am just kind of curious here. Your book of business has grown exponentially over the last several years and the 

29 

top loan is $729,000 now. Whenever you look at a loan of that size, 

is it really fulfilling your mission to be making loans of that size? 

Ms. GALANTE. Congressman, that was a loan limit increase that 

was done in 2008 as part of the Housing Recovery Act, and those 

loan limits were extended by Congress last year. They expire at the 

end of this year. I do not think that is a typical traditional place 

for FHA but we are implementing the congressional mandate to 

have those— 

Mr. LUETKEMEYER. Okay. If you don’t believe it is a traditional 

place for FHA, then where do you think it should be? 

Ms. GALANTE. Again, I think loan limits should recede over time. 

I think they should go back to the $629,000 first, and I think as 

we proceed we— 

Mr. LUETKEMEYER. It has doubled from what it was back in 

2008, I believe—is that a good place to go back to, $363,000, is that 

a— 

Ms. GALANTE. Again, I think these are questions that we should 

work on together. I think that the loan limits should recede over 

time, and an appropriate role and an appropriate way of constraining FHA’s ultimate market share, loan limits is a good way 

to do that. 

Mr. LUETKEMEYER. This is a concern of mine. It seems like, with 

the book of business that you keep talking about, which is improving now as we go along, which is great, but I have some questions 

about that. Number one, the book of business you are taking on are 

these higher loans, which are not necessarily what I believe and 

you just admitted to as—and testified to as not really where your 

mission should be, number one; and number two, it looks to me like 

you are using these larger loans as a way to underwrite and pay 

for a lot of the smaller loans that are where the problems are at. 

I think this is something that we need to get back to. I am not 

arguing with your mission. I think you have a mission and I know 

I would like to see FHA get back into that niche or where you need 

to be. 

That being said, in your testimony you made the comment twice 

on page three that you think we need to be financing creditworthy 

borrowers, and to me that—and qualified borrowers is another 

term that was used. And I agree with that. If we are doing that, 

I think that we are looking at a borrower who can afford to make 

the payment. And when you are looking at people who are getting 

homes of this size, they are not low-income individuals. With a 

$729,000 loan, you are looking at somebody who is going to have 

to make probably a $3,000-a-month payment. That is not a low-income person. 

Even if you go back down to where we need to be with this, we 

still need to get back to the sound tenets of lending. People have 

to be able to pay for what they are going to get involved in, and 

if we don’t do that, would you agree that we have a problem, that 

we have a moral risk there, a moral responsibility to people to not 

put them in something they can’t afford? 

Ms. GALANTE. Certainly. But I think what we really need to 

focus on together is what does that prudent underwriting look like? 

What is the right— 

30 

Mr. LUETKEMEYER. Let’s be honest here now. When you look at 

people who don’t have a downpayment, why do they not have a 

downpayment? Are they somebody who is just getting into the market, somebody who just got out of school, somebody who doesn’t 

have a job? Is it somebody who has had a financial hardship, a 

medical problem, and suddenly all their money is gone? Are they 

somebody who can’t physically manage their money, and then they 

can’t save anything? Or are they just somebody who is struggling 

to make ends meet and don’t have the wherewithal to get there? 

Those are all different scenarios. Some of them are worthwhile, 

some of them aren’t, but I think the moral responsibility that we 

have is to provide that service but not to put people in homes who 

can’t afford it, and I think we have—we are doing that. 

Chairman HENSARLING. Regrettably, since the chairman took 

some of his time, the time of the gentleman from Missouri has expired. 

The Chair now recognizes another gentleman from Missouri, Mr. 

Clay, for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. Thank you for conducting 

this hearing. And this gentleman from Missouri has a different 

take on the FHA than the previous questioner. 

And let me thank the Assistant Secretary for coming today. 

Critics of the FHA falsely state that loans insured by the agency 

are just like subprime loans. Can you help us to debunk that notion? And moreover, how did FHA’s market share change during 

the subprime boom and what is FHA’s current market share? 

Ms. GALANTE. FHA did not do low-doc, no-doc, no documentation 

for a loan. We did not do loans that reset. We do 30-year, fixedrate, fully underwritten mortgages. During the subprime boom 

years, those other kinds of instruments were available to people, 

and what happened is that, frankly, FHA’s market share went to 

about 2 percent because people were solicited and took these very 

abusive loans rather than coming to the FHA. So that is what happened in the ramp-up to this crisis that frankly engendered the crisis and put the whole economy at risk. 

So when that bubble burst, FHA was there again to help a broad 

range of borrowers be able to buy a home and to refinance, sometimes out of those very toxic mortgages that they had, unfortunately, gotten themselves into. 

Mr. CLAY. So the FHA is now experiencing an uptick in loans 

during this recent bounce-back of the U.S. housing market? 

Ms. GALANTE. I would say this: FHA, during the depths of the 

crisis, took on more activity. We are now receding. Our loan volumes have been going down as private capital starts to come back 

to the marketplace. So we are now down to about 15 percent market share. 

Mr. CLAY. And currently, FHA has an active portfolio of $1.13 

trillion in insured loans. Can you discuss whether you think FHA 

has the appropriate level of resources and staffing to manage this 

book of business both in terms of lender enforcement, servicer monitoring, and oversight of the firms that handle REO management? 

Ms. GALANTE. We could certainly use additional financial resources. We are working on technology changes so that we can do 

31 

our business better and we could certainly use some additional enforcement authority to both monitor our portfolio and our lenders. 

Mr. CLAY. Okay. Thank you. 

And how does the low interest rate environment impact FHA’s 

finances? 

Ms. GALANTE. Yes, well, under the actuarial report, if the interest rates remain as low as they are, frankly, we do see some people 

refinancing out of FHA into other things or so there is a—there can 

be, actually, a negative if the low interest rates—to our total economic value as a result of low interest rates. But low interest rates 

are a good thing for current borrowers and, frankly, helps them absorb some of the mortgage insurance premiums that we have needed to put on our new loans. 

Mr. CLAY. Thank you for that response. 

And how have both the annual and up-front mortgage insurance 

premiums at FHA changed since this Administration took over in 

2009? Do you believe that the FHA is changing its pricing to facilitate a return of private capital to the market? 

Ms. GALANTE. I do believe that the pricing changes that we have 

made over time are increasing private capital availability and essentially, for most borrowers now, our rates are, frankly, high, and 

that is helping facilitate private capital coming back for those who 

can go there. 

Mr. CLAY. And so competition is good? 

Ms. GALANTE. Yes. 

Mr. CLAY. Thank you for your responses. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Ohio, Mr. Stivers, for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you holding 

this very important hearing. 

I do believe that FHA poses a risk to taxpayers because they 

mispriced their risk—the premiums they charge for their risk. And 

you said in your testimony that you have raised your premiums, 

but I am curious about a few things. I have a few questions. 

Number one, does FHA charge the maximum premium that is 

authorized by law? 

Ms. GALANTE. We charge the maximum premium on the very large—the loans over $629,000. 

Mr. STIVERS. But for these other risky loans that you talked 

about, does FHA charge the maximum amount authorized by law 

for all loans? 

Ms. GALANTE. We do not charge the maximum premium, but we 

believe we are priced now appropriately for the risks that we are 

taking on. 

Mr. STIVERS. And second, the FHA has had the authority to use 

a tiered pricing structure for more risky loans. For example, condos 

are more likely to default than single-family housing. But has FHA 

in that instance charged more for the more risky loans, such as 

condos? 

Ms. GALANTE. I think you are making an assumption that condos 

are inherently more risky. Certainly, our data doesn’t— 

Mr. STIVERS. The historical data backs that up though, doesn’t 

it? 

32 

Ms. GALANTE. Not the FHA data. 

Mr. STIVERS. The historical data in the broader marketplace does 

back that up. Go ahead, ma’am? 

Ms. GALANTE. So again, we don’t charge a different premium 

based on the geography or the loan type. 

Mr. STIVERS. But you are authorized to by law? 

Ms. GALANTE. I am not certain that is the case, but— 

Mr. STIVERS. You have been since 2008. 

The next question: In answering Mr. Luetkemeyer’s question you 

admitted that you have sort of strayed from your basic mission of 

affordable housing, and in 2006 FHA controlled about 4.5 percent 

of the new purchase market; today, give or take, it is about 30 percent—might be 28, 29, but almost 30 percent of the new purchase 

market. What is the right amount for your niche market that you 

are supposed to serve and what is your transition plan to get 

there? 

Ms. GALANTE. I don’t think we have strayed from our mission. 

We have a dual mission, including playing the countercyclical role. 

Congress asked us to take on loans up to the higher limit and we 

have done that, and we have done it in a way that still tries to get 

those loans to go to the jumbo market. So we have played that role 

and we do believe that over time, we should be receding. But those 

loan limits are authorized—not authorized, required by Congress at 

this time. 

Mr. STIVERS. So what do you think is the average income of somebody who buys a $725,000 house? 

Ms. GALANTE. I would have to do the math, but probably $100,000. 

Mr. STIVERS. And would you call that person somebody who is 

low- to moderate-income? 

Ms. GALANTE. Again, our incomes are based on area median income, so whether you are low- or moderate-income depends on the 

area median income of your jurisdiction. I am from the San Francisco Bay area where the moderate-income definition probably is 

$100,000. 

Mr. STIVERS. And certainly, that $700,000 in San Francisco is 

not what it is in some other places, but it is still a very expensive 

home by American standards. 

The next question I have is about your mortgage insurance. You 

now write about 50 percent, in round numbers, of the mortgage insurance market. Is that correct? 

Ms. GALANTE. We are down to 42 percent. 

Mr. STIVERS. Okay, so almost 50 percent. And what are you 

doing to make sure that the premiums that you charge are less 

than what is charged in the private mortgage insurance market. Is 

that correct? 

Ms. GALANTE. Again, the private mortgage insurance market 

prices their insurance differently than we do. And, by the way, it 

is a different product. It is a top loss; it is not a full mortgage insurance. So they price it differently than we do. And you have to 

combine that pricing with securities pricing to really get to any 

kind of appropriate comparison. 

Mr. STIVERS. Sure. Do you think it is appropriate to have—to insure dollar one losses and not have any insurance and insure up 

33 

to 100 percent, unlike the private mortgage insurance market, that 

usually insures about 20 to 30 percent of the loss—you insure 100 

percent of the loss? 

Ms. GALANTE. I’m sorry, what is the question? 

Mr. STIVERS. Do you think that is appropriate? 

Ms. GALANTE. We do insure 100 percent of a loss and we have 

just changed a policy to ensure, for example, that we keep our 

mortgage insurance premiums in place for the totality of the period 

of time that insurance is in force. 

Mr. STIVERS. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

And thank you, Commissioner and Assistant Secretary Galante. 

Let me also thank you and FHA and HUD for your strong support 

with me in our efforts. Each year, as you know—I think you were 

at one of our home foreclosure prevention events in Atlanta, Georgia. I appreciate you for doing that. As you know, I represent seven 

counties around Atlanta, the suburbs, which is the epicenter of so 

much of the home foreclosures. So I appreciate your involvement 

with that. 

I want to go back for a moment, because I don’t think you were 

given the necessary opportunity to really respond to Mrs. 

Bachmann’s, my colleague from Minnesota’s, concerns, and you 

made the statement that you felt that she had gotten it backwards. 

And I sort of agree with you on that, with all due respect. 

Let’s get the record straight on this in terms of your mission and 

your role. I think it is profound—and these statistics I am about 

to give I want you to concur with, and very revealing so it helps 

tell the whole picture, and that is this: In the last year—in Fiscal 

Year 2011 is it not true that over half of all African Americans who 

purchased a home—not in one area but 52 percent, over half of all 

African Americans who purchased a home in the United States of 

America and 50 percent of all Hispanics who purchased a home in 

the whole Nation of America did so with FHA financing. Is that 

correct? 

Ms. GALANTE. That is correct. 

Mr. SCOTT. And also, 78 percent—nearly 80 percent of all FHA 

borrowers were first-time buyers. Is that not correct? 

Ms. GALANTE. That is correct. 

Mr. SCOTT. That is phenomenal. Now, I would like for you to 

kind of elaborate on this, because these statistics are very telling. 

Why is this so? 

Why is it that one agency, the FHA—if it were not for the FHA, 

where would the African-American community be in 

homebuyership? First-homeowners? And the Latino community? 

And is it not other factors that are at play here so that we can tell 

the full story on the mission and the role that FHA—and you have 

the opportunity to set the record straight on how this relates to the 

FHA mission. Would you please? 

Ms. GALANTE. Yes. Thank you. 

There are a couple of points I would like to elaborate on. The 

first is that FHA has played a particularly strong role in this crisis 

34 

in particular. Again, home purchase mortgage availability dropped 

for everyone, but it dropped more for African-American and Latino 

homebuyers. It also dropped more for low-income neighborhoods. 

It has fallen off 75 percent in low-income neighborhoods, 50 percent for more middle- and upper-income neighborhoods. So again, 

as the private market left, FHA stayed in the market, continued 

to be there to serve this broad clientele. 

Mr. SCOTT. Now, I want to talk to you about, because there have 

been some other significant misunderstandings about FHA’s market share and how that has shifted over time. For example, at the 

hearing last week it seems that as if some members on our committee have not fully recognized how FHA has reduced its footprint 

in the mortgage market as we have slowly but surely recovered 

from the housing crisis. 

Can you please explain to the committee, first of all, traditionally 

what kind of market share has FHA had? 

Ms. GALANTE. Historically, FHA has been 10 percent, maybe a 

little bit less, maybe a little bit more. Pre-ramp-up to the bubble, 

as I had mentioned earlier, we dropped to maybe a 2 percent market share as people went to the subprime, toxic mortgage market, 

unfortunately. 

So we do think—and again, market share is a funny statistic as 

well, because you have to look at the fact that the entire market 

dropped during these past number of years. 

Mr. SCOTT. And finally, before the hammer comes down on me, 

many of my colleagues have said they are interested in helping 

continue to support FHA, which I am glad to hear on the—on my 

Republican side. But let me ask you your fear of sequestration. 

Chairman HENSARLING. I am sorry. The time of the gentleman 

has expired. The proverbial hammer did come down. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I don’t come from a wealthy part of the country. There are a lot 

of my constituents who have used FHA to purchase a home. They 

are low- and moderate-income individuals. And I have seen the 

program work for a lot of people. So I—what we talk about here 

today, I don’t want that to be taken away. It has been a helpful 

program. 

But over the last several years there have been a lot of questions 

that have been asked from this committee and others about the solvency of FHA. Some have compared it to Fannie and Freddie and 

have inquired as to whether FHA is going to need a Federal taxpayer bailout. 

And so as those questions have been asked, many have come in 

and told us not to worry. The program is fine, it is solvent. Be assured, we are not Fannie and Freddie. 

For instance, Secretary Donovan was testifying before the Senate 

Banking Committee in 2009 and he indicated that within 2 to 3 

years the capital reserve would be back up to 2 percent. Last year, 

in February, you were here and you told us that we expect to be 

at a capital reserve of $8 billion by the end of 2013. 

And so, as I am looking at the statements that have been made 

in regard to the questions that have been asked, I have some conVerDate Nov 24 2008 18:16 Nov 04, 2013 Jkt 080868 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\80868.TXT TERRI
35 

cern now that we have a shortfall of $16.3 billion and a negative 

capital reserve of 1.44 percent. And as I sit here I wonder, have 

we been misled in Congress? Have you in HUD been negligent? Incompetent? 

How can we ask these pointed questions that we had concerns 

about, outside individuals had concerns about, and we have not 

been given the appropriate information until today? What is it? Is 

it incompetence? Have we been misled? What has the issue been? 

Ms. GALANTE. There are two different analyses of FHA’s book of 

business, so you have to start with—this is, unfortunately, more 

complicated than any of us would like. The actuarial studies which 

you are referring to in terms of the economic value and the capital 

ratio, done independently on long-term economic forecasts and 

long-term projected losses. Set that aside. 

Whether we need to draw any funds from Treasury is based on 

the President’s budget, which is done by different economic analysis and comes up with a budget re-estimate. And again, even if 

we needed to draw, it is to put money into reserves. 

So to be clear, this is totally different than a Fannie or Freddie 

that were private entities taking private risk, taking profits privately and giving them to shareholders, and then the government 

comes in years later after they have spent those funds— 

Mr. DUFFY. I want to be clear—I only have 2 minutes left. 

Ms. GALANTE. Yes. 

Mr. DUFFY. You are saying it is complicated, okay? 

Ms. GALANTE. Yes. 

Mr. DUFFY. And you are the Commissioner. Listen, there are outside people who don’t have the access to information that you have, 

who have been raising the red flag saying, ‘‘Hey, we have a problem at FHA.’’ They have come in, we have had hearings on it. So 

how can you come in and tell us, ‘‘We don’t have any problems. We 

are going to be fine?’’ 

And outsiders who don’t have your information knew that we 

were going to have this very problem that we are talking about 

today and you didn’t share that with us. That gives me great concern. Have you talked to the President about needing dollars in his 

budget? Have you communicated with him? 

Ms. GALANTE. No, sir, I have not. 

