[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE FHA REFORM ACT OF 2010
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 11, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-110
U.S. GOVERNMENT PRINTING OFFICE
56-774 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
EMANUEL CLEAVER, Missouri THADDEUS G. McCOTTER, Michigan
AL GREEN, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri GARY G. MILLER, California
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
JOE DONNELLY, Indiana WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
PAUL E. KANJORSKI, Pennsylvania ADAM PUTNAM, Florida
LUIS V. GUTIERREZ, Illinois KENNY MARCHANT, Texas
STEVE DRIEHAUS, Ohio LYNN JENKINS, Kansas
MARY JO KILROY, Ohio CHRISTOPHER LEE, New York
JIM HIMES, Connecticut
DAN MAFFEI, New York
C O N T E N T S
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Page
Hearing held on:
March 11, 2010............................................... 1
Appendix:
March 11, 2010............................................... 39
WITNESSES
Thursday, March 11, 2010
Alston, Mark, First Vice President, Consolidated Board of
Realtists, on behalf of the National Association of Real Estate
Brokers........................................................ 32
Anderson, Mike, CRMS, President, Essential Mortgage, and Vice
Chairman of Government Affairs, National Association of
Mortgage Brokers............................................... 22
Aponte, Graciela, Legislative Analyst, Wealth-Building Policy
Project, National Council of La Raza........................... 23
Caplin, Andrew, Professor of Economics, Co-Director, the Center
for Experimental Social Science, New York University........... 25
Courson, John A., President and Chief Executive Officer, Mortgage
Bankers Association............................................ 26
McMillan, Charles, CIPS, GRI, Immediate Past President, National
Association of Realtors........................................ 28
Stevens, Hon. David H., Assistant Secretary for Housing/FHA
Commissioner, U.S. Department of Housing and Urban Development. 4
Taylor, John, President and Chief Executive Officer, National
Community Reinvestment Coalition............................... 30
APPENDIX
Prepared statements:
Alston, Mark................................................. 40
Anderson, Mike............................................... 50
Aponte, Graciela............................................. 62
Caplin, Andrew............................................... 70
Courson, John A.............................................. 78
McMillan, Charles............................................ 86
Stevens, Hon. David.......................................... 95
Taylor, John................................................. 113
THE FHA REFORM ACT OF 2010
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Thursday, March 11, 2010
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:09 p.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Representatives Waters, Velazquez, Maffei;
Capito, Neugebauer, and Jenkins.
Also present: Representative Garrett.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order.
Good afternoon, ladies and gentlemen. I would like to thank
the ranking member and other members of the Subcommittee on
Housing and Community Opportunity for joining me today for this
hearing on the FHA Reform Act of 2010.
This is our third hearing on the Federal Housing
Administration since October of last year. During those
hearings, we learned about the state of FHA's capital reserve
levels, which dropped below the 2 percent threshold mandated by
Congress to .53 percent, along with the efforts FHA has taken
to tighten controls over risk.
Today, we are here to discuss the additional steps FHA
would like Congress to take to ensure FHA's long-term financial
solvency during what some observers are referring to as the
housing equivalent of a 500-year flood.
First, FHA would like to increase the cap on the annual
mortgage insurance premiums it can charge in order to boost
capital reserves. The bill would allow FHA to increase the cap
from .55 percent to 1.55 percent for new borrowers, with
downpayments below 5 percent. However, FHA has said that they
will only raise annual premiums to .90 percent, and would also
use their existing authority to lower the up-front premium back
down.
As I understand it, if FHA limits the premium increase to
.90 percent, new borrowers would only see their monthly
payments rise by $42 a month. I believe that limiting the
premium increase balances the need to keep FHA financially
solvent while minimizing the impact on new borrowers. However,
I would like to hear more information from the Commissioner
about the circumstances under which FHA would need to raise
annual premiums to 1.55 percent of the loan balance.
Second, FHA is also seeking the authority to crack down on
lenders that use fraud or misrepresentation or don't originate
or underwrite loans in accordance with FHA requirements. In
addition, FHA would like the ability to withdraw originating
and underwriting approval for a lender nationwide based on the
performance of one or more of its regional branches.
These legislative provisions will help FHA continue its
increased policing of problem lenders. FHA has already stepped-
up enforcement, withdrawing 10 times as many lenders from FHA
approval in 2009 than the last Administration did in 2008.
I have been long committed to ensuring that FHA remains an
available, affordable, and safe option for all families. I
wrote legislation to modernize FHA, which was included in the
Housing and Economic Recovery Act of 2008. I also worked with
Representative Speier of California and Representative Driehaus
of Ohio on legislation to keep subprime lenders out of FHA,
which was incorporated into the Helping Families Save Their
Homes Act of 2009.
I look forward to continuing to work on sensible
legislation that will balance the requirement to restore FHA's
financial solvency with the requirement that we need to keep
FHA available to a wide variety of Americans, including low-
income, minority, and first-time home buyers.
However, as we move forward, we need to be cautious that we
do not overcorrect and end up curtailing the role of FHA to the
point where homeownership is only available to the wealthiest
households.
I am eager to hear the testimony of our witnesses today.
And I would now like to recognize our subcommittee ranking
member, Ms. Capito, to make an opening statement.
Mrs. Capito. Thank you. I would like to thank Chairwoman
Waters for holding this hearing today on an issue that I
believe deserves immediate attention and action by this
committee, and that is reform of the Federal Housing
Administration.
As my colleagues know, last fall, Housing Commissioner
Stevens testified before this subcommittee on the challenges
faced by FHA's Capital Reserve Account, which fell below the
mandated 2 percent of FHA insurance in force. Not only had the
account fallen below 2 percent, it fell to .53 percent of the
total insurance in force.
Clearly, this is a wakeup call for Congress and the
Administration. And if we don't take the steps necessary to
shore-up the FHA Insurance Fund, we will be facing another
taxpayer bailout.
I am encouraged by the steps that Commissioner Stevens has
already taken to resolve the problems facing the FHA. He has
made several administrative changes and is moving forward with
additional regulations to address the difficulties at FHA, such
as increasing the up-front premiums, raising the downpayment
for low FICO score borrowers, and reducing seller concessions.
In addition to the administrative and regulatory changes,
the Administration is seeking legislative changes to increase
the annual premium and increase enforcement on FHA lenders.
I support the Administration's efforts, but we can do more.
Last night, I introduced H.R. 4811, the FHA Safety and
Soundness and Taxpayer Protection Act. This legislation builds
on the Administration's legislation by making the chief risk
officer a permanent member of the FHA Commissioner's team--and
I commend him for appointing his current chief risk officer--
and giving the Commissioner the ability to contract out to
properly analyze risk, and enhancing the Commissioner's ability
to temporarily suspend lenders who have high rates of early
defaults.
Additionally, my legislation includes a pilot program for
risk-based pricing, something I have talked about in the
subcommittee before. I realize the Commissioner and I may not
see eye-to-eye on this issue, but I hope that we can work
together to find some common ground and the flexibility needed
to implement risk-based pricing.
As the housing market recovers, and the FHA program returns
to a more normal percentage of the total market, risk-based
pricing would be an important tool, I believe, for the FHA to
have in their arsenal.
Finally, I think it is important to note recent CBO re-
estimates of the Administration's Fiscal Year 2011 budget. The
Administration's submitted budget estimated that FHA and Ginnie
Mae receipts would be $6.9 billion. These receipts were used to
offset a $48.5 billion HUD budget.
CBO has just this past week re-estimated the FHA and Ginnie
receipts to be only $2.5 billion, a $4.4 billion shortfall. CBO
has said that the discrepancy between OMB and CBO can be
attributed to the fact that CBO uses higher prepayment and
default rates and lower recovery rates.
But this raises significant concerns, again, on the FHA's
ability to analyze its book of business. I hope the
Commissioner will take some time and address this issue for us
today.