Mr. DUFFY. So if the President is going to offer money to FHA 

as a way of a bailout, he is going to be shooting in the dark. Or 

has the agency talked to him about dollars that are going to be 

needed for him in his budget? 

Ms. GALANTE. Congressman, I just want to say a couple of 

things. We have been totally transparent with this committee; we 

have been totally transparent with Congress. We have an actuarial 

study. We describe in that actuarial study the risks of going one 

way or another. We have— 

Mr. DUFFY. What happened in the last year? Last February, you 

were here, and you were telling us that we were going to have a 

reserve of $8 billion by the end of 2013. And lo and behold, we are 

$16 billion short. How did you get it wrong in a mere 12 months 

to have this analysis completely wrong? 

Ms. GALANTE. Congressman, we didn’t get it wrong. 

Mr. DUFFY. You didn’t get it right. 

36 

Ms. GALANTE. We provided you an actuarial study that had a 

range of things that could happen depending on economic circumstances. The economic circumstances—house prices—did not 

match what the independent actuary predicted would happen. 

These are long-term forecasts that they make and we are reporting 

to you those results. 

Mr. DUFFY. You got it wrong. Outsiders got it right. That makes 

me concerned about how honest or competent you guys have been. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And I thank the ranking member, as well. 

And I would like to assure those persons who are viewing this 

at home that we really do love FHA and that we really do want 

to save FHA. FHA, seriously—let me ask a question so that you 

may say it, Madam Commissioner. Has FHA ever been bailed out 

before, ever? 

Ms. GALANTE. I want to be clear that FHA has what we call permanent and definite budget authority, so these are 100 percent 

guaranteed loans by the government. We have been self-sustaining 

through the 80 years of our existence. 

Mr. GREEN. Founded in 1934 or 1935, and since that time you 

have not received what is being called a government bailout. Is this 

correct? 

Ms. GALANTE. Again, I have a challenge with the whole concept 

of thinking about any potential draw from the Treasury being a 

‘‘bailout.’’ 

Mr. GREEN. Yes, ma’am. 

Let’s continue with another proposition. One of the things that 

you are trying to correct and you are correcting has to do with your 

premiums and the fact that you at one time, after a buyer had a 

certain amount of equity there was—it had an impact on the premiums paid. Is this correct? 

Ms. GALANTE. That is correct, yes. 

Mr. GREEN. Could you kindly and quickly explain this circumstance? 

Ms. GALANTE. Yes. When borrowers pay a mortgage insurance 

premium—we had a previous—we had a policy that we just 

changed last month, but prior to last month, when your loan automatically self-amortized down to essentially 78 percent loan-tovalue, we would be cancelling that premium even though we still 

were 100 percent— 

Mr. GREEN. Let’s do this, if I might ask, Madam Commissioner, 

explain to us what cancelling means. What does that mean to the 

borrower? Do you continue to pay the premium or do you cease to 

pay a premium? 

Ms. GALANTE. If the premium is cancelled, it means you cease to 

pay the premium. 

Mr. GREEN. And as a result, the borrower would now have more 

money in his pocket, of course, but FHA would have less money to 

capitalize it. Is this correct? 

Ms. GALANTE. That is correct. 

37 

Mr. GREEN. And you have now changed this, and as a result are 

you projecting that this will help you to stabilize FHA? 

Ms. GALANTE. That is correct, and we are—we obviously continue 

to have the risk of that loan. 

Mr. GREEN. You have the risk of that loan but you have made 

that change? 

Ms. GALANTE. Yes. 

Mr. GREEN. And you are making other changes to stabilize and 

secure FHA, correct? 

Ms. GALANTE. That is correct. 

Mr. GREEN. Would you give us one additional significant change 

that you are making, please? 

Ms. GALANTE. Yes, one additional change is that we are now requiring that if you have a 620 FICO score or credit score or less, 

we require no more than a 43 percent debt-to-income ratio, and 

without additional compensating factors for that borrower. 

Mr. GREEN. Now, much has been said about how FHA has been 

a benefit to persons in this country who are known as minorities. 

Quite frankly, it is a term that I don’t particularly like, but I use 

it to communicate. 

But is it true that the overwhelming majority of the loans in 

your portfolio are held by Anglo-Saxons? 

Ms. GALANTE. That is correct. 

Mr. GREEN. Would you guess that of the loans in your portfolio 

that are held by people who we in this country call White, would 

you guess that it is probably upwards of around 70 percent or 

more? 

Ms. GALANTE. I think it is more in the 60s, 60-plus percent 

range. 

Mr. GREEN. 60-plus percent. So FHA is not a welfare program, 

is it? 

Ms. GALANTE. It is not. 

Mr. GREEN. Okay. It has been a program that has been of great 

benefit to people across all lines—it wasn’t designed to accommodate any particular ethnic group, was it? 

Ms. GALANTE. No, it was not. 

Mr. GREEN. And FHA, throughout its history, has pretty much 

complied with the will of Congress, has it not? 

Ms. GALANTE. Absolutely. 

Mr. GREEN. So if FHA is making loans at $729,000, it is doing 

so because of Congress, correct? 

Ms. GALANTE. Correct. 

Mr. GREEN. And I mention this to you because listening to this 

argument, one would think that FHA has been a renegade, you 

have just been out there doing all sorts of dastardly things, you 

created the yield spread premium, you created 3-27s, 2-28s, no-doc 

loans, prepayment penalties that coincided with teaser rates, that 

you have just been ugly. But this is not true, is it? 

Ms. GALANTE. No, it is not. Thank you. 

Mr. GREEN. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The gentleman from Michigan, Mr. Huizenga, is recognized for 5 

minutes. 

38 

Mr. HUIZENGA. Thank you, Mr. Chairman. And I would like to 

submit into the record a couple of things. One is a letter from the 

National Association of Federal Credit Unions, and I wanted to 

talk a little bit about the content there. And another is an ad 

called, ‘‘My FHA,’’ regarding FHA mortgages, and I would like to 

submit that into the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. HUIZENGA. All right. Thank you. 

Commissioner Galante, I appreciate you being here. My background is in real estate and developing. My family is still involved 

in construction. 

And I have a couple of concerns and I think we were hearing two 

lines of discussion from two friends over there, Mr. Green and Mr. 

Scott, about who actually benefits from these programs. And it 

seems to me that as we are looking at claims, half of all of the 

loans are to African Americans, half are to Hispanics, is what you 

had said earlier, and when I got my REALTORS® license, the Elliott Larson Act says that we cannot discriminate. One of those 

things that it says is we cannot discriminate on race and creed. 

Low- and moderate-income is not a Black issue, it is not a White 

issue, it is not a red issue, and it is not a yellow issue; it is a green 

issue. And what I learned is you are green when you come and 

make that application. Can you afford it or can you not afford it? 

Do you have enough green to buy that product that you are out trying to buy? 

And I am concerned that we have seen sort of both sides of the 

argument on the other side of the aisle that this is sort of meant 

to benefit, or at least the implication is that it benefits one particular race over another, and I just want to make sure that we do 

not accept—because I believe that the—certainly the law demands 

it, morality demands it, and we must have equal treatment under 

the law. And if we are not doing that, then we cannot allow some 

sort of separate but equal system occurring here, which seems to 

be the implication from Mr. Scott’s line of questioning. 

Now, on to this advertisement—and I know you don’t encourage 

these ads or particularly control them at all, but I am going to read 

this to you: FHA bad-credit home loans. Many people don’t realize 

that FHA loans can help people with bad credit. Need a home 

mortgage but concerned about bad credit? You have come to the 

right place. An FHA mortgage can get you into a new home even 

if you have bad credit because the loans are insured by the Federal 

Government. If you have had accounts forwarded to collections, if 

you have filed bankruptcy in the past, if you have high debt, you 

may still qualify for an FHA loan. And it says at the end, if you— 

there are much better choices in very expensive financing that 

banks call subprime. 

And it seems to me that, based on some of the questioning that 

we heard earlier from Mrs. Bachmann and others, I am afraid that 

this industry—people with bad credit are being encouraged to go in 

and use FHA as a vehicle for a subprime type of loan. And I have 

to believe that cannot be acceptable, because we know how devastating losing a home is. We know how devastating that can be. 

And the letter from NAFCU here, the Federal credit unions, we 

know that FHA’s current policy with respect to strategic default, 

39 

which—strategic default would be someone literally making the 

choice to default, to walk away—is barring such borrowers from obtaining an FHA loan for a minimum of 3 years. So they are barred 

from getting another FHA loan for 3 years. 

Comparatively, Fannie Mae has instituted a policy that would 

prohibit such borrowers for 7 years. Can you explain to me why 

you would have a 3-year gap versus Fannie Mae having a 7-year 

gap if we are trying to make sure that people aren’t compounding 

bad decisions? 

Ms. GALANTE. Let me address both of your points. You are correct that we do not condone the kind of ads that you talked about 

there that you have seen on the Internet, and I just recently issued 

to our lenders a reminder that we will enforce against any FHA 

lenders for advertising. We do require borrowers to meet our credit 

criteria, so we want to be very careful about that. We will refer 

people to the I.G., to the Department of Justice— 

Mr. HUIZENGA. I have 30 seconds left, just quickly, if you can address the 3 years versus 7, and then I want to hear your opinion: 

If this was a private company, would it be in receivership? Because 

my suspicion is that it would be. 

Ms. GALANTE. On the 3-year versus 7-year, again, our requirements are at 3 years, you can apply to return—or to come into the 

FHA but you still have to meet our credit criteria, including the restrictive credit criteria that I have mentioned that we have tightened up on—the 620, the 43 percent DTI as an example restriction. 

So not anybody can come back into—or come into FHA as a result 

of having been through—and let’s be clear, particularly in this recent circumstance, some of these folks have been through a very 

devastating experience and they are not— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney. 

Mr. CARNEY. Thank you, Mr. Chairman. 

And thank you, Commissioner Galante, for coming in. I have 

found in the 2-plus years that I have been sitting on this committee that the most challenging thing is to seek some light with 

all the heat that has been going on, and I thought we had arrived 

at that point when my friend, Mr. Westmoreland, was speaking 

and he started off by saying that we on their side didn’t want to 

do away with FHA. We recognize that there was an important role 

in the marketplace. We want to make it stronger; we want to protect the taxpayers. And I think those are things that both Democrats and Republicans on the committee agree on. 

Mr. Duffy started off the same way and then went off on a little 

bit of a rant about the—you and the FHA not being straight-up 

with the committee. It is my understanding that we had hearings 

last year and legislation that was passed here by the House to address some of these issues that we are talking about today. Isn’t 

that the case? 

Ms. GALANTE. That is the case, and I think there are many 

things that all sides of the aisle can agree on with respect to 

strengthening FHA. And I really appreciate that. 

Mr. CARNEY. We had a couple of witnesses last week who came 

in and they had a whole list—I asked my staff to put it together 

40 

and it is two or three pages—of things that they suggested, policy 

proposals to help address the financing issue that FHA faces. Is 

there anything among those ideas on those lists that got your attention that we should really think about as Democrats and Republicans who care a lot about FHA and its important mission? 

Ms. GALANTE. I would say this: What we are focused on in terms 

of strengthening FHA right now are immediate actions that we can 

take, like the enforcement with lenders, like the emergency authority for the dealing with the reverse mortgage program. 

I think there are other ideas, some of them that are on this list, 

that are worth talking about in terms of future conversation— 

where is FHA play in the broad new housing finance system? And 

so I want to spend time on a number of those, whether it is looking 

at our appraisal board versus the way we currently do appraisals. 

Those are quite interesting things for us to go back and take a look 

at. 

Mr. CARNEY. So let’s talk about that in the 21⁄2 minutes that I 

have left. You mentioned this at the top about looking more broadly about housing finance in this country and the GSEs and somebody before me said that is a priority for both sides. 

Where do you see FHA fitting into a new framework for housing 

finance in this country? 

Ms. GALANTE. So again, I think this could be a longer conversation— 

Mr. CARNEY. Obviously. 

Ms. GALANTE. —amongst all of us, but we have been very clear, 

the Administration has been clear that we do believe that FHA 

should be playing a smaller role, a more targeted role, that loan 

limits should come down over time, and that we should focus on 

those more targeted credit needs in the country. 

Mr. CARNEY. What might they look like—more targeted— 

Ms. GALANTE. Yes, more targeted. So back to, again, an area 

home price, something in a range around the median home price, 

a little above, a little less, that is the typical— 

Mr. CARNEY. That was one of the suggestions that one of the— 

Ms. GALANTE. Yes. 

Mr. CARNEY. —folks last week talked about. 

How about market share? I think it was maybe Mr. Green or 

somebody else who mentioned, what do you see as the appropriate 

market share for FHA? 

Ms. GALANTE. So again, I hate to—market share I think really 

is a difficult challenge but— 

Mr. CARNEY. You mentioned 10 percent as a historical number 

or something in that— 

Ms. GALANTE. 10 percent is a historical number. Again, it 

changes over time, and I think you want a—you want the ability 

to be in a range in 10, 15 percent of the market. 

Mr. CARNEY. So I see a little bit lower than—by the way, I think 

this chart that you provided is a great illustration of the appropriate role of FHA insurance where you see the PMI just dropping 

right precipitously off the table and FHA moving in at a very critical time in the housing market and filling that void. 

But it looks like the historical level was somewhere above 15 percent and below 30 percent. Any sense of where it might be in an 

41 

ideal world going forward? I guess it would depend on economic 

conditions as well. 

Ms. GALANTE. Yes. And again, that particular chart is for a small 

portion of the overall mortgage market. It is for purchase only and 

only mortgage insurers, so it is a particularly shrunken piece of the 

overall pie. 

Mr. CARNEY. Thanks very much. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Indiana, Mr. Stutzman, for 5 minutes. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

And thank you, Ms. Galante, for being here. It has been a very 

informative hearing. 

First of all, my question is, do you understand why all of the red 

flags around FHA? Do you understand why we are so concerned 

about FHA? And I think one of the big red flags is that the President is suggesting including money for FHA in his budget. 

Ms. GALANTE. I think it is absolutely reasonable and important 

to look at FHA’s long-term financial health, and the actuarial gives 

some indication about what kind of money we need over the long 

term and that we are short of that under the actuarial. So this is— 

absolutely we understand the importance of this. 

Mr. STUTZMAN. Okay. You said earlier that you think the low 

limits should recede, and I appreciate that. What I am concerned 

about—and I am new to this committee, but as I sit here and listen 

and try to absorb what is happening, it seems that FHA is outside 

of its original charter, and a lot of that is due to the recession and 

the housing collapse. But what I—it seems to me that as FHA is 

trying to get out of this hole that it is in, it is now moving outside 

of its original intent. 

As I look at this chart here that compares FHA’s operations in 

2008 compared to today, the average FICO score in 2008 was 647, 

and today it is 696. Is that roughly correct, do you know? 

Ms. GALANTE. Sounds correct. 

Mr. STUTZMAN. To me, that says that we are trying to move— 

that FHA is trying to move into market area that it is not designed 

to be in. Also, the loan sizes have moved up. 

What I think that is happening here is not entirely your fault, 

but is the result of policies on a macro level where we have now 

seen—since 2009, when President Obama took office, we have seen 

a huge decline in median household income. In 2009, it was 

$55,198; today, it is $50,678. 

You talked about the premium increases and I guess I don’t—I 

understand you are going to those you are serving and increasing 

the insurance premiums, but do you understand, when median 

household incomes are dropping and the increase on premiums are 

increasing, we are squeezing people to where they are going to be 

put in a position where they cannot afford to be in their homes. 

Any comment? 

Ms. GALANTE. Again, you have made a number of points there. 

Let me say a couple of things. 

First of all, on the credit scores of FHA borrowers going up in 

this recent period of time, we would be, frankly, delighted if lenders would lift some of their credit overlays that they have been putting on top—FHA enables loans to creditworthy borrowers but at 

42 

lower credit scores than lenders are currently lending to, so this is 

not something that FHA is trying to induce. This has to do with 

a broader concern on the part of lenders and that is something that 

we want to work with them on to ensure that they are giving access to FHA loans to as broad a prudent population as possible. So 

that is one point I want to make. 

The other thing is that again, we do think that these premium 

increases have been important for the health of the fund. They 

have also been important in terms of ‘‘pricing our risk correctly.’’ 

We do believe that because interest rates are so low, borrowers are 

able to absorb those increases. 

Mr. STUTZMAN. But when you are asking for only 3.5 percent 

down, people are getting into homes very possibly that they just 

cannot afford. Mortgage insurance premiums go up, median household incomes decline. You said earlier that you think we are on the 

road to recovery. The President said the same thing last night in 

his State of the Union address. 

What I see coming from the Midwest is that maybe the DC 

Metro area is doing fine, but the rest of the country is not, and so 

my comment to you is that we have to get back to your original 

charter which you are originally designed for, lowering the caps 

and really helping those who do need the help. 

With that, I will yield back, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Florida, Mr. Murphy, for 5 minutes. 

Mr. MURPHY. Thank you. 

Commissioner, thank you for your time and your service and for 

answering our questions today. I ran for Congress because I believe 

in a smarter government, and at the same time, my background in 

the construction industry informs me of the critical role the housing market plays in my own State of Florida and across the country. 

Whatever we do to resolve the problems at FHA must be done 

with a mindful eye on how it could affect middle-class homeowners, 

as we have discussed today. 

Two years ago, the Obama Administration outlined its proposal 

to limit GSE involvement in the housing market while preserving 

the Federal Government’s role in a more limited capacity. 

Commissioner Galante, do you think that the answer to the problems faced by the GSEs and FHA is as simple as narrowing the 

scope of borrowers? 

Ms. GALANTE. I think it is much more complicated than that, but 

that is part of the issue. 

Mr. MURPHY. There has been talk of the max loan size. Would 

you agree that this isn’t a one-size-fits-all? That this should be tied 

to some sort of a formula for maybe the location, for the market, 

for the location of that house? 

Ms. GALANTE. Yes, absolutely, and to be clear, the high loan limits that people have been talking about, the $729,000, that is only 

for higher-cost areas, and to be clear, that only represents about 

half a percent of FHA’s business at the moment. 

Mr. MURPHY. So, the million-dollar question or I guess because 

of the size of what we are talking about, perhaps the trillion-dollar 

question is, how do we help stabilize the overall market faster to 

43 

reduce the expected future claims on FHA, but most importantly 

to restore the dream of homeownership that has fallen out of reach 

to so many middle-class families because of this recession? 

Ms. GALANTE. Thank you for that question. One of the things 

that we are doing that we have not talked much about today, so 

I appreciate the question, is what are we doing to ensure that with 

policies that we currently have in place and are putting in place, 

the best thing that is going to help FHA in terms of moving forward is to deal with these legacy loans and we have very substantial policies in loss mitigation and asset management activities 

being able to dispose of distressed assets, distressed loans more 

quickly. All of that will help our recovery. All of that will help 

FHA’s dollar recovery, which will help FHA in terms of its overall 

financial picture. 

Mr. MURPHY. Do you mind outlining a couple specifics there for 

what you are doing not only to help what happened but to prevent 

it from happening again? 

Ms. GALANTE. Yes, so there is both. There is both dealing with 

the damage that has been done and on that front, again, we are 

making it easier for borrowers to do a short sale when they are in 

distress for example. 

We are making loss mitigation and doing modifications easier for 

people to get. So we are selling our distressed loans in the market 

faster. We have an overhang. Moving forward, we have increased 

premiums to price risk appropriately for the risk that we are taking on with borrowers. 

We have made some underwriting changes that I have talked 

about here today in terms of ensuring that borrowers are prepared 

for the financial obligations they are taking on. 

Mr. MURPHY. Thank you, Commissioner. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from South Carolina, Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

And thank you, Commissioner Galante. I have a couple of questions. I heard a lot over the last couple of hearings about the dual 

mission of the FHA, and I have been able to find one. I have been 

able to find the one that says you are supposed to serve as the 

lower economic groups, the first-time homebuyers, provide gaps 

where private credit markets don’t exist, and I can find that. 

I can’t find any legal justification, any basis for what everyone 

talks about is the second half of the mission, which is this automatic economic stabilizer, this countercyclical mission of the FHA. 

Where are you drawing that from? 

Ms. GALANTE. Congressman, if you go back and look at the original founding of FHA, you can see quotes from the Federal emergency administrator talking about the purpose of that, so the congressional intent talking about the purpose of FHA at the time was 

actually to get the economy back on its feet again— 

Mr. MULVANEY. It is fair to say it is not in the statute, right? 

That mandate is not in the statute. It is implied perhaps in many 

of the things that we do, from having hearings like this to raising 

the borrowing rates, but it is not the same as the other mandates. 

44 

Ms. GALANTE. It probably isn’t in the wording of the statute, that 

word countercyclical, but the fact is that it was created to be a 

source of credit availability when nothing else was there so that it 

would be steady and available. 

Mr. MULVANEY. But I think you would agree with me that in an 

ideal—while that first mandate to serve that underserved market 

is consistent and permanent, the countercyclical mandate is supposed to come and go, right? 

Ms. GALANTE. Yes, but again, underserved, you can be underserved at different points in different ways, right? So underserved 

because capital has left or underserved because capital is never interested in a particular whether it is a rule— 

Mr. MULVANEY. But there was no countercyclical purpose to 

the—it was not serving that mission during the first half of the 

2000s, right, the first decade? You were not serving a countercyclical mission when the market was overheated, were you? 

Ms. GALANTE. That is correct. 

Mr. MULVANEY. Okay. 

Ms. GALANTE. And in regional distress, we have played a countercyclical role— 

Mr. MULVANEY. So let me ask you, as the housing market comes 

back, and we understand that it is and we are hopeful that it continues to do so, what affirmative steps are you taking to lower your 

market share? 

Ms. GALANTE. We have already taken a number of affirmative 

steps, as I think you have heard today, including raising premiums 

5 times on new borrowers moving forward. That certainly is helping private capital come back in to, and if you read the Washington 

Post over the weekend, and you can see quotes from all kinds of 

mortgage brokers, et cetera, they are very concerned that FHA— 

Mr. MULVANEY. All right. So you have raised rates a couple of 

times. I understand that. I have put a graph up that the chairman 

used earlier. I have also provided you with a copy so that you can 

actually see it, and I recognize the fact that you have some concerns with some of the previous estimates. 

Are you more comfortable with the estimate of 2012, the line 

that is shown in dotted red? I recognize that the fact you said you 

had a difficults because of the difficulty of making a 30-year projections and so forth. Granted, this is only a 5- or 6-year projection, 

not a 30-year production, but are you more comfortable with a 20- 

year graph curve on this graph? 

Ms. GALANTE. So again, I would just say, I am not sure where 

these numbers are— 

Mr. MULVANEY. This is the independent auditor report. You have 

seen this several times today. 

Ms. GALANTE. Yes. This is an actuarial report projecting based 

on economic conditions. This economic— 

Mr. MULVANEY. Are you comfortable with it? 

Ms. GALANTE. I don’t think that economic conditions are ever 

going to be exactly as what was predicted— 

Mr. MULVANEY. Do you do your own projections? 

Ms. GALANTE. We do—not to the level of complexity that are 

done— 

45 

Mr. MULVANEY. Can we see the projections that you have done? 

Everything you have given us today is backward-looking. It stops 

in the second quarter of—third quarter of 2013. Can we see your 

projections? 

Ms. GALANTE. So, again, we don’t do long-term— 

Mr. MULVANEY. I am not interested in long-term, I am interested 

in short-term. You said you are going to get back above the 2 percent line in the next couple of years. Can we see those projections? 

Ms. GALANTE. Those are based on the actuarial report. 

Mr. MULVANEY. So you are relying on this line? 

Ms. GALANTE. The— 

Mr. MULVANEY. You said you had concerns with this line, but 

when you say that we are going to be back at 2 percent in the next 

couple of years, you are relying on this graph. 

Ms. GALANTE. To be clear, we are statutorily required to do an 

independent, to have an independent actuarial done and to present 

that information and what it shows in terms of the economic value 

of the fund based on that independent actuarial and to provide that 

to Congress. 

Mr. MULVANEY. Does this graph assume that you go back down 

to a historical level of roughly 10 percent market share? 

Ms. GALANTE. The actuarial report does over time project that we 

go back down. I don’t know to what volume. 

Mr. MULVANEY. Does this report assume that you have what you 

called a roughly 10 percent failure rate relatively; that your average failure rate. I think Mr. McHenry asked you about seriously 

delinquent. Does this assume that you maintain a roughly 10 percent failure rate? 

Ms. GALANTE. Yes. 

Mr. MULVANEY. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maryland, Mr. 

Delaney. 

Mr. DELANEY. Thank you, Commissioner, and thank you for your 

service during this very important time. Housing is obviously central to our recovery. 

My first question relates to the standard that we hold FHA to, 

and there is something that has confused me across this hearing 

and the prior hearing that some of my colleagues mentioned, and 

I think this started with Mr. Pinto’s testimony. 

There seems to be a sense that FHA is a private business and 

it should be held to public company standards. As someone who 

ran a large financial services company that was publicly traded, 

which I started, I think I understand how people think about private businesses and how they think about public company standards, and in addition to running it ethically and in a responsible 

manner, you focus on your shareholders and you have a profit motivation and you have all kinds of incentive structures in your management team to pursue those objectives. 

Did I miss something? Is FHA a private company that is held to 

public company or private company standards? I just want to give 

you an opportunity to respond to that because perhaps I missed 

that somewhere. 

46 

Ms. GALANTE. No, you are correct. FHA is part of the Federal 

Government. 

Mr. DELANEY. Got it, because I think it is important when people 

talk about a private company or a public company that they have 

an understanding as to what that means. And I think one thing 

you may want to mention in future testimony is that practically 

every publicly traded financial services company trades as a multiple of its projected earnings, which inherently means people are 

looking at the future prospects, which is one of the things I think 

you are looking to, to buttress some of the losses you have incurred. 

And so even if you were to be held to a private company standard, I think this notion that doesn’t exist, which I think was in Mr. 

Pintos testimony, is flawed. So just a comment there. 

My second question is, do you have economic data to show that 

if FHA would have stayed at its historical market share and not 

increased its market share and housing prices would have inevitably continued to fall, what the overall economic impact would 

have been on the taxpayers, and how that relates to the additional 

costs FHA clearly incurred by stepping into the breach after the financial crisis? And we should be reminded that across the financial 

crisis, 19 of the 20 largest financial institutions in the United 

States either failed or required massive government support. 

So it was not an inconsequential breach. It was a never-seen-before breach. So I was wondering if you have economic data to show 

what FHA actually saved the economy by stepping in the way that 

the way it did. And if so, maybe you could provide that to us or 

if you have any comments on that? 

Ms. GALANTE. Yes, I would just say that Mark Zandi of Moody 

Analytics has done a certain amount of that work. I don’t have detailed projections, but clearly, house prices would have declined 

further. So not only would have FHA been hurt by that, but the 

broader economy would have been hurt by that. 

Mr. DELANEY. Do you have a sense as to the multiples? In other 

words, if we think about the additional losses in the book of business that you, that FHA underwrote during a time of declining 

housing prices, which is definitionally something a private market 

participant would never do, and you clearly incurred losses higher 

that you, than the organization would have liked. Do you have a 

sense as to what the payback has been to the economy? 

Ms. GALANTE. I don’t have specific numbers on that. 

Mr. DELANEY. It might be relevant to put some of these things 

in context going forward. And then my last question is—because I 

am concerned about this notion of crowding out the private market 

because I do think we want to leg into a much more robust private 

market. 

And it seems to me the private market hasn’t been participating 

in the mortgage industry for two reasons. The first is credit, meaning they were concerned about how prices were falling when you 

come from an industry where prices had historically rose across all 

the data you could measure, there were no real underwriting models to allow these institutions to step into a falling home price market. 

47 

That, I think, in many markets we are starting to get away from 

that. Housing prices are stabilizing, improving. There is a lot more 

work to do. So we may be past the credit concerns that these institutions have. 

The second concern is that they have this pricing. In other 

words, it may not be economical for them to compete at the levels 

you, in the GSE’s are, and that is a product-specific analysis, right, 

it relates to single-family; it relates to multifamily. Do you have a 

sense as to how far the private market is off your pricing and 

where pricing would need to be for them to be more robust players? 

Ms. GALANTE. I would say where this gets a little complicated is 

some of the private markets charge different pricing for different 

kinds of credit characteristics for most borrowers to whom they are 

interested in lending. 

So for higher credit score borrowers, for example, we believe we 

are priced higher than they are at the present time. So I don’t 

think it is a pricing issue at this point. I think it goes back to credit quality, credit concerns, housing, housing market recovery concerns— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

And Commissioner Galante, for all of the kind of sparks and so 

forth, I think I heard at least one area of general agreement that 

something you said in response to a question from the other side 

of the aisle that although FHA, as you know, went to a really low 

market share for a while and then for very high market shares and 

we know the reasons why, but you said, and I wrote this down as 

close as I could, that you would like to see it go to a smaller, more 

targeted role and that loan limits should come down. Correct? 

Ms. GALANTE. That is correct. 

Mr. CAMPBELL. Okay. So now let us talk a little bit about how 

we do that. And I guess the first question is, would you see that 

as being somewhere around a historical 10 to 15 percent area? 

Ms. GALANTE. Ten to—of market share? 

Mr. CAMPBELL. Yes, market share. 

Ms. GALANTE. I think that is a reasonable assumption, yes. 

Mr. CAMPBELL. Okay. I really don’t think there is much debate 

about that anywhere, so let us talk about how to get there. First 

of all, where are we? GAO said in what they said was the latest 

available third-quarter 2012 that FHA had 56.4 percent of the insured market. 

I think I heard you say 40 or 42 percent. Is GAO wrong? Because 

I have that they said 56.4 percent in the third quarter of 2012. 

Ms. GALANTE. Our data that I am using shows us at 42 percent. 

We would have to do a double check with that data if that is coming from the GAO. 

Mr. CAMPBELL. Is that over the same period of time? You can 

look at the sheet— 

Ms. GALANTE. I think our— 

Mr. CAMPBELL. I think you have to—I know how that works. 

48 

Ms. GALANTE. I am not sure what quarter of—it is in 2012, but 

I am not sure what quarter our data is from. I think it is the third 

quarter. 

Mr. CAMPBELL. Okay, I would like to suggest, Mr. Chairman, 

that is something we ought to try and figure out. That is not a 

small discrepancy, 56 to 42 percent. So it would be nice to know 

where we are and where we are actually beginning. 

Chairman HENSARLING. Would the gentleman yield? 

Mr. CAMPBELL. Yes, I would be happy to yield. 

Chairman HENSARLING. Just for the record, this comes from 

HUD’s U.S. Housing Market Conditions report. 

Mr. CAMPBELL. From the GAO, yes. Okay. So apparently, you are 

saying the GAO numbers are wrong, so we need to talk to somebody to figure out where we are starting from. But then, when we 

look at other things, if you look at private insurance, they have to 

have a 25:1 leverage ratio. You guys are at 36:1. We have QM and 

QRM from which FHA would be exempt from underwriting and 

risk retention requirements. 

Might that not be a place to start in order—and I know the gentleman from Maryland who I guess left now mentioned he is concerned about FHA crowding out the private market, and so if the 

private mortgage insurance market has much tougher standards 

then you are required to have, isn’t that going to crowd them out 

to some degree? 

Ms. GALANTE. I think the only rule that we have right now is the 

Qualified Mortgage standard and so I am not quite sure and again, 

that is not a place yet, but I am not quite sure what you are referring to in terms of how that affects the private market versus FHA. 

Mr. CAMPBELL. Okay. Under the QM and QRM proposals, FHA 

would be exempt from various risk retention, elements of that and 

some of the underwriting provisions. So FHA wouldn’t have, an 

originator wouldn’t have to have risk retention, and you wouldn’t 

have to follow certain underwriting principles. 

Wouldn’t it be better if that were not the case if you were following similar rules to the private mortgage market if we want— 

and again, keeping you at your original mission, but if we want private mortgage insurance to start to step in and take over where 

you are right now in some places. 

Ms. GALANTE. Again, the only rule that we have is the Qualified 

Mortgage and FHA will be writing its own qualified mortgage 

standard. The QRM is still under discussion in terms of, in rule 

making so I can’t speak to and we don’t know what the terms and 

conditions of those QRMs will be. 

Mr. CAMPBELL. Okay, but regardless of where they are, should 

you have a different standard than the private mortgage insurance 

market on things like risk retention, et cetera? 

Ms. GALANTE. Again, we are a government agency. We don’t have 

the same kind of capital requirements. We are not borrowing, we 

are not getting equity from private entities that we need to pay a 

return on. So to— 

Mr. CAMPBELL. No, but you are getting equity from the taxpayers, and you don’t need to pay a return, but we need to protect 

that money. We need to be as judicious with it as possible, understanding the mission of FHA. 

49 

Ms. GALANTE. And again, we have our requirements under Federal credit reform in terms of what kinds of capital we need to be 

reserving for. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Washington, Mr. Heck, for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. I wasn’t sure this would 

happen until April or May, but I appreciate it very much. 

Commissioner Galante, again, thank you very much for your 

service. I would just like to start by noting that it was 40 years 

ago this year that I bought my first home with the help of the 

FHA. 

I would like to ask you a little bit about the reverse mortgage 

activity, and I am prompted to do so because in your testimony you 

set forth what appears to be a significantly disproportionately negative impact on your balance sheet as a result of activity in that 

area. 

So, if you could please briefly describe utilization of this over the 

last 5 to 10 years, briefly describe what actions you are taking 

today to ameliorate that negative impact, answer whether or not 

you need congressional action in order to take additional action, 

and if so, will you be seeking it? 

Ms. GALANTE. Yes, thank you. The reverse mortgage program I 

think has a very important mission objective, which is to help seniors who have limited income but some equity in their homes to be 

able to stay in their homes. 

Having said that, over the past number of years, for a variety of 

reasons, we have gotten into a situation where seniors are taking 

out up-front in a fixed lump sum much more money than they 

frankly can afford over the period of time and not having money 

on an ongoing basis for property taxes and insurance and important elements of maintaining their home. 