I look forward to working with the chairwoman and Chairman
Frank and the Administration to enact these common-sense
reforms included in my legislation, H.R. 4811. This legislation
incorporates the majority of the provisions announced by the
Department, along with additional provisions designed to give
HUD the tools it needs to adequately administer the program and
protect the taxpayer.
Thank you for being here today, and I look forward to
hearing from you and the other witnesses on the panel. Thank
you.
Chairwoman Waters. Thank you very much.
Representative Maffei, for 2 minutes.
Mr. Maffei. Thank you, Madam Chairwoman. I am very pleased
that you called this hearing. I think it is very important.
I do think it is going to be very valuable to have our
questions answered. I have several constituents, actually, who
have a lot of concerns about many of these proposed policy
changes. And I would say that it comes down to them being
worried about the unintended consequences of some of them. One
of the largest, perhaps, is that small mortgage lenders may be
put at a disadvantage compared to large mortgage lenders, and
in fact may not even be able to stay in business compared to
some large ones because of some of the proposals.
And I am writing the Secretary on this, and I actually
would ask unanimous consent that I could just put my letter to
the Secretary in the record.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Maffei. Another unintended consequence is potentially a
slowdown in the economy. I mean, obviously we want to make sure
that we avoid a next housing crisis. But we don't want to get
in the way of perhaps an economic recovery that is on the way.
And I also remain concerned about whether these changes will
necessarily fully address what actually happened, and I share
that with the Ranking Member.
My district is actually pretty unique, I suppose, in that
we actually had very little subprime lending, much less
predatory lending than virtually anywhere else; as a result,
lower foreclosures. This isn't because we are a wealthy area;
in fact, quite the opposite. We never had any real estate boom
in upstate New York, and so we never had the bust.
And the problem is, as the constituent groups come in,
whether they are Realtors, small business, small mortgage
lenders, etc., and they look at the changes and they go, well,
we didn't have any of these things, and these changes would, in
effect, slow down our real estate market, which is not in need
of slowing down, frankly. It is in need of speeding up.
And so I am a little concerned about sort of the one-size-
fits-all approach. I am not sure if it is avoidable. And again,
I believe these are unintended consequences. I think you have
done a lot of work here. But I do have some questions as
regards how these will affect my constituents.
Thank you very much. Thank you, Madam Chairwoman.
Chairwoman Waters. I am pleased to welcome our first
distinguished guest. Our first witness will be the Honorable
David Stevens, Assistant Secretary for Housing and Federal
Housing Commissioner, U.S. Department of Housing and Urban
Development.
I thank you for appearing before the subcommittee today. An
without objection, your written statement will be made a part
of the record. You will now be recognized for a 5-minute
summary of your testimony. Thank you.
STATEMENT OF THE HONORABLE DAVID H. STEVENS, ASSISTANT
SECRETARY FOR HOUSING/FHA COMMISSIONER, U.S. DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Mr. Stevens. Chairwoman Waters, Ranking Member Capito, and
members of the subcommittee, thank you for the opportunity to
testify here today regarding the Federal Housing
Administration's recent reforms, legislative proposals, and
contributions to the HUD Fiscal Year 2011 budget request.
I appear before you at a moment when it is clear that our
housing market has made significant progress towards stability.
As of September, stabilizing home prices and lower financing
costs had increased home equity by over $900 billion, $12,000
on average for the Nation's 78 million homeowners.
Confidence deriving from increased home equity has helped
the economy grow at the fastest rate in 6 years and create
jobs. Historically low mortgage rates have spurred a
refinancing boom over the past year that has helped nearly 4
million borrowers save an average of $1,500 per year, pumping
$7 billion annually into local economies and businesses.
FHA has been an essential part of this improved outlook, in
the past year helping more than 800,000 homeowners refinance
into stable, affordable, fixed-rate mortgages, protecting an
additional half-million families from foreclosure, guaranteeing
approximately 30 percent of all home purchased loan volume in
America and fully half of all loans for first-time home buyers.