The actuarial projects that even though the reverse mortgage 

program, which was put into the MMI fund in 2009, is only 7 percent of the portfolio, it is generating 17 percent of the losses or 17 

percent of the negative economic value. So that is a major problem, 

and it needs to be fixed, moving forward. 

We issued a mortgagee letter, guidance where we essentially disallowed those large up-front draws on a fixed-rate basis moving forward and that goes into effect this spring. 

Frankly, there are more things that we would want to do including financial assessments of borrowers, whether they can afford to 

pay the taxes and insurance or set aside for the taxes and insurance, and we can do those via regulation, but that takes a yearand-a-half or more to go through that regulatory process. 

So what we are asking Congress for is authority to make those 

through guidance mortgagee letters and come back and do the rulemaking over time and that would help is very much in terms of 

putting this program on the right foot moving forward. 

Mr. HECK. And I began with asking, what has happened to utilization over time of this program? 

Ms. GALANTE. The utilization actually went up over the past few 

years and it has started to come back down again. I don’t have the 

numbers right in front of me— 

50 

Mr. HECK. Thank you. 

Ms. GALANTE. —but I can get them for you. 

Mr. HECK. I yield back. 

Chairman HENSARLING. I am always happy to have those 2 minutes back. The gentleman from Virginia, Mr. Hurt, is now recognized for 5 minutes. 

Mr. HURT. Ms. Galante, thank you. 

And Mr. Chairman, thank you. Mr. Chairman, one thing I wanted to point out is the figure that we have been using, and I think 

this committee has been operating on, comes from HUD’s US Housing Market Conditions quarterly report, which indicates in the 

third quarter of last year, the FHA percentage of the mortgage insurance market was 56.4 percent. 

Now, that is what we are dealing with, and it doesn’t seem like 

you know where your 42 percent comes from, but I think I would 

ask the chairman to follow up to make sure that we know what the 

correct information is. That is very important, I think, for the work 

of this committee. 

I come from Virginia’s 5th District and we have, I think by your 

figures, 13,500 citizens, people who are in my district who are in 

or have benefited from the FHA program. Of the 13,500, it appears 

to me when you add up 30-, 60-, and 90-day delinquencies, foreclosures, and bankruptcies, we are talking about 17.2 percent of 

that 13,500. 

So you have about 2,300 people who are in those 5 categories; 

understanding that is a wide variety. I think when we talk about 

the full story, which we have heard a lot about or heard mentioned 

here today, I think it is important to remember that the American 

dream of owning a home does not derive from Washington, D.C., 

and I think if you spend enough time in this room and around 

these vaunted halls, one might think that is what drives homeownership in this country. 

It is working 16 hours a day; it is working 80 hours a week. It 

is having two jobs or three jobs to be able to achieve that dream. 

That is, if you ask the people, probably the 13,500 people that FHA 

affects and all the other homeowners, and thousands of others who 

reside in my district. 

If you asked them about homeownership, that is what they 

would tell you, and I am sure you know that, but I think it makes 

your mission particularly important because what we are dealing 

with are those people and their dreams, and I think that encouraging people, having policies that encourage people to do things 

that are not in their best interests and that they can’t live up to 

hurts them far more than it helps them. 

And I think if you asked those 2,300 people in my district who 

face these circumstances, they would say that they are not better 

off, and I would assume that you would agree. 

But talking about the big picture as you seem to have invited the 

conversation of the big picture, I was just wondering, from a big 

picture, we talk about the FHA wanting ultimately to have 10 to 

15 percent of the market share, is that correct? 

Ms. GALANTE. I am not saying we want—that is an important 

point. I am not saying we want to have 10 to 15 percent. I think 

naturally through—we were down to 3 percent and that is okay 

51 

with us to when that happens, when private capital is there to do 

it. 

Mr. HURT. But you are—as the Commissioner, I assume you 

have goals. Do you have a goal to reach 10 to 15 percent? Is there 

a goal that you have in mind? 

Ms. GALANTE. Just to be clear, we have a goal to reseed to 10 

or 15 percent— 

Mr. HURT. Okay, that is what I am asking. 

Ms. GALANTE. —but not to try to always stay at 15 percent. We 

don’t have an upward goal, I guess is what I am trying to clarify. 

Mr. HURT. So you have a goal to get down to 10 to 15 percent, 

maybe even more, but at the same time you say that as an agency, 

you would like to believe it should also be a goal to be self-sufficient. Is that right? 

Ms. GALANTE. That is correct. 

Mr. HURT. Can you do those two things at the same time? Can 

you be have only 10 to 15 percent of the market and have the private market come in and take up the slack, which I think we all 

want, and I think you want? Can you still be self-sufficient and be 

at 10 to 15 percent? Are those things inconsistent? 

Ms. GALANTE. They are not inconsistent. Again, if you look at 

FHA over time, historically, except for regional ramp-ups because 

of an economic distress, we have had historically a lower market 

share. We are not trying to drive that market share up in order 

to be ‘‘self-sustaining.’’ 

Mr. HURT. But you say you have taken steps to drive that market share down. 

Ms. GALANTE. We have, yes. 

Mr. HURT. And you will continue to do that? 

Ms. GALANTE. Yes, we will. 

Mr. HURT. Do you believe the private sector better prices risk 

than the public sector, than FHA as a maxim? 

Ms. GALANTE. I would say this crisis would teach us that no, that 

has not actually been the case and I would— 

Mr. HURT. If that is the case, then why do we want to have the 

private sector get more of the marketplace? 

Ms. GALANTE. Again, the private sector can do what it will to 

come in in front of the public. Why wouldn’t you want the private 

sector to be taking that overall risk? 

Mr. HURT. Thank you. I yield back what I don’t have. 

Chairman HENSARLING. The Chair now yields to the gentleman 

from New Jersey, the chairman of the Capital Markets Subcommittee, Mr. Garrett, for 5 minutes. 

Mr. GARRETT. And I thank the chairman. 

One of the points that was raised about whether you are a private entity or not, and of course you are not a private entity, and 

I agree with that, but you do have shareholders, and the shareholders of course are the American taxpayers. 

And so one point is, I really see no reason why this entity should 

not have to comply with and abide by and be examined by the 

same accounting standards as any other private entity would be. 

Do you agree with that? 

Ms. GALANTE. I do not. 

52 

Mr. GARRETT. You think that there should be an exception because you are a public entity serving the public good? 

Ms. GALANTE. It is an ‘‘exception.’’ It is that the FHA follows 

Federal credit reform which is how loan guarantee programs, credit 

programs for all Federal Government guarantee programs are done 

and that does calculate appropriately for the FHA’s— 

Mr. GARRETT. We can have a discussion on that because we are 

looking to move to provide for more transparency within the FHA 

to the public as far as what their potential losses are in the future. 

But since you are a public entity and you are supposedly doing 

good for the American public as opposed to harm, can you tell me 

how many people the FHA loaned to back in 2009 and 2010, and 

how many of those are now in foreclosure? How many loans? 

Ms. GALANTE. I don’t have the exact numbers for 2009 in front 

of me. I can— 

Mr. GARRETT. You can get that? 

Ms. GALANTE. —probably grab those. 

Mr. GARRETT. And could you also find out how many of those 

foreclosures were for minorities? 

Ms. GALANTE. We can get you those statistics. 

Mr. GARRETT. And you can—how many of those loans went into 

foreclosure also for people who fell below the watermark as they 

say, underwater within a year of receiving the loans. In other 

words, you issued them a loan and then 12 months later, they are 

already underwater. Do you know how many that is? 

Ms. GALANTE. You would have to have the external market data 

for that particular point in time to do that. 

Mr. GARRETT. But isn’t that—that would be something you would 

want to know as far as the loans you are giving to people if they 

are actually falling underwater a year after, within a year after 

year you are losing them. Isn’t that something you would like to 

know as far as being a public entity? 

Ms. GALANTE. We track all kinds of statistics. Certainly it is important. In this economic crisis, there were a lot of people— 

Mr. GARRETT. But the point here is if you are a public entity trying to do more good than harm, you are not really doing good to 

them if you are, if the number of foreclosures that are out there 

is high and the number between minorities is high and yet you are 

putting people into loans that they cannot afford and they are underwater within a year. Is that not part and parcel of the problem, 

that you provide for loans with loan downpayment requirements in 

a declining market? 

Ms. GALANTE. So— 

Mr. GARRETT. That is what you had in 2009 and 2010. 

Ms. GALANTE. Again, as part of our countercyclical role, as home 

values were declining, people didn’t know exactly how far homes— 

Mr. GARRETT. So the market is going down and you are helping 

people to get into the market so they can see 6 or 7 months later 

that their house is worth less. Is that good for the people or is that 

bad for the people? 

Ms. GALANTE. We help people get into the market. We didn’t 

have perfect vision about where home prices were going— 

Mr. GARRETT. So you really don’t care— 

53 

Ms. GALANTE. —we help people refinance out of bad mortgages, 

so there was a lot of countercyclical work that was important for 

us to be doing in that period of time. 

Mr. GARRETT. It seems like the answer to everything we say is 

that it is countercyclical. So it is okay for the government to help 

somebody to get into a mortgage that you know they can’t afford, 

even though it is a declining market, and 12 months from now they 

will actually be underwater and go into foreclosure. 

Is that maybe the reason why when this committee tried to provide some degree of reform for FHA back in 2009 and 2010, and 

with the Chair’s permission, I would like to put this in the record— 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. GARRETT. —this is talking points or lobbying points by—not 

by you because you weren’t here but by some of the people who are 

with you here—I had an amendment, which has downpayment requirements of 5 percent, and a prohibition of financing by closing 

cost. 

The chairman had an amendment, a moratorium of FHA insurance until the MMIF meets capital ratio requirements. I had other 

requirements—one, two, three, four other amendments that we 

were trying to make sure that since you didn’t have a view towards 

the future that you would not find yourself in the situation that 

you are finding yourself today. 

Do you think it was appropriate that FHA came and lobbied 

against reform to the FHA in 2009 and 2010? 

Ms. GALANTE. Let me be clear. We do believe that you can do 

quality, low-downpayment loans successfully. Over our history, we 

have done that. 

Mr. GARRETT. Let me just give you one example. I was out of the 

room. Somebody asked you whether you would be able to give a 

loan for $755,000 to somebody making—you were asked what was 

the median income for somebody getting that loan and you said 

about $100,000. Is that correct? 

Ms. GALANTE. I believe that is what I said, yes. 

Mr. GARRETT. If you make $100,000, your take-home pay is around $6,500 a month, and that means your mortgage and tax 

payment on that is almost $4,000 a month to pay for that loan. Is 

that type of loan that you want to put somebody into, especially 

during a declining market? 

Ms. GALANTE. Again, we are dealing with the loan limits that 

Congress has— 

Mr. GARRETT. I am not talking about the loan limits. I am talking about your underwriting practices to put somebody who makes 

$100,000 into a house that is worth almost $800,000; $755,000. Is 

that a prudent use of taxpayers’ money? And is it fair to put the 

person into that home when you know that he cannot afford $4,000 

a month on a mortgage when he is only making $6,500 a month? 

Is that good? 

Ms. GALANTE. So again, I was guessing at the median income required to make that mortgage payment— 

Mr. GARRETT. The appropriate level of income, I would assume under the standard rule, would be around $250,000. If that was the 

level, would you think that would be appropriate then to help 

somebody making $250,000 to buy a $750,000 home? 

54 

Ms. GALANTE. If we are asked by Congress to go to $729,000 in 

high-cost areas, and we prudently underwrite that loan based on 

a debt-to-income ratio, based on the longevity of employment— 

Mr. GARRETT. The question, Mr. Chairman, is whether that 

would be a prudent loan, I would assume. 

Chairman HENSARLING. The time of the gentleman has expired. 

In order to accommodate Ms. Galante’s schedule, the last questioner will be the gentleman from Kentucky, Mr. Barr. 

Mr. BARR. Thank you, Mr. Chairman. 

And Commissioner Galante, thank you for your testimony today, 

and let me apologize in advance if I am covering territory you have 

already covered. I had to step out for a little bit, but I wanted to 

just get your feedback on some statements made by other regulators in the financial services sector. 

A press release from the Consumer Financial Protection Bureau 

(CFPB) in January of this year indicated that it was the government’s policy to make sure lenders offer mortgages that consumers 

can actually afford to pay back. I would assume you agree with 

that basic government policy. 

Ms. GALANTE. Yes, it is the Ability-to-Pay Rule. 

Mr. BARR. Right, exactly. And the same release stated that, 

‘‘Unaffordable loans helped cause the worst financial crisis since 

the Great Depression.’’ Would you concur with that statement? 

Ms. GALANTE. Yes. 

Mr. BARR. And in addition, the CFPB release stated that, ‘‘Lenders should not set up consumers to fail.’’ I also assume you would 

agree with that basic statement? 

Ms. GALANTE. Certainly, and when you talk about unaffordable 

and unsustainable, the CFPB clearly has written rules so that we 

don’t get into this situation that we have gotten into today, not 

FHA, but as a society of no documentation and high rates— 

Mr. BARR. No. I understand, but as a general policy obviously the 

government shouldn’t be doing anything to set consumers up to 

fail. That is a policy that this Administration has advocated. 

Ms. GALANTE. These policies are to assure that no one sets up 

consumers. 

Mr. BARR. Sure, sure, and as I understand it, there are now, according to the GAO, 16 financial literacy programs across the Federal Government and there are 4 homeowner counseling programs 

across the Federal Government. I take it that the FHA is supportive of these financial literacy programs. Is that correct? 

Ms. GALANTE. Absolutely. We actually have an Office of Housing 

Counseling. 

Mr. BARR. Right, and so in just doing a little bit of homework on 

some of these financial literacy programs, I was looking at the Web 

site www.money.gov which is presumably a Web site set up as a 

part of the Office of Financial Literacy, a new government agency 

that was established as a result of Dodd Frank. 

Is it fair to say that you support these efforts to counsel individuals and make sure that people are measuring their ability to 

repay before undertaking the obligation of homeownership? 

Ms. GALANTE. We do, and we actually announced—and I don’t 

know anything about that one— 

Mr. BARR. Okay. 

55 

Ms. GALANTE. —so I am not endorsing whatever that site is, but 

we actually have in our report to Congress indicated that we want 

to bring back what FHA had many years ago: a robust housing 

counseling effort for new homebuyers to FHA. 

Mr. BARR. In one of the links on this www.money.gov Web site, 

this new Web site I suppose, there is no substantive guidance for 

the consumer, but it does redirect the person to the FDIC site, 

which has the section on there to buy or not to buy a home. And 

I will just read it to you and have you respond to it. 

‘‘Homeownership may not be for everyone. It is a big financial 

commitment starting with the initial shock of your purchase including a downpayment and fees followed by years of monthly 

mortgage payments, real estate taxes, property, insurance, and 

maintenance costs.’’ 

That is the advice that the Federal Government is giving prospective homeowners. Do you agree with that advice? 

Ms. GALANTE. Yes. 

Mr. BARR. Okay. So the follow-up question then is—and I understand your testimony earlier. I did have the benefit of hearing what 

FHA is doing in part to address the negative capital ratio and some 

of the reforms that you are by administrative measures taking to 

try to deal with some of the challenges that the agency faces. I 

think you testified that there is some credit box tightening and premium changes and whatnot, which I applaud the agency for taking 

the steps. 

But generally speaking, do you think that encouraging lending to 

individuals in this category, the category of low credit scores, people who can barely get by on cheap up-front pricing, the 3.5 percent 

downpayment, the low downpayment requirements, do you believe 

that encouraging lending to that category of individuals is consistent with the advice that the Federal Government is giving 

across all of these financial literacy programs? 

Ms. GALANTE. Again, to be clear, FHA provides 30-year, fully-amortizing, fixed-rate loans, underwritten to borrowers’ qualifications. 

Again, have we tightened up some in terms of how much income 

you need to have, how much after payment of debt that you need 

to have? Absolutely, and these are, including low downpayment, 

very sustainable mortgages for these families over time and we 

think these are affordable and appropriate. 

Now, I am not saying there aren’t further things that we should 

look at in terms of overall credit quality, but these are affordable, 

sustainable mortgages. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members in the queue. 

I would like to thank Commissioner Galante for coming today, 

and again, thank you for your service to our country. 

56 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place her responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

Without objection, this hearing is adjourned. 

[Whereupon, at 1:06 p.m., the hearing was adjourned.] 

(57) 

A P P E N D I X 

February 13, 2013 

58 


80868.001

Opening Remarks of the Honorable Ruben Hinojosa 

Committee on Financial Services 

"Bailout, Bust, or Much Ado About Nothing?: A Look at the Federal Housing 

Administration's 2012 Actuarial Report" 

February 13,2013 

Chairman Hensarliug and Ranking Member Waters, I would like to thank you for holding 

this hearing. 

Thank you to our distinguished panelist, Ms. Galante for your time and testimony. 