Indeed, as access to private capital has contracted in
these economic times, borrowers and lenders have flocked to
FHA. The increased presence of FHA and others in the housing
market, including Fannie Mae and Freddie Mac, has helped
support liquidity in the purchase market, helping us ride
through these difficult times. And with FHA financing 51
percent of African-American homes purchased in 2008, and 45
percent of Latino homes, FHA is far and away the leader in
helping minorities purchase homes.
With FHA's temporarily increased role, however, comes
increased risk and responsibility. Last October, I detailed to
the subcommittee several of the reforms we had made to date to
mitigate risk and replenish FHA's capital reserves, which have
fallen below the congressionally mandated 2 percent.
On January 20th, we proposed additional steps, some of
which will require legislative authority. Thank you for the
opportunity to explain these proposals in more detail.
These policy changes balance three guiding principles:
first, improving FHA's loan performance and capital reserves;
second, continuing to support the broader housing market and
recovery; and third, preserving FHA's traditional role in
providing homeownership opportunities to responsible
underserved borrowers. And I want to highlight the word
``responsible.''
First, we are asking Congress for authority to restructure
FHA's mortgage insurance premiums, and we would like to reduce
the up-front premium to 100 basis points and increase the
annual premium to 85 and 90 basis points depending on the loan-
to-value.
This will create more sustainability to increase FHA's
reserves and facilitate the return of private capital to the
mortgage market. The bill is in circulation. We have provided
the subcommittee with a copy of that proposal.
If these changes are adopted during the current fiscal
year, they increase the value of the MMI fund by approximately
$300 million per month, which would replenish FHA's capital
reserves even faster than if this authority was provided
through the annual appropriations process.
We look forward to working with the authorizing committee
members. We hope the appropriators and authorizers will move to
pass it on as expeditiously as possible. And we certainly look
forward to considering H.R. 4811 and how that can blend into
the goals of FHA.
Secondly, FHA is proposing a two-step FICO floor for FHA
borrowers. Purchase borrowers with FICO scores of 580 and above
will be allowed to make the minimum 3\1/2\ percent downpayment.
Those with scores between 500 and 579 would be required to make
a 10 percent downpayment.
Some have suggested that FHA raise the minimum requirement
to 5 percent across-the-board as a way to improve loan
performance. As you can see, we have gone further, to 10
percent for FICO scores below 580 to ensure that we are only
insuring responsible loans.
We determined after extensive evaluation that an across-
the-board 5 percent proposal would be inadequate to control
risk for some of the borrowers, and excessive to control risk
for other responsible borrowers, which would adversely impact
the housing market recovery.
Increasing the minimum downpayment to 5 percent across-the-
board translates to 300,000 fewer responsible first-time home
buyers having access to homeownership, and would have
significant negative impacts on the broader housing market,
forestalling the recovery of the housing market, potentially
leading to a double dip in housing prices by significantly
curtailing demand.
The policy changes that FHA has instead proposed in the
Fiscal Year 2011 budget contribute an additional $4.1 billion
in receipts to FHA, and have a much more moderate impact on the
broader housing market.
The third policy change we are proposing is to reduce the
maximum seller concessions from 6 percent to 3 percent, which
is in line with industry norms. The current level exposes the
FHA to excessive risk by creating incentives to inflate
appraised value. Further, our experience with FHA with these
loans is that loans with higher levels of seller concession are
more likely to go into default.
Our fourth proposal is to further increase lender
enforcement. In its Fiscal Year 2009 actuarial review, the
independent actuarial review, the independent actuary projected
that more than 72 percent of FHA's losses over the next 5 years
will come from loans already on our existing books. That is why
we have renewed our focus on enforcement and lender
accountability.
Since Fiscal Year 2009, we have taken action on more than 6
times the number of lenders that FHA had done in the past
decade. We are seeking congressional authority to extend FHA's
ability to hold lenders to the same standard and permit FHA to
recoup losses through required indemnification for loans that
were improperly originated or in which fraud or misrep was
involved.