We are here today to address growing concerns about the financial situation at the Federal 

Housing Administration, or FHA. Increasing defaults have led to a dramatic reduction in 

the Mutual Mortgage Insurance Fund's economic value and capital ratio. I look forward to 

hearing about the steps being taken by the F.H.A. to improve the MMI Fund's financial 

situation. 

Last week we heard three of the four panelists argue that the FHA represents a failure of 

the federal government and that we all would have been better off, especially low-income 

families, if it never existed. That is a false assessment. As the National Realtors Association 

and many other industry supporters of FHA have indicated, if the FHA were not there 

during the housing crash to ensure the availability of credit, the crash would have caused 

an even greater recession, and perhaps a Depression. 

Yes, we need to address the FHA's fiscal situation. But we cannot discount the value of the 

counter-cyclical role it played during the recession. 

Again, thank you for holding this hearing today. I look forward to the testimony. 
59 


80868.002

Statement of Randy Neugebauer 

Full Committee Hearing 

"Bailout, Bust, or Much Ado About Nothing?: A Look at FHA's 2012 Actuarial Report" 

February 13,2013 

Thank you, Mr. Chairman, for holding this important hearing examining FHA's FY 2012 

Actuarial Report. As you mentioned, this is the second in a series of hearings examining FHA. In 

a few weeks my Subcommittee will hold another hearing that will focus on the competitive 

advantages FHA has relative to private mortgage insurers and how those advantages drastically 

contribute to the crowding out of private capital in housing finance. 

I would also like to thank Commissioner Galante for her testimony and extend my sincere 

appreciation to the Commissioner for what I believe was a very productive meeting with her a 

couple of weeks baek. I look forward to working with you as we seek to reform FHA and nurse 

it back to financial health. 

As we meet today, FHA's financial eondition continues to deteriorate. The FY 12 actuarial report 

which we are examining today showed that FHA's MMI Fund capital reserve ratio fell to 

negative 1.44 percent - well below the Congressional mandated ratio of 2 percent. To put it 

simply, FHA currently does not have sufficient reserves to cover its expected losses. The report 

also noted that the MMI Fund's economic value was negative $16.3 billion - paving the way for 

another taxpayer funded bailout. This is on top of the roughly $190 billion taxpayer bailout of 

Fannie Mae and Freddie Mac. 

The situation at FHA is pretty dire; however this won't be the story we will hear from our 

witness here today. We will hear how profitable FHA's new books of business are; how FHA is 

on a pathway to grow out of its past mistakes; and how FHA's new and improved underwriting 

standards will limit taxpayer risk. 

But unfortunately, we have heard this story before. In October 2009, Secretary Donovan stated 

that because of the quality of loans underwritten by FHA, the drop below the Congressionally 

mandated reserve ratio would be "temporary" and would "return above 2 percent within the next 

2 to 3 years." That same month former FHA Commissioner, Dave Stevens, came before this 

Committee and stated that FHA "would not need a bailout." Three years later, the fund has a 

capital ratio of negative 1.44 and we are well on our way for a taxpayer funded bailout. 

The fact that FHA's public comments directly contradict the reality of its capital position has 

unfortunately resulted in a credibility gap with Congress and the American people. 

But even if we take FHA at its word that it will grow out of its problems, we have to ask 

ourselves: is this the mission of FHA? Did Congress ever intend FHA to become a dominant 

component of our mortgage finance system? Did Congress ever intend FHA to expand its 

insurance portfolio to higher income borrowers with homes as expensive as $729,000? Did 
60 


80868.003

Congress ever intend FHA to be greater than 50% of the mortgage insurance market; and to 

crowd out the private mortgage insurance industry? Did Congress ever intend FHA's insurance 

portfolio to balloon to over $1.12 trillion - making it larger than the P&C and Life & Health 

insurance industries combined? I would argue, no. 

I do want to emphasize that I'm not advocating for the elimination of FHA. What I am 

suggesting, however, is that the agency has exceeded its historical mission and these actions pose 

a threat to the American taxpayer. There is a proper place for FHA, appropriately sized for the 

market and its historical mission, which is intended to complement rather than compete with the 

private sector in building a sustainable housing finance system. 

I look forward to working with Chairman Hensarling, Ranking Member Waters and Ranking 

Member Capuano to address these important issues. I thank the Chairman for holding this 

hearing today and look forward to hearing the views of Commissioner Galante. 

### 
61 


80868.004

THE HONORABLE DENNIS Ross (FL-lS] 

229 Cannon House Office Building 

Washington, DC 20515 

Office: 202-225-1252 

hlJ:QllQ.S'n nisLQE_JJQJ!l!g,gQ)I 

Committee on Financial Services Hearing 

"Bailout, Bust, or Much Ado About Nothing?: A look at the Federal Housing 

Administration's 2012 Actuarial Report" 

February 13, 2013 

Statement for the Record 

Again, thank you Mr. Chairman for holding this hearing today, and I thank Commissioner Galante for 

joining usI'd like to echo the concerns of Chairman Hensarling over Federal Housing Administration's (FHA] longterm stability. FHA-insured loans in my state of Florida - the state that's been the arguably the hardest 

hit in housing downturn have underperformed FHA loans nationwide. Seventeen-percent of FHAinsured loans in Florida have been seriously delinquent for more than 60 days, yet nationwide, only 11 

percent have been seriously delinquent. Furthermore, in Lakeland in my district, FHA loan limits are 

considerably higher than the HUD area median home price. FHA currently insures homes for as much as 

$271,050 but median home prices are $78,000 - this is a whopping 324% of the median home price. 

What I find even more disconcerting is that 26% of FHA insured loans in Florida are being given to 

people making over $75,000 when the median income in 2011 was only $47,827. That's a 12% increase 

since 2006, even though Florida is still well below the nation-wide median income of $52,762. These 

increases and numbers do not add up, nor do they represent any form of logic on behalf of FHA. 

What they lead to instead is to further convince me that FHA is unnecessarily crowding out a perfectly 

good private market for mortgage insurance in Florida. In fact, I find it appalling that your own Web site 

boasts, "[FHA] is the largest insurer of mortgages in the world, insuring over 34 million properties since 

its inception in 1934." A taxpayer-backed federal program shouldn't be the largest provider of anything, 

much less private mortgage insurance that can be found in the open market. In fact, it should be in 

FHA's interests to ensure homebuyers know about their options. FHA should be taking steps to 

encourage residents to go to the private market first, and the FHA second. The FHA should be the 

mortgage insurance provider of last resort. 

Therefore, I look forward to hearing from you today to educate me and the other committee members 

on what you're doing to make that happen and move away from this push to remain the largest insurer 

of mortgages world-wide, US-wide, and certainly Florida-wide. 
62 


80868.005

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

WASHINGTON, DC 20410 

Written Testimony of Assistant Secretary for Housing and Federal Housing Administration Carol 

Galante 

Hearing before the House Financial Services Committee 

Wednesday February 13, 2013 

Chairman Hensarling, Ranking Member Waters, and Members of the Committee, I appreciate the 

opportunity to appear today before the Committee to discuss the financial condition of the Federal 

Housing Administration, including the annual report on the Mutual Mortgage Insurance Fund (MMIF). 

We are in an important phase of the recovery of America's housing markets. As 2013 begins, though 

there are regional variations, there are a number of encouraging trends that indicate that our economy 

in general and housing in particular, are moving in a positive direction. 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. In 

addition, increasing home values lifted 1.4 million families above water in 2012. While there is still a 

long way to go, these indicators suggest that the housing market is continuing to improve in a manner 

that will contribute positively to the overall economy. 

On the other hand, despite these positive developments, it is still clear that the recovery is fragile, and 

there are a Wide range of factors that could limit the progress that is taking place. Accordingly, we must 

remain focused on our efforts to restore the housing markets and assist families in returning to 

prosperity while also taking steps toward 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 homeownership 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 ofthe 

independent actuarial review conducted by Integrated Financial Engineering (IFE) and provides a status 

1 
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80868.006

report on the fiscal health of the MMI Fund. Via its review, the actuary measures the economic net 

worth of FHA's portfoliO at the end of the fiscal year- essentially, the total value of the portfolio after 

FHA pays all expected claims for the next thirty years in a run off scenario where no new loans are 

insured, based on an independent, commercially available, economic forecast. This economic value is 

then divided by the total value ofthe 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, which Secretary 

Donovan testified about before the Senate Banking Committee on December 6,2012, in FY 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. Books of business originated from 2007-2009 continue to be the prime 

source of stress to the Fund, with fully $70 billion in claims attributable to these 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 down payment 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 factorfor whether FHA will need to draw on permanent and 

indefinite budget authority from the Treasury. ~ny determination that such a draw is necessary will not 

be made until the end of FY 2013, 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 ofthe fiscal year, and will be impacted by the steps FHA takes over the course 

of the year to increase revenue or reduce losses. 

While the magnitude of the figures involved in this year's budget re-estimate are large, as an example, 

the President's FY 2012 budget submission, issued in February of last year, anticipated that FHA would 

need to draw nearly $700 million in assistance from the U.S. Treasury, as prOVided for under the Federal 

Credit Reform Act, to cover expected claim obligations. Instead, at the end of FY 2012 the Capital 

Reserve Account held $3.3 billion - even after setting aside the necessary funds to cover the increase in 

expected costs over the prior year. The fact that the MMI Fund ended the fiscal year with this balance is 

due primarily to policy changes made during FY 2012 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 FY 

2013. 

Secretary Donovan and I 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 

2 
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80868.007

persons and entities underserved by the conventional market. Through its single family, mUltifamily and 

healthcare 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 homeownership 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 denied access to credit to realize the American dream 

of homeowners hip. 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 healthcare 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 

healthcare 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 homeownership 

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. For example, in many communities affected by the oil patch crisis of the 1980s FHA played a 

vital part in keeping credit flowing and regional real estate markets from shutting down entirely. And 

never has FHA's ability to act counter cyclically been more important than during the recent housing 

crisis, when FHA played a very prominent role in stabilizing the housing finance system and averting a 

total collapse ofthe housing market. By design, FHA's programs are meant to complement, not 

supplant, private capital. They are 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 ofthis 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 

3 
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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 FY 2012 

In 2012, FHA continued to play an important part in the ongoing recovery ofthe nation's housing 

market and broader economy. FHA insured nearly 1.2 million single-family forward mortgage loans 

during the fiscal year, with a total dollar value of approximately $213 billion. Of the over 700,000 

thousand home-purchase 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 firsttime buyers. 

FHA 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. For 

Hispanic and Latino populations which, according to the National Association of Hispanic Real Estate 

Professionals are expected to account for 40 percent of the estimated 12 million new household 

within the next 10 years, 49 percent use FHA to access homeownership. 

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 FY 2012 fell once again from that of the prior 

year, continuing its decline from the peak levels seen in FY 2009. As a percentage of total market 

share, refinance and purchase transactions, FHA represents 14.6 percent of the nation's mortgage 

market. In terms of dollars of Single-family loans insured, 2012 is the lowest volume since the start 

of the crisis. Indeed, FHA's volume by loan count is now at levels seen in 2002 and 2003 when it's 

market share was smaller than today. Thus, FHA's current market share is more indicative of the 

reduction in the total size of the market than it is of abnormal levels of FHA activity. 

Home Equity Conversion Mortgage (HECM) insurance endorsements in FY 2012 were also down by 

25 percent from FY 2011 levels, to 54,591 loans. FY 2012 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. 

, Zandi, Mark. (2012, September 28). Obama policies ended housing free fall. The Washington Post. 

http://www.washingtonpost.comirealestate/obama-policies-ended-housing-free-fuII/2012/09127/20635604-0372-

1 le2-9b24-fl730c7f63 12 _story.html 

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FHA and Overall Market Originations by Loan Type 

FHA All 

Purchase I Refinance I All Purchase I Refinance I All 

2003 629,919 638,542 1,268,461 7,426,006 15,677,677 23,103,684 

2004 457,404 237,995 695,399 6,904,911 7,966,749 14,871,660 

2005 322,915 133,261 456,176 7,233,456 7,251,637 14,485,093 

2006 295,261 115,859 411,120 6,563,679 5,765,899 12,329,578 

2007 317,181 211,093 528,274 5,222,266 5,071,725 10,293,991 

2008 844,893 560,767 1,405,660 3,508,103 3,583,680 7,091,783 

2009 1,088,356 896,558 1,984,914 3,338,302 6,052,223 9,390,525 

2010 944,159 518,571 1,462,730 2,925,707 5,432,837 8,358,544 

2011 759,386 312,385 1,071,771 2,864,629 4,774,054 7,638,683 

2012 724,315 534,780 1,259,095 2,779,974 5,858,193 8,638,167 

Source: HUD Estimates of Market Data and FHA Single Family Data Warehouse 

FHA Market Share 

~Purchase fIIIII Refinance --Combined 

FHA served an important and necessary role in the nation's housing finance system throughout 

2012. 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. 

5 
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B. The Mutual Martgage 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:' a Financing Account, which reflects the business transactions related to 

insurance operations, and a Capital Reserve Account, which reflects secondary reserves to cover 

unexpected increases in program costs, including higher claim expenses, or lower fee collections. 

Both of these accounts are held at the U.s. Treasury. The Capital Reserve Account was established to 

assist in managing to the two-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 like all 

federal government direct-loan and loan-guarantee programs, its financing account operates with 

what is called "permanent indefinite budget authority" under the Federal Credit Reform Act to cover 

unexpected increases in program costs. 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 Section 202 of the 

National Housing Act, and included in the FHA financial statement. The other is the annual subsidy 

re-estimate 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. 

In 2012, the actuarial study applied a stochastic method to estimate the net present value (NPV) of 

future cash flows, 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, model estimates reflect a wide variety of possible economic conditions 

The outcome of the complete actuarial study 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 seven years by adding projected endorsements each year, forecasting their cash flows and 

2 There 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 pre-1992 insurance endorsements. The year 1992 marks implementation of the 

Federal Credit Reform Act of 1990 and introduction of the Financing Accounts. 

6 
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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 costs 

above-and-beyond lifetime expected costs, or if negative, the additional resources necessary to 

cover lifetime costs on outstanding guarantees. 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 re-estimate 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 claim expenses, premium revenue, and recoveries on 

outstanding loan cohorts over their remaining lifetimes (up to 30 years). If resources in the MMI 

fund Financing and Capital Reserve accounts fali short of expected lifetime costs to the Fund, FHA 

would draw on support from the Treasury as explained above. Permanent and indefinite authority 

from Treasury is only necessary if FHA is unable to satisfy the budget re-estimate requirements from 

the funds in the Capital Reserve at the end of the fiscal year. 

C. The FY 2012 Actuarial Review 

In FY 2012, as noted above, the MMI Fund capital reserve ratio as calculated in the Actuarial Review 

fell below zero to negative 1.44 percent. The actuarial assessments estimate that the economic 

value of the Fund as of the end ofFY 2012 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 FY 2014 and reach 2.0 percent during FY 2017 under its 

base-case estimate. These forecasts assume no changes in policy or other actions by FHA. Policy 

changes that were announced when the actuarial report was released are expected to accelerate 

the time to the Fund's 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. As stated preViously, projected losses are 

particularly large for the fiscal year 2007-2009 loans, totaling $70 billion in claims for these books 

alone. 

Loans using seller-funded down payment 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 ofthe MMI Fund would be positive 

$1.77 billion today. Thus, we are very grateful for the action by Congress in 2008 to eliminate sellerfunded down payment loans from the FHA program, avoiding substantial additional losses from 

these loans. 

7 
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80868.012

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-preand post-2009-is based, at least in part, on the impact of key policy changes which have added 

over $20 billion to the Fund since 2009-as demonstrated by the following chart. 

Source: FY 2012 Actuarial Reviews of the MMI Fund; analysis by U.s. Department of HUD/FHA. 

While the general trends revealed in the 2012 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 the 2012 actuarial report differ substantially from the expected 

status of the Fund as projected in the 2011 actuarial report. There are three factors driving the 

change in the estimated economic value of the MMI Fund compared to what was projected in 2011: 

First, the house price appreciation forecast used in the 2012 actuarial study, predicted 

significantly lower levels of appreciation in the near term than the projections built into the 

forecast underlying the 2011 actuarial study. This yielded a cumulative difference in projected 

house price appreciation of 8 percentage points over the first five years. Thus, the downward 

revision in house price forecasts from 2011 to 2012 accounted for an estimated $10.5 billion in 

reduced economic value compared to the actuary's 2011 and 2012 projections of what the 

Fund's economic value would be as of the end of FY 2012. 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 

8 
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80868.013

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 substantial 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-leading to lower premium revenue, 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 the house price assumptions and 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 $13 billion in reduced economic value is attributable to refined methods to better 

capture shares of Pre-foreclosure sale (PFS or short sales) and REO in claim predictions. 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, the 2011 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 FY 2012. Furthermore, the FY 2011 

report stated explicitly that there was an approximately 50 percent chance that if economic 

forecasts in FY 2012 differed materially from those used in the prior year's 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 established in the base 

case scenario. For the FY 2012 report, FHA asked the Actuary to estimate the value of the Fund 

based upon those economic paths that yield the 10th best, 25th best, 25'h worst, 10'h 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 

FY 2012. 