FHA currently has the authority for loans originated
through the lender-insured process, which accounts for less
than a third of all FHA-approved lenders. We are asking that
Congress grant explicit authority to require indemnification
for loans that were improperly originated for all FHA lenders.
Finally, as you know, last Friday the CBO released its
estimate of the Fiscal Year 2011 budget, including the review
of FHA changes. Although the CBO re-estimate includes a
significantly more conservative assessment of how new loans
were made through FHA's MMI fund and how it will perform in
coming years, both CBO and the Administration forecast, with
our proposed FHA changes, credit activities, that it will
result in let receipts to the government that are positive to
the government, meaning a negative subsidy. We differ, however,
on the amount.
While the President's budget forecasts $5.8 billion in net
receipts, resulting primarily from insurance premium and other
fees, CBO re-estimates those net savings at $1.9 billion. They
agreed with Ginnie Mae, and the GISRI fund will result in
roughly another $1 billion from receipts.
While recognizing that such a difference with CBO
complicates budget resolution development, it is important to
note that the $5.8 billion in receipts forecast in the
President's budget will determine any receipts transferred back
to FHA's capital reserves. This will help the fund get back on
track to be capitalized with the statutorily mandated 2 percent
insurance in force. I would also note that we remain confident
in our forecast.
I have submitted more detailed testimony for the record.
But Madam Chairwoman, as you can see, we have proposed a
comprehensive set of reforms to improve loan performance, hold
lenders accountable, and increase revenues to the FHA fund,
while ensuring that FHA continues to support the overall
recovery of the housing market and continues to serve its
mission of providing homeownership opportunities for
responsible borrowers.
I would like to take this opportunity also to introduce two
members of our new leadership team. To my left, Bob Ryan, FHA's
first Chief Risk Officer; and Vicki Bott, our Deputy Assistant
Secretary for Single-Family Housing. Both Vicki and Bob come
with over 2 decades of experience in the housing market, and
are part of the new force behind FHA.
We look forward to working with Congress closely on these
issues, and we hope to gain your support for our legislative
request to further reduce risk to the American taxpayer. And
with that, I am happy to answer any questions you may have.
Thank you.
[The prepared statement of Commissioner Stevens can be
found on page 95 of the appendix.]
Chairwoman Waters. Thank you very much. I recognize myself
for 5 minutes.
Let me again welcome you to this hearing today. Allow me
also to recognize that you have had to take some tough steps in
order to ensure the solvency of FHA. I am appreciative for the
work that you have done to do that. It was not easy for me to
look at what had to be done and simply agree to it. But I
recognize what has brought us to this point in this center
relative to the economic meltdown and the role that subprime
played in that, and so I know what must be done.
Let me also commend you on the steps that you have taken to
deal with the problem lenders, the fraud and the abuse that I
think helped to cause problems relative to the subprime
meltdown. So the work that you are doing to police these
lenders is extremely important.
Again, I like what I see. I am anxious to look at your
bill, your proposals that you have. And I understand that our
ranking member has something that she is working on, so we will
certainly entertain that.
However, having said that, I am hopeful that we can correct
the problems that we are confronted with and make sure that you
are meeting the mandates that you are responsible to meet in
terms of your reserve.
I want to know what factors would lead FHA to lower the
annual premium back down to .55 percent? Would FHA lower their
premium back down when, for example, reserve levels are
recapitalized above the 2 percent level, interest rates rise,
you find that minority and low-income home buyers are
disproportionately excluded from homeownership? What would
cause you to take a different course to make sure that we were
providing opportunity for all?
Mr. Stevens. Thank you for your comments and your support.
Let me try to talk about the fee in this context, and I would
love to have Bob jump in after I make some initial comments
about the fees.
I bought my first loan with an FHA loan back when rates
were 21 percent, and the mortgage insurance premium back then
was 3.8 percent. The fees with FHA loans have changed over
time. As you recall, that period of time was also a housing
crisis, which we now refer to as the ``oil patch'' crisis. And
it resulted in high foreclosure rates and, quite frankly, is
the most similar book that we see to today.