The significant shift in dollar value this year from what was expected in last year's report highlights 

the volatility associated with thirty 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 Pratect 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 ofthe Fund by at least $20 billion. That FHA's capital ratio has 

9 
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80868.014

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 four 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. As Secretary Donovan said before the Senate Banking 

Committee in December, that work is not over. To that end, in January and February of 2013, we 

issued additional guidance implementing policy changes to benefit the Fund. 

1. Counterparty Risk Management and Lender Enforcement 

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 settlements with 

lenders and servicers for violations of FHA origination or servicing requirements. 

Additionally, we have been concerned of late with a number of web-based and print 

advertisements that proclaim the supposed ease of obtaining an FHA-insured loan following a 

foreclosure. While FHA has taken a number of proactive steps in the past few years to clarify its 

requirements regarding lender advertising and to enforce those requirements aggressively, we 

determined in recent months that it was necessary to address the issue of post-foreclosure 

advertising specifically. Therefore, on January 25, 2013 FHA issued a reminder to its industry 

partners that advertisements that imply that little or no qualification criteria are necessary to 

obtain an FHA loan are unacceptable and that FHA will not hesitate to take action within its 

authority to enforce its requirements related to lender advertiSing, including sanctions by HUD's 

Mortgagee Review Board and/or referral to the HUD Inspector General or the Consumer 

Financial Protection Bureau (CFPB). 

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 down payment assistance programs 

which cost the MMI Fund more than $15 billion in economic value. Further, we enacted 

increased down payment requirements for borrowers with credit scores below 580. The longterm positive impact of these two credit policy changes cannot be overstated. The 2005 - 2008 

vintages, accounting for less than 15% 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 down payment assistance will have accounted for 

44% of those losses. Additionally, we have proposed regulations to reduce the amount of 

allowable seller concessions that increase risks to FHA arising from inflated appraisals. 

In late 2012, FHA announced several additional policy changes that continue its work to 

strengthen credit policy while balancing the need to avoid negatively impacting the ongoing 

recovery and maintaining access to mortgage financing for credit worthy borrowers while also 

taking steps to recede FHA's total market share. These steps - requiring manual underwriting 

10 
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80868.015

for borrowers with credit scores below 620 and debt to income (DTI) ratios over 43 percent, 

enhancements to FHA's TOTAL Scorecard, and a proposed increase in the required down 

payment for borrowers seeking loans in excess of $625,500 - will. together with all the other 

measures outlined above as well as those detailed in Appendix A of FHA's Annual Report to 

Congress, 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 four years. Since 2009, FHA has increased premiums five times - the most 

recent increase coming in response to the FY 2012 actuarial review, and which will add an 

additional $150 or more in annual mortgage premium costs for the average FHA borrower. 

Combined. the premium increases made since 2009 have, to date, 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% 

and the time in inventory for FHA properties has reduced by 45%, decreasing losses on the REO 

portfolio and improving recoveries for the Fund. 

Finally. in FY 2012, FHA implemented a significant expansion of its note sales program whereby 

non-perfonming 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 non-retention 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 

11 
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this initiative of more than $1 billion over the next two years. The next DASP sale is scheduled 

for March 2013. 

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. 

Economic Net Worth by Book-of-Business 

Changes Haye Led to ImproH'ment~ in Fund Trajectory 

-

~ ro ,. 0 

~ ~ ~ ~ £i ~ ~ ~ 

(S bil) -Book V,,!ue (d~ 

Source: FY 2012 Actuarial Reviews of the MMI Fund; analysis by U.S. Department of liUD/FI1A. 

B. Additional Actions to Be Taken in FY 2013 

While FHA has enacted substantial reforms under tile 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 FY 2013. 

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 

12 
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80868.017

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 FY 2014, 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%-20% 

of total dispositions since 2010, yielding average loss severities about 20% 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% in the last year A reduction in 

loss severities will further improve fund performance .. 

• Re-design 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, ta rgeting payment reductions of at least 20% for FHA-HAM P modifications, 

which will result in more sustainable payment outcomes for borrowers over the long term. 

This approach is intended to 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 pennit them to retain their homes, home retention is simply not an option for some 

borrowers. For these borrowers, pre-foreclosure sales (short-sales) offer an opportunity to 

transition out oftneir homes. This enables both FHA and the borrowers to avoid the costs 

and damages of the foreclosure process. FHA will introduce a streamlined pre-foreclosure 

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 are anticipated 

to 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 plans to expand a pilot whereby properties secured by non-performing 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 

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80868.018

method of disposing of these properties is expected to 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 is anticipated to 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 FY 2013, FHA will implement the following policies for new originations. 

• Revised Premium Cancellation Policy 

Under a policy change made in 2001, FHA has been cancelling required mortgage insurance 

premiums (MIPs) on loans for which ~he outstanding principal balance reaches less than 

78% ofthe original principal balance. However, FHA remains responsible for insuring 100% 

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. That 

policy, which was reversed in a Mortgagee Letter published on January 31, 2013, 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 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%-12% of all claims losses will 

occur after MIP cancellation. Therefore, beginning with new loans endorsed after June 6, 

2013, 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 forthe flexibility Congress granted us in 2010 to adjust FHA's premium 

pricing. And we have utilized that flexibility five times, with the most recent increase in 

annual MIP released in a mortgagee letter on January 31, 2013. Consistent with FHA's 

continued efforts to balance its countercyclical role in the nation's mortgage market with its 

14 
76 


80868.019

responsibility to manage the Fund, FHA will 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 counter-cyclical 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. And we welcome 

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.3 FHA intends to develop new policies which 

incentivize, or in some cases require, borrowers to complete a pre-purchase 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 pu rchases. 

3. Stabilize and Strengthen the HECM Program 

Changes in borrower utilization of the HECM program and the modeling changes employed by 

the actuary for the FY 2012 review 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 

3 HUD conducted a review of pre-purchase 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 pre-purchase counseling services. Only one of the purchasers had falien 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!pre_purchase_counseling.html 

15 
77 


80868.020

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 losses and reduce the likelihood of 

borrower defaults due to nonpayment of property taxes and insurance. 

In administrative guidance dated January 30,2013, FHA consolidated the Fixed Rate 

Standard program with the Fixed Rate HECM Saver product, which will result in a reduction 

of the maximum amount of funds available to a HECM borrower. 

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: 

o Limiting the draw at origination to mandatory obligations (Le. 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; 

o 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 

o 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. 

E. legislative Requests to Further Strengthen the Fund 

Over the past several 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 non-compliance with FHA policy and provide greater flexibility for FHA 

16 
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80868.021

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% of all FHA approved lenders. Currently FHA only has authority to 

require indemnification for lenders with Lender Insurance (U) 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 FHAinsured 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 poorly performing servicers to transfer 

individual loans to another servicer with better performance results. 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. 

V. 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 done precisely what it was 

17 
79 


80868.022

designed to do. It has allowed millions of American families to benefit from homeownership and 

affordable rental options. It has provided vital 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 led to a second Great Depression. FHA must continue to be a reliable steward of taxpayer 

dollars and also remain a key source of access to homeownership for the families of today and for future 

generations. We are committed to that goal, and we look forward to collaborating with Members of 

this committee in that effort. 

18 
80 


80868.023

Talking Points on Amendments to HR 5072, the FHA Reform Act of 2010 

Downpayment requirement of 5% 

and prohibition of financing of 

dosing costs 

loan performance but rather that performance is due to a 

combination of factors induding credit score. An across the board 

5% minimum down payment does not go far enough in current 

market conditions for the riskiest borrowers and is too stringent for 

safer borrowers. FHA is proposing to in the process of 

implementing regulations that will increase the minimum down 

payment to 10% for borrowers with credit scores below 580, while 

keeping the minimum down payment at 3.5% for borrowers with 

credit scores of 580 and above to reflect analysis of FHA loan 

performance data. 

FHA has regulatory authority to adjust down payment requirements, 

in response to market conditions or other factors, in conjunction 

with data analysis. FHA is appropriately using this authority to make 

credit policy changes, as described above, and it would be 

counterproductive to put in place restrictions that remove that 

flexible authority. 

Increasing FHA's statutory down payment from 3.5% to 5% would 

potentially reduce the volume of loans endorsed by FHA -loans that 

are fully underwritten and the vast majority of which would perform 

- by more than 40%. This would have a negative impact on the 

broader housing market by significantly reducing demand and could 

potentially lead to a double dip in housing prices, threatening the 

positive signs of stabilization in the housing market. 

Raising the down payment would effectively exclude more than 

300,000 potential responsible borrowers who could otherwise 

perform in an FHA-insured loan. This would especially impact the 

underserved borrowers which FHA is intended to selVe. 

An increase in FHA's minimum downpayment from 3.5% to 5% 

would have relatively little impact on restoring the FHA capital 

reselVes to the Congressionally mandated level of 2 percent. 

Increasing the minimum down payment to 5% for all loans would 

add $500 million in receipts to FHA's baseline 2011 budget. In 

contrast, the policy changes that FHA has put in place, in 

combination with the restructuring of mortgage insurance premiums 

which has been proposed through the FHA Reform Act, would 

contribute $4.1 billion in receipts to the FHA. 
81 


80868.024

Garrett - 085 

Risk-sharing requirement - 5% 

retention of loan by originator 

- Garrett - 086 

Prohibition on financing upfront 

mortgage insurance premium 

Garrett - 087 

Downpayment requirement for 

higher~ri5k borrowers 

-

Risk sharing requirements should be considered more broadly in the 

context of pending regulatory reform legislation. 

The proposed structure would potentially have a negative impact on 

the pricing and operations of Ginnie Mae securities, The 

amendment would create two owners of loans, effectively 

obligating Ginnie Mae to service for the other owner (of the 5%) 

without adequate protections to Ginnie Mae, Additionally, investors 

could raise interest rates depending on who held the 5%, Loans 

originated by larger institutions may price better than a community 

bank simply due to the larger balance sheet of the larger institution 

and not related to loan quality, 

A risk-sharing requirement will require that banks hold capital 

against their FHA-insured loans, This proposal will limit the ability of 

small lenders to participate in the FHA program, concentrating 

participation on the hands of the largest banks, 

The FHA Reform Act of 2010 will permit FHA to restructure upfront 

and annual mortgage insurance premiums and enable FHA to reduce 

the upfront mortgage insurance premium to 1%, which will 

significantly reduce risk, 

FHA retains authority to adjust upfront mortgage insurance 

premiums in the future through regulation and it would be 

counterproductive to put in place restrictions that remove that 

flexible authority, Requiring borrowers to pay their upfront MIP in 

cash would create another hurdle to homeownership without 

necessarily leading to a commensurate increase in loan 

performance. 

FHA analysis has shown that down payment alone is not indicative of 

loan performance but rather that performance is due to a 

combination of factors including credit score. An across the board 

5% minimum down payment does not go far enough in current 

market conditions for the riskiest borrowers and is too stringent for 

safer borrowers, FHA is proposing to in the process of implementing 

regulations that will increase the minimum down payment to 10% 

for borrowers with credit scores below 580, while keeping the 

minimum down payment at 3.5% for borrowers with credit scores of 

580 and above to reflect analysis of FHA loan performance data, 

FHA has regulatory authority to adjust down payment requirements, 

in response to market conditions or other factors, in conjunction 

with data analysis, FHA is appropriately using this authority to make 

credit policy changes, as described above, and it would be 

Talking Points on Amendments to HR 5072, the FHA Reform Act of 2010 

Page 2 of4 
82 


80868.025

Garrett - 089 

Downpayment required during 

periods when MMIF does not 

comply with capital ratio 

requirement 

-

Hensarling - 164 

Moratorium on FHA insurance until 

MMIF meets capital ratio 

requirements 

counterproductive to put in place restrictions that remove that 

flexible authority. 

The National Housing Act requires the HUD Secretary to make 

changes to return the MMIF capital reserve above the mandated 2%. 

These changes can include a variety of reforms, including but not 

limited to minimum downpayment. FHA has instituted a series of 

reforms within the past year to strengthen the safety and soundness 

of the fund and return the capital ratio above 2%. 

A mandatory increase in the minimum down payment for all loans to 

5%, irrespective of future loan performance, would significantly 

lengthen the timeframe within which the MMIF capital ratio could 

return to 2%. This requirement would reduce expected future 

mortgage insurance premiums to the MMIF by preventing 

responsible borrowers from obtaining lower down payment loans 

that would perform and contribute premiums that are used to 

rebuild the capital reserves. 

An increase in FHA's minimum downpayment from 3.5% to 5% 

would have relatively little impact on restoring the FHA capital 

reserves to the Congressionally mandated level of 2 percent. 

Increasing the minimum downpayment to 5% for all loans would add 

$500 million in receipts to FHA's baseline 2011 budget. In contrast. 

the policy changes that FHA has put in place, in combination with 

the restructuring of mortgage insurance premiums which has been 

proposed through the FHA Reform Act, would contribute $4.1 

billion in receipts to the FHA. 

The National Housing Act requires the HUD Secretary to make 

changes to return the MMIF capital reserve above the mandated 2%. 

These changes can include a variety of reforms, including but not 

limited to minimum down payment. FHA has instituted a series of 

reforms within the past year to strengthen the safety and soundness 

of the fund and return the capital ratio above 2%. 

Prohibiting FHA insurance on new loans, irrespective of future loan 

performance, would significantly lengthen the timeframe within 

which the MMIF capital ratio could return to 2%. This requirement 

would reduce expected future mortgage insurance premiums to the 

MMIF by preventing responsible borrowers from obtaining FHAinsured loans that would perform and contribute premiums that are 

used to rebuild the capital reserves. 

FHA has been mandated by Congress to serve as a countercyclical 

force in the housing finance system, to ensure liquidity to 

Talking Points on Amendments to HR 5072, the FHA Reform Act of 2010 

Page 3 of 4 
83 


80868.026

responsible borrowers during times of financial stress in the private 

sector. During such times of financial stress, the broader downturn 

in the economy and falling housing prices may lead to a decline in 

FHA's capital ratio. This amendment would prohibit FHA from 

fulfilling its countercyclical role at precisely the time that it would be 

most needed. The FHA traditionally has a market share of 10-15%, 

which has increased to approximately 30% during this economic 

crisis. 

The capital ratio is highly dependent upon prospective housing price, 

interest rate, and other economic forecasts over the next thirty 

years. These forecasts can change significantly over a short period 

of time, especially during volatile periods of economic recovery. The 

ability to precisely predict the capital ratio during such periods is 

difficult. This amendment would require withdrawal of liquidity 

from the housing market, which could lead to dramatic impacts on 

the broader economy, based on imperfect information that is 

subject to change. 

The official capital ratio is calculated once per year, during the 

annual actuarial review. While FHA provides quarterly updates to 

Congress on the status of the MMIF, the official capital ratio is only 

calculated once per year. This amendment would effectively require 

FHA to exit the housing market for a minimum of a year if the capital 

ratio were to fall below 2%. 

This amendment would introduce considerable uncertainty to the 

housing market, as FHA's presence in the market would be 

uncertain. This would translate to higher costs to the consumer as 

the market would have to price this new risk into the mortgage 

finance system. These costs would not contribute any benefit to the 

taxpayer or help to return the MMIF capital ratio above 2%. 

Significant negative impact to pricing and operations of Ginnie Mae 

securities as supply of FHA loans for its securities would become 

more unpredictable. 

Talking Points on Amendments to HR 5072, the FHA Reform Act of 2010 

Page 4 of 4 
84 


80868.027

A 

NAFCU 

3138 JOth Street North 

Arlington, VA 22201-2149 

703.522.47701800.336.4644 

f: 703.522.2734 

fbecker@nafcu.org 

National Association of Federal Credit Unions I www.nafcu.org 

February 5, 2013 

The Honorable Jeb Hensarling 

Chairman 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

The Honorable Maxine Waters 

Ranking Member 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

Re: The Role of the Federal HOllSlllg AtlmillisfmtloJ1 ill Housing Finance • 

Deal' Chairman Hensarling and Ranking Member Wa~ar"':"" ~.I7 

Fred R. Becker, Jr. 

President/CEO 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association 

that exclusively represents the interests of our nation's federal credit unions, I write in conjunction 

with tomorrow's Full Committee hearing, "The Role of the Federal Housing Administration (FHA) 

in Housing Finance." Given the increase in FHA guaranteed mortgages in recent years, and 

questions surrounding the stability of the Mutual Mortgage Insurance Fund, NAFCU appreciates the 

Committee holding this important hearing. During consideration of the FHA Emergency Fiscal 

Solvency Act of 2012 eH.R. 4264) last Congress, NAFCU strongly SUPPOlted provisions of the 

legislation that would have given the FHA necessary tools to better manage financial risk. 

Given the Committee's concerns about the solvency of the FHA, NAFCU would also like to once 

again bring to the Committee's attention an ongoing trend whereby homeowners who have the 

capacity to make their mortgage payments instead choose to default. This concept of "strategic 

default" is troubling to community-based financial institutions like credit unions. Simply put, policy 

makers should ensure that policies do not unintentionally create an incentive for borrowers to walk 

away fi'Om their mortgages. 

As you may know, the FHA's CUIT-ent policy with respect to strategic default is ban'ing such 

borrowers from obtaining another FHA loan for a minimum ofthl'ee years. Comparatively, Fannie 

Mae has instituted a policy that would prohibit such bOl'l'Owers for seven years. 

The FHA recently pledged to enforce additional enforcement for those bad actors soliciting 

borrowers with the false pretense that they can "automatically" qualify for an FHA loan after three 

years without meeting a host of other requirements. Still, NAFCU remains concerned about the 

FHA's general policy on this issue and encourages Congress to exercise additional oversight in this 

area. Lawmakers should actively debunk the idea that the FHA is a safe haven for those who 

strategically defaulted on previous mortgages. This risk to the taxpayer, encouraged by CUl'l-ent FHA 

policy, is a critical part of the safety and soundness conversation that must be reviewed. 

NAFCU I Your Direct Connection to Education, Advocacy & Advancement 
85 


80868.028

As you know, NAFCU has long supported the important role the FHA plays in our nation's housing 

market. Thc FHA's viability is crucial, especially in providing an option for those who would 

otherwise be unable to obtain a mortgage in the conventional mortgage market. As community-based 

financial service providers, credit unions take great pride in responsibly assisting their memberowners attain homeownership. To that end, NAFCU looks fOlward to working with the Committee 

on FHA and related housing finance reform issues dul'ing this session of Congress. 

Again, thank you for holding this important hearing today. If my colleagues or I can be of assistance 

to you or if you have any questions regarding this issue, please feel free to contact myself 01' 

NAFCU's Senior Associate Director of Legislative Affairs, Jillian Pcvo, at 703-963-7082. 

cc: Members of the House Financial Services Committee 
86 


80868.029

CAROLYN B. MALONEY 14TH OISTlUCT, NEW YORK 

2332 R,AYlJOAN HOOSE ()FFlce Buu.olNG 

Wp.SHINGTON, DC 20515-3214 

t20Z.225-7944 

COMMJ11'a'iS: 

RNANCIAL SERVICES 

OVERSIGHT AND GOVERNMENT REFORM Qi:ongre55 of tbt mn.ttb ~tatt5 

JOINT ECONOMIC COMMITIEE 

The Honorable Shaun Donovan 

Secretary 

j!)OU5e of l\tpttS{entatibeS{ 

~inlIton. 1.B(: 205l5-32l4 

November 9, 2012 

U.S. Department of Housing and Urban Development 

451 7th Street SW 

Washington, DC 20410 

Dear Secretary Donovan, 

O/STltlCTC\fFlCES: 

o 1651 THlAoAv£NUE 

SUlTEl11 

o 

NEW VORK. NY 10128 

(212) 800-0606 

21~77 31sT 5T"£ET 

As'rOR\A.NY 11105 

(718) 932-1804 

WE8sm-: h~Hm&loney.hOl.lse.gO\l 

I have read several press reports over the last week concerning the health of the Mutual Mortgage 

Insurance Fund (MMl Fund) which included projections that the FHA may need to draw down funds 

from the Department of Treasury to cover expected claims over the next 30 years. Accordingly, I am 

writing to request infonnation concerning the FHA's ability to cover expected losses based on the MMl 

Fund's current levels. 

The foreclosure crisis ofthe last four years has put enormous stress on the housing market and its ability 

to recover from the losses we experienced starting in 2007. I understand that losses from loans originated 

between 2005 and 2008 will likely continue to be a drag on the Fund. However, the FHA insures a much 

larger share of the market than it did before the crisis and, as a result, several steps have been taken since 

2009 to help sure up the Fund. These include increases in insurance premiums, new rules requiring higher 

risk borrowers to make higher down payments and efforts to mitigate losses on delinquent loans. The 

FHA has also reportedly recovered approximately $900 million as part of the mortgage servicing 

settlement. These actions will likely bolster the agency's reserves, however, I believe it is important to 

know whether they will ward off the need for temporary support from the U.S. Treasury. 

I am hoping you can provide my office information about the capital reserves in the MMI Fund which are 

dangerously low and only slightly above the 2% level that is required by law. Specifically, to what extent 

are you concerned that the Fund is operating so close to the 2% level? In addition, what is the likelihood 

that FHA will need to access funds from the U.S. Treasury and what additional steps will the FHA take to 

ensure it does not need to access those funds? Finally, please advise my office as to the efforts by the 

FHA to enforce the rules that are designed to stem foreclosures and decrease further losses. 

Thank you for your assistance with this request. I look forward to working with you to address the 

housing crisis that has been holding back economic growth in our country. 

S~y, j 

~J:!~~;t~- Member of Congress U 

PIUNTEO ON A<:CYCLEO pmR 
87 


80868.030

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

WASHINGTON, DC 20410-1000 

ASSISTANT SECRETARY FOR CONGRESSIONAL 

AND INTERGOVERNMENTAL REIATiONS 

The Honorable Carolyn B. Maloney 

U.S. House of Representatives 

Washington, DC 20515-3214 

Dear Representative Maloney: 

FEB 11 2013 

I am writing in further response to your letter to Housing and Urban Development (HUD) 

Secretary Shaun Donovan of November 9, 2012 concerning the Federal Housing Administration 

(FHA) Mutual Mortgage Insurance (MMI) Fund. 

As you know, HUD delivered to Congress on November 16,2012 its fiscal year 2012 

Report to Congress on the Financial Status of the MMI Fund. The report indicated that although 

FHA has over $30 billion dollars in cash reserves on hand, the Fund's capital reserve ratio fell to 

negative 1.44 percent, and the Fund's economic value, the estimated amount needed for the FHA 

to meet expected claims over the next 30 years, is negative $16.3 billion. As Secretary Donovan 

has testified before the Senate Banking Committee and as FHA Commissioner Carol Galante 

will testify before the House Financial Service Committee on February 13, earlier FHA books of 

business continue to be the prime source of stress to the Fund, with fully $70 billion in estimated 

claims attributable to the 2007-2009 books of business alone. In contrast, the independent 

actuary attested once again to the high quality and profitability of books insured since 2010, 

which are the strongest in agency history. 

Secretary Donovan and Commissioner Galante remain very concerned about the . 

actuary's estimate of the level of capital reserves in the MMI Fund based on expected claims and 

economic projections over the next 30 years. Throughout the tenure of this Administration, FHA 

has taken and will continue to take aggressive and decisive actions to improve the health and the 

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, despite the severe economic downturn, is primarily due to the reforms to 

risk management, credit policy, lender enforcement, and consumer protections made over the 

past four years - the most sweeping changes to policy in FHA's nearly 80 year history. A 

complete list of these FHA actions taken unde:t: this Administration is enclosed with this letter. 

With respect to your question about the possibility of FHA accessing funds from the U.s. 

Treasury, the President's budget, which is currently under development, will reflect an estimate of 

whether FHA may require use of pennanent indefinite budget authority to satisfY the projected 

budget re-estimate. The actual amount needed, if any, would be determined in September before 

the end of the current fiscal year. Under the Federal Credit Reform Act of 1990, FHA, like other 

government direct loan and loan guarantee programs, is required to hold sufficient capital to pay 

expected losses for the duration of the terms of the loans it insures. Therefore, if such a transfer 

were necessary, it would reflect that under the economic assumptions common to the President's 

www.bud.gov espanol.hud.gov 
88 


80868.031

budget, FHA lacked sufficient funds in its Financing Account to pay expected claims over the next 

30 years. This internal governmental accounting transaction would not reflect that FHA was 

carrying a negative cash balance at the end of the fiscal year. 

As you are aware, our country's housing market is experiencing a still fragile recovery from 

the serious problems we experienced only too recently. Much of the progress that we are seeing in 

the housing sector has been possible because of the FHA, which has provided access to 

homeownership for millions of American families and without which the crisis would have been 

much worse. In fact, Moody's analytics estimates that were it not for FHA's presence during the 

crisis, house prices would have fallen an additional 25 percent. We look furward to working with 

you and other Members of Congress on additional legislation that will help ensure that the FHA 

continues to fulfill its vital role of providing access to homeownership for underserved, low-wealth 

populatious while strengthening the MMl Fund. 

I hope that this information will be helpful. Please do not hesitate to contact me if you 

would like any further information. Thank you again for your inquiry and your continuing interest 

in the Department's programs and activities. 

Sincerely, 

~ffI General Deputy Assistant Secretary for 

Congressional and Intergovernmental Relatious 
89 


80868.032

U.S. Department of Housing and Urban Development 

L Appendix A: Summary of FHA Policy Changes under 

the Current Administration 

1. Changes implemented via mortgagee letter with an implementation date of January 

1,2010: 

a. Modifications to streamline refinance documentation requirements 

b. New appraisal standards 

c. Submission of audited financial statements required for supervised lenders 

2. Mortgage insurance premium (MIP) increase and adjustments to upfront/annual 

MlP relationship 

a. 111212010 - Increased Upfront MIP to 2.25% 

b. 10/4/2010-

i. Lowered up front MIP to 1 % 

ii. Raised annual MIP to 85 to 90 basis points 

c. 4/18/2011- Increased annual MIP by 25 basis points 

d. 4/9/2012-

i. Increased upfront MIP from 1 % to 1.75% 

ii. Increased annual MIP by lO basis points 

e. 6/1112012 - Increased annual MIP for loans in excess of $625,500 by 25 basis 

points 

f. 4/112013 - Increased annual MIP by 5-10 basis points, depending on loan amount 

audLTV. 

3. New downpayment requirements 

a. Mortgagee Letter effective October 4,2010 

i. Loaus to borrowers with a FICO of 579 or lower require a minimum 10% 

downpayment 

ii. Loans to borrowers with a FICO of 580 or above require current minimum 

3.5% downpayment 

ill. Minimum FICO of 500 

b. Federal Register Notice published February 6, 2013 

i. Loans to borrowers seeking loans above $625,500 require a 5% 

downpayment 

4. Enhanced underwriting requirements 

a. Mortgagee Letter effective Aprill, 2012 

i. Updated documentation requirements for self-employed borrowers 

ii. Offered new guidance on disputed accounts 

iii. Expanded the definition of family members for identity of interest 

transactions 

b. Mortgagee Letter published January 31, 2013 

i. Borrowers with credit scores below 620 and debt to income ratios over 

43% subject to manual underwriting 

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U.S. Department of Housing and Urban Development 

S. Changes to the HECM Program 

a. Mortgagee Letter effective October 4,2010 

i. Introduced HECM Saver, which provides a lower upfront premium 

(.01%) and a lower max principal limit 

Ii. Increased annual MIP to 1.25% 

iii. Adjusted the HECM Principal Limit Factors, resulting in lower maximum 

principal limits 

b. Mortgagee Letter published January 3, 2011 

i. Provided detailed guidance regarding the property charge loss 

mitigation requirements for HECM loans 

c. Mortgagee Letter published January 30, 2012 

i. Consolidated Fixed Rate Standard and Fixed Rate Saver programs 

6. Increased enforcement for FHA-approved lenders 

a. Enforcement actions taken against lenders 

1. Heightened enforcement ofHUD requirements for FHA-approved 

lenders has yielded over: 

1. 1,780 lenders withdrawn from FHA's program as a result of 

violations of FHA approval, originatio~ or servicing 

requirements. 

2. Imposition of more than $14.26 million dollars in civil 

money penalties and administrative payments for FHAapproved lenders 

ii. Issued notice to lending community that FHA will pursue directly 

or through Federal partners those who advertise access to FHA, 

particularly after foreclosure or other credit impacting event, does 

not require satisfaction of all FHA loan origination and 

underwriting criteria 

b. Mortgagee Letter effective January 21, 2010 

i. Enhanced monitoring of lender perfonnance and compliance with 

FHA guidelines and standards. 

ii. Expanded the Credit Watch Termination Initiative to include 

evaluation of lender underwriting performance in addition to 

origination performance 

c. Implementation of statutory authority through regulation of section 256 of the 

National Housing Act to enforce indemnification provisions for lender's using 

delegated insuring process 

i. Final rule published January 25,2012, with an effective date of February 

24,2012 

ii. A Mortgagee letter and Lender Insurance guide will soon be issued to 

implement this new rule. 

d. Additional authority sought by FHA through legislation: 

i. Amendment of section 256 of the National Housing Act to apply 

indemnification provisions to all Direct Endorsement lenders. This 

would require all approved underwriting mortgagees to assume liability 

for all of the loans that they underwrite 

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U.S. Department of Housing and Urban Development 

ii. Legislative authority permitting HOD maximum flexibility to establish 

separate "areas" for purposes of review and tennination under the 

Credit Watcli initiative. This would provide authority to withdraw 

originating and underwriting approval for a lender nationwide or in a 

specific area on the basis of the perfonnance of its regional branches 

7. Changes to FHA lender approval requirements 

a. Final rule published week of April 20, 2010 

i. Increased net worth requirements for approved mortgagees. All new 

lender applicants for FHA programs must possess a minimum net 

worth of $1 million. Effective one year from enactment of the rule, 

current FHA approved lenders, with the exception of small 

businesses, must possess a minimum net worth of $1 million. Current 

FHA-approved small business lenders must possess a minimum net 

worth of $500,000. Effective three years after enactment of the rule, 

approved lenders and applicants to FHA single-family programs, 

regardless of size, must have a net worth of $1 million plus 1 % of 

total loan volume in excess of$25 million 

ii. Eliminated independent FHA approval of mortgage brokers who 

originate but do not underwrite loans. FHA-approved mortgagees who 

underwrite loans retain strict liability for all loans, regardless of 

origination via their retail operations or through their sponsored 

mortgage brokers 

iii. Codified requirements for submission of audited financial statements 

by supervised mortgagees 

b. Mortgagee Letter published on January 5, 2011 

i. Required mortgagees that possess NMLS IDs to provide those to FHA 

for both lender approval and loan origination processes 

c. Mortgagee Letter effective July 28, 2011, provided altemative fmandal 

reporting requirements for small supervised lenders to decrease burdens 

associated with FHA's lender approval and renewal processes 

8. Updated Quality Control Requirements for Direct Endorsement Lenders 

a. Mortgagee Letter effective January 5, 2011 

i. Updated FHA's quality control requirements to include new 

requirements related to Sponsored Third Party Originators, reporting of 

fraud and material deficiencies, and recording of sales or transfers of 

FHA mortgages 

9. Refinance Program Policy 

a. Mortgagee Letter published February 14, 2011 

i. Extensive guidance regarding requirements and changes for FHA 

Standard and Streamlined refinance programs 

h. Mortgagee Letter published March 6, 2012 

i. For borrowers who are current on their loans, FHA reduced the upfront 

and aunual MIPs for Streamline refinances of FHA-insured loans 

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80868.035

u.s. Department of Housing and Urban Development 

endorsed on or before May 31, 2009 to permit these borrowers to take 

advantage of historically low interest rates, reducing their payments and 

decreasing risk to FHA 

10. Consolidated and updated FHA condominium policy 

a. Mortgagee Letter issued June 30, 20 11, and effective August 29, 2011 

i. Consolidate guidelines published in 2009; 

ii. Provide a single source ofinfonnation for the Condominium 

Approval and Recertification Process; 

ill. Update, consolidate and clarify existing condominium policy 

guidance; and 

iv. Expand FHA's flexibility to consider exceptions at the individual project 

level 

b. Mortgagee Letter issued in summer 2012 to revise updated guidance 

11. Reduction in allowable seller concessions 

a. Proposed policy change published in June of 2010 

i. Received over 1,000 comments, prompting extensive additional analysis 

which led to substantial revisions to the rule 

ii. New proposed rule published February 23, 2012 

iii. Final Rule Expected in 2013 

12. Enhanced and expanded loan sale program 

a. Effective with the quarterly sale that took place in September 2012, FHA 

expanded the 601 Note Sales Program, now known as the Distressed Asset 

Stabilization Program, providing the opportunity for better outcomes for 

borrowers, communities and FHA on non-performing loans. 

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Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

Questions from Representative Foster: 

Question 1: 

As the FHA sells discounted, delinquent loans to investors, what specific efforts are being 

pursued to keep underwater borrowers in their homes? Are there further steps that can be 

taken to ensure that borrowers are afforded every opportunity to stay in their homes and 

combat blighted communities? 

HUD has been active in helping borrowers having trouble making their mortgage payments. 

Traditionally, FHA has offered a Streamlined Refinance option to all borrowers with FHAinsured loans, allowing homeowners an opportunity to refinance their home to take advantage of 

lower interest rates without an appraisal. In 2011, FHA announced that borrowers whose loans 

were endorsed for insurance before June 1,2010 could refinance their loans at the same 

mortgage insurance premium that FHA charged at the time of origination. This program has 

greatly benefited underwater borrowers by permitting them to reduce their mortgage payments 

and at the same time reduced risk to FHA. 

Additionally, FHA helps underwater borrowers avoid foreclosure through the FHA-Home 

Affordable Modification Program (HAMP), a component ofHUD's loss mitigation program. 

Borrowers who experience a loss of income or an increase of living expenses due to certain 

verifiable causes can, through the FHA HAMP, reduce their mortgage payments to no more than 

31 percent of the homeowner's verified gross income, allowing them to keep their home. In 

November 2012, FHA outlined changes to its loss mitigation waterfall, moving HAMP up so 

borrowers could more quickly be offered deeper payment relief. 

FHA also assists underwater borrowers through its short refinance program. This program started 

in 2010 and allows some underwater non-FHA borrowers the opportunity to qualify for a new 

FHA-insured mortgage if they are current on their existing mortgage and if their lender agrees to 

write off at least ten percent of the UPB (unpaid balance) of the first mortgage. This helped 

responsible borrowers who were current on their mortgages but were experiencing financial 

hardships because property values in their community had declined. Finally, HUD's Office of 

Housing Counseling continues to assist underwater borrowers. In 2012, 2,410 HUD-approved 

housing counseling agencies assisted over 1.9 million renters and owners. 

Question 2: 

My understanding is that low value loans are generally of little interest to large purchasers of 

mortgage securities. Are you aware of any efforts at FHA to separate out and sell specialized 

portfolios consisting of low-value, non-performing loans in the $100,000 and below range? 

HUD cannot speak to the interest in low-value loans among other issuers of securities; however 

Ginnie Mae, which securitizes 98 percent of FHA insured loans, does not allow non-performing 

loans to remain in its securities. Modified loans can be securitized through Ginnie Mae, but they 

must go through a 3-month trial modification and demonstrate re-performance before being 

securitized. 

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Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

FHA has sold a large number of low-value, nonperforming loans over the past year as a result of 

the Distressed Asset Stabilization Program, but there has been no separate effort other than 

through that process to sell specialized portfolios of these types of loans. 

Question from Rep. Hinojosa 

Some of my colleagues have argued that the Federal Housing Administration represents an 

overreach of the federal government into the private home loan sector. We continue to hear 

the refrain, "the F.H.A. footprint is too Large, bring in more private industry." I don't believe 

anyone in this room will argue against increasing the market share of private industry in the 

home loan business. However, the role of the F.H.A. is to stabilize the supply of credit during 

times of contraction, and to make sure that working-class families are not cut out from the 

American Dream. 

We had an extreme period of contraction recently, and the F.H.A. stepped in. Housing prices 

hadn'tfallen so quickly since the Great Depression, and as the agency whose role it is to 

provide stabilization, you can expect that its finances will take a hit. Up until this point, from 

its conception in 1934, the FHA has not cost the taxpayer a dime. Now we will have to address 

its fiscal soundness, while still acknowledging the important role it plays in American 

communities. 

I would like to ask you, Ms. Galante: Can you discuss the role the F.H.A. played during the 

recession providing housing credit, and how its existence may have altered how the recession 

played out? 

During and after the worst recession since the Great Depression, FHA played a crucial role in the 

recovery of the housing market, preserving access to credit and, according to Mark Zandi, 

preventing a 25 percent steeper decline in housing prices across the country. FHA's fundamental 

role in the housing finance system is to provide access to credit for those not adequately served 

by the private market, and when the private market significantly decreased its lending activity 

during the housing crisis, FHA played its traditional countercyclical role to provide credit to 

borrowers. 

Since its creation in 1934, FHA has played a vital role in our nation's housing market-serving 

as a stabilizing force during national or regional market constrictions and ensuring that 

underserved borrowers are able to access mortgage credit. In the last five years alone, FHA has 

helped nearly 7 million families become homeowners or refinance into a more affordable home 

loan-ultimately aiding in the recovery of the housing market. 

Questions from Rep. Luetkemeyer 

Question 1: 

Generally speaking, banks and other lenders are being required to tighten lending stando.rds 

in an effort to protect borrowers, customers and, more generally, the American public. Is FHA 

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Questions for the Record 

February 13, 2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

tightening lending standards? Ls FHA fully complying with or adopting the rules promulgated 

by the federal government the last several years? If not, why? 

Before and in the aftermath of the Great Recession, FHA continued to require full documentation 

in originating FHA-insured loans and, since 2009, has taken significant steps to tighten its lender 

oversight and credit policies to ensure that newly insured loans are strong and appropriately 

priced. 

Since 2009, FHA has increased down payment requirements for borrowers with credit scores 

below 580, and regulations are being finalized to reduce the amount of available seller 

concessions. Furthermore, FHA has taken steps to require manual underwriting for borrowers 

with credit scores below 620 and debt-to-income ratios over 43 percent. FHA has enhanced 

FHA' s TOTAL Scorecard, and is proposing an increase in the required down payment for 

borrowers seeking loans that are greater than $625,500. 

Under the Dodd-Frank Act, HUD has created an Office of Housing Counseling within the Office 

of Housing, served as a rulemaker for the Qualified Residential Mortgage rule, and issued a 

proposed rule on qualified mortgages. 

Question 2: 

As I understand it, when a buyer purchases a FHA and HUD-owned property, that buyer is 

provided with a select list of settlement service providers and title agents with whom they may 

work. Many argue that this type of action, should it occur in the private market, would be a 

clear violation of RESPA. Do HUD and FHA have plans to open its title and settlement 

service providers list in such a way that the agencies are not picking providers (contrary to 

RESPA) but rather, like all other home sale transactions, the buyer can freely choose his or 

her service providers? 

When a buyer purchases a FHA real estate owned (REO) property, the buyer is free to select any 

closing agent and/or title company in which they chose to do business. HUD does not maintain 

nor provide a list of closing entities. There is currently no difference in how HUD closes its sales 

transaction under Buyer Select than what occurs as normal course of business in the private 

market. 

Questions from Rep. Ross 

Question 1: 

Commissioner Galante - I asked this question of the experts last week and now I'm glad I'm 

able to ask you this as welL I appreciate that FHA and committee members are looking at the 

long-term stability of the MMIF, but my immediate concern is over these non-performing 

loans you mentioned that make up a large part of the notes FHA currently holds. Transferring 

some of that current risk load back to the private market first-where it should be-should be 

one of the first steps the agency takes. In fact, right now, FHA currently insures over 20,000 

homes right now in my district, and my understanding is that FHA had actually sold off a bulk 

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Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

of their insured notes in the Tampa area last year and is planning to do the same in Orlando 

next year. I believe this is part of the Distressed Asset Stabilization Program you mentioned. 

Could you talk a little bit about that process? Did it go well, and what is the interest for more 

of these kinds of sales in the future? Is there the capacity, right now, to purchase those notes 

and relieve the FHA of more of your inventory? 

Begun in 2012, DASP disposes of severely delinquent loans by selling them before they go 

through the foreclosure process and become HUD-held REO properties. This enables FHA to 

avoid carrying and maintenance costs associated with REO disposition while achieving material 

reductions in FHA's delinquent loan portfolio. Purchasers are required to pursue a course ofloss 

mitigation and can initiate foreclosure only if this process fails. Since purchasers acquire these 

notes at prices often less than the balance of the loan, they have financial flexibility to realize a 

return on their purchase investments while providing expanded loss mitigation options to current 

borrowers who have exhausted FHA's loss mitigation tools-creating an additional opportunity 

to avoid foreclosure. The use of a competitive bid mechanism for these sales maximizes returns 

to the FHA fund while providing this enhanced foreclosure prevention to borrowers. 

After delinquent FHA-insured loans are pooled and sold competitively through an auction, the 

original servicer submits insurance claims to FHA for all the eligible loans. FHA processes the 

claims, removes the FHA insurance, and transfers the loan to the new servicer. Once the note is 

purchased, foreclosure is delayed for a minimum of six additional months, giving the new 

servicer an opportunity to find a solution to allow the loan to re-perform, or find an alternative to 

foreclosure that best meets the need of both the borrower and the servicer. 

The first three sales were a success. The program sold more than 45,000 total notes, and there is 

strong investor appetite for continued sales through this program. FHA has the capacity to 

process the sales, and the private market has shown the ability to take on these notes. Because 

the notes are generally sold for less than the outstanding principal balance, the purchaser has the 

ability to grant principal reductions or modify the loan terms while still making a return on the 

initial investment. 

Question 2: 

Additionally, I appreciate the guidance you've given lenders, warning against excessive 

advertising for "cheap, FHA rates," and some other deceptive practices. In your testimony you 

claim that you believe the private market should be the primary provider of mortgage 

insurance, and the FHA be there to fill in, yet your website boasts that you're currently the 

largest mortgage insurance provider in the world. Therefore, I'd like you to explain what steps 

you see the FHA taking that would encourage lenders to steer homebuyers to other non-FHA 

options when it comes to mortgage insurance? What kind of direction are you giving lenders 

to ensure FHA is the mortgage insurer of last resort, not the first? 

As previously noted, FHA played a crucial role in preventing further damage to the housing 

market during this worst economic downturn since the Great Depression. FHA plays a 

countercyclical role, expanding activity to ensure access to credit. Without the FHA, it would 

have been much more difficult for middle-class families to get a home loan, home prices would 

4 
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80868.040

Questious for the Record 

February 13,2013 Hearing on "A Look at thc FY 2012 FHA Actuarial Report" 

HUD Responses 

have fallen even further, and more families would have lost their homes to foreclosure. FHA has 

been critical to promoting stability in the housing market. 

As a consequence of playing this role and constructions of credit in the overall mortgage market, 

FHA market share did increase, reaching its peak in 2009. However, since that time, and while 

FHA took critical steps to strengthen the health of the MMI fund and revise credit and asset 

management policies, that market share has declined. In addition, since 2009, FHA has adjusted 

premiums five times and, in June 2013, reversed a policy whereby borrowers with FHA-insured 

loans did not pay mortgage insurance premiums once the loan reached a 78 percent loan-to-value 

ratio, even though the loan itself remained FHA-insured. These changes have enabled FHA to 

ensure it is properly pricing for risk, protecting the Fund while also preserving access to credit 

for families underserved in the mortgage finance market which FHA was designed to serve. 

Questions from Rep. Roycc 

Qnestion 1: 

Commissioner Galante, in late January, the FHA announced that you intend to raise the 

minimum down payment requirement on loans above $625,500 from 3.5 percent to 5 percent 

and charge the maximum annual premium allowed of 1.55 percent. In this announcement, 

you stated that "this change •.. will help protect FHA and further facilitate its efforts to 

encourage higher levels of private market participation in the housing market." If this is true, 

why shouldn't the FHA implement similar increases for all loans to increase private market 

participation in the housing market? Also, FHA still allows seller concessions of up to 6 

percent of the purchase price towards closing costs-while the industry standard is closer to 3 

percent. So even in the case of a 3.5 percent down payment or 5 percent down, the addition of 

a seller concession of up to 6 percent could lead to the FHA insuring an underwater loan from 

the get-go. This would happen in cases when a seller concession is merely tacked onto the 

final sale price of the house-the FHA recognized this as a possible outcome in your own 

proposal (in January 2010) to reduce the allowable seller concession from 6 percent to 3 

percent stating that the current policy "creates incentives to inflate appraised value." This was 

proposed in early 2010 but over three years later has still not been implemented. 

Don't you agree we need to move quicker and more boldly in order to return the FHA to a 

soundf'lScalfooting? Please answer this question both as it relates to minimum down 

payments and seller concessions. 

FHA has consistently proven that low down payment lending can be done successfully because 

loan performance is a function of a number of factors, not just the Joan-to-vaJue ratio at 

origination. Through fully documented, holistic underwriting, FHA has served millions of 

borrowers-including, according to HMDA, approximately 49 percent of African American and 

48 percent of Hispanic borrowers, through FHA. Further, 70 percent of FHA loans serve firsttime homebuyers who may find it difficult to accumulate a down payment but who have the 

resources to sustain a monthly mortgage payment. 

5 
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Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

BUD Responses 

FHA agrees that reducing allowable seller contributions to 3 percent would reduce risk to the 

Fund and borrowers. Since the initial 201 0 proposal, due to significant comments, FHA reproposed its rule and is in the process of finalizing a regulation to accomplish this goal. 

FHA is committed to working expeditiously on all regulatory actions and has demonstrated its 

ability to work quickly and boldly on many policy issues. As a government agency, FHA also 

must allow for public participation and an open exchange of ideas. It must promote predictability 

and reduce uncertainty, and it must identify and use the best, most innovative, and least 

burdensome tools for achieving regulatory ends. It also must take into account benefits and costs, 

both quantitative and qualitative. These general regulatory principles help ensure FHA 

implements sound regulations and account for the views of affected private sector stakeholders, 

State, local, and tribal officials, and the public as a whole. 

We look forward to working with the committee to accomplish the shared goal of working more 

swiftly and effectively to respond to emerging risks and protect the Fund. Despite many policy 

and organizational changes undertaken by FHA over the years, there are a number of constraints 

which FHA strongly feels limit our ability to manage risk appropriately and are having a 

negative impact on FHA's fiscal health. These constraints include an increasingly complex 

mortgage market, aging FHA systems and infrastructure, a need for additional skills and 

expertise, and difficulty responding quickly to major risk issues as a result of contractual and 

statutory limitations. For FHA to manage risk and maintain operations as a 21 st century mortgage 

insurer, these constraints must be dealt with appropriately. For that reason, we would like to 

continue to explore with the Committee tools which can be leveraged to allow FHA to minimize 

risk to the Fund and taxpayers while continuing to serve consumers. 

Question 2: 

Has the FHA ever used appraisals panels in the past, where members of a panel were selected 

based on experience and geographical competence similar to the practice of the VA? Please 

give some historical background on their use. If so, why was this system abandoned? Do you 

think a system based on rotation (VA) rather than lender selection (FHA) would improve 

appraiser independence and quality? What quality control is conducted on appraisal work 

now? Does FHA have a standard similar to the VA where a minimum of 10% of the work is 

field reviewed? 

In the past, FHA managed a roster of appraisers. Appraisers applied to FHA to be added to the 

panel, provided a list of areas in which they were competent to practice, and were then assigned 

on a rotational basis. At that time, each state had appraisal review managers on staff who played 

a very active part in the process. However, with the transition to the Homeownership Center 

(HOC) structure and due to problems with this practice related to timeliness to appraisals-when 

the market was very active it could take a few weeks to get an appraiser to respond and even a 

month or six weeks to get the appraisal back to the lender-and at the urging of the lending 

industry, it was ended in the late 1980s. This is when "lender select" was created. 

While it is possible to create a system to manage FHA appraisers in a manner similar to VA, 

there are some difficulties. At present, FHA has approximately 51,000 appraisers on the Roster 

and in the past few years has received at least one appraisal report for approximately 38,000 of 

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80868.042

Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

them. Assigning all of these appraisers in rotation would in no way guarantee higher quality or 

better independence. The best way to improve that is to continue with our program to receive the 

appraisal reports electronically and build out the quality control processes we have planned. 

FHA has been processing 900,000 to 1,200,000 loans in the past few years (significantly more 

than VA), so while we appreciate the advantages of the VA panel we believe we can provide 

effective independence and quality improvement by following the program we have begun to 

build. 

Question 3: 

It is my understanding that the FHA maintains capital reserves both as secondary capital and 

in the financing account-which together make up the total reserves. How do these two 

accounts interact? What has been the recent history of transfers between the two accounts? 

Unique to FHA, unlike other federal direct loan and loan guarantee programs, is the maintenance 

of two accounts-a Financing Account and a Capital Reserve Account. Under the Federal Credit 

Reform Act (FCRA), as with other direct loan or loan guarantee programs, FHA must maintain 

sufficient reserves in the Financing Account to pay expected losses. In addition, the Capital 

Reserve Account holds amounts in excess of those needed to pay all anticipated claims. When 

the Financing Account balance falls below the mandated level, funds can be transferred from the 

capital reserve account in order to ensure the Financing Account contains enough to satisfy 

expected losses over the life of the loans. 

Like other federal credit agencies, FHA estimates and re-estimates the net lifetime costs-known 

as credit subsidy costs-{)fthe mortgages it insures. When the present value of estimated cash 

inflows (such as borrower insurance premiums) exceed the present value of expected cash 

outflows (such as insurance claims), negative subsidies are generated. As each loan is endorsed, 

negative subsidy is generated. The negative subsidy is disbursed from the MMI financing 

account and collected in the MMI Capital Reserve. Additionally, downward re-estimates are 

disbursed from the Financing Account and collected in MMI Capital Reserve account. A 

downward re-estimate indicates that not enough subsidy has been paid from the financing 

account to the Capital Reserve account. 

When it is estimated the Financing Account has disbursed too much subsidy, an upward reestimate is needed. Upward re-estimates are transferred from the Capital Reserve account to the 

Financing account. 

The following chart shows the recent history of transfers between the two accounts. 

7 

80868.043

Questions for the Record 

February 13,2013 Hearing on "A Look at the FY 2012 FHA Actuarial Report" 

HUD Responses 

Fiscal Year 

Activity (in millions) 2013 2012 2011 2010 2009 

Negative Subsidy (Financing to 

Capital Reserve) (16,753) (5,582) (6,739) (2,651) (566) 

Downward Re-estimates 

(Financing to Capital Reserve) (5,241 ) (5,655) (847) (26) (469) 

Upward Re-estimates (Capital 

Reserve to Program to Financing) 27,672 13,868 7,601 9,868 10,384 

o FY 13 Upward and Downward re-estimates will be recorded in September 2013