Now, we would never go back to that level; at least, I
don't foresee that. But clearly, what drives the need to adjust
premiums, as with any kind of insurance business, is looking at
the forecasting of risk on a go-forward basis.
And today, what has impacted FHA's capital reserves so
dramatically are a couple of things that are now resulting in
the need to raise the fees, the most important of which is home
price forecasts, home price appreciation forecasts. That is the
single greatest determinant on what ultimately caused this
default in the FHA portfolio.
We have seen several series of declining forecasts on home
prices. Now, at present, the current home price numbers are
right in line with the forecast, and so there is some reason
for potential optimism. But that doesn't eliminate the fact
that the risks that the portfolio has taken on in these past
book years are going to cause extended losses over the years to
come as these loans go through the default cycle.
And it is for that reason that we feel very strongly that
the premiums must be increased, and that they need to be
restructured in a way that makes it more palatable for
consumers to pay on an as-you-go basis by increasing the annual
premium; also, to allow an opportunity for private capital to
come back in.
That being said, I would still be very clear. Just like in
past years when the premiums have been higher and were lowered,
you could see a point in time in future years where premiums
would adjust depending on expected performance of the
portfolio.
And before I let Bob just jump in, as it relates to the
underserved communities that FHA has traditionally been here to
serve, we pay vigilant focus on making sure the policies we
implement are effective in getting the capital reserves to
where they need to go, that put us in a position of ensuring
responsible homeownership over the long term, but have policies
that also take into significant consideration the impact to the
underserved. And I can assure you that is a top objective of
mine in this Administration.
Chairwoman Waters. Thank you. My time has expired. I am
going to call on the ranking member, Ms. Capito, for 5 minutes.
Mrs. Capito. Thank you. The FHA currently is insuring loans
up to $729,750 in maximum high-cost areas, and the limits for
conforming loans are similar. I think we need to look, and you
have mentioned it in your statements--we need to look at how we
are going to bring the private market back in, and FHA is going
to step back into maybe what would be a more traditional role
for FHA and a more manageable role.
Are the higher loan limits an impediment at all to that
effort of bringing the private markets back in? I know you
mentioned when we had a meeting last week that this isn't
really a very large part of the FHA market. But if you could
speak to that issue.
Mr. Stevens. Sure. I think that is a great question, and it
is something that we look at closely. It is concerning, and
particularly the point that you made about returning to our
normalized level. There are two issues associated with this.
First of all, there is a complete absence, which I think we
all recognize, of private capital in the mortgage finance
system for a broad range of home buyers today. And the
temporary limits, which today extend to 125 percent of median
income up to the maximum loan amount of over $700,000, that
loan amount is actually only available in select markets around
the country because of the median sales price formula, home
price formula.
That being said, once that expires, the temporary limits,
the permanent authority is 115 percent of median income up to
still a fairly high number. And that has been allocated FHA.
I think the most important thing we need to do to make sure
that private capital reemerges is to create an environment
where confidence and stability exists in the housing sector.
When home prices stabilize, unemployment amends, private
capital will come back. Will FHA play a role in these high loan
balance markets over the long run? Our expectation is that will
not be the case. Even today, less than 3 percent of our
portfolio is over $417,000. So we don't even see a large influx
of these high-dollar loans under the current scenario.
Mrs. Capito. Okay. Thank you. Another question I have is on
this downpayment issue. It is 3.5 percent now; for those with
FICO scores of 580 and below, you have moved it to 10 percent.
And again, a conversation that we had in the past, I would like
for you to enumerate for me again why you don't believe that
moving the downpayment up to a 5 percent across-the-board--and
you address this in your opening statement--
Mr. Stevens. Yes.
Mrs. Capito. --that is not the great predictor of whether
there is going to be a default or whether there is not enough
skin in the game.
That is an issue, that is a bone of contention, with a lot
of members on my side of the aisle. And I would just like to
have you on the record on that one more time, please.
Mr. Stevens. Thank you. And I really do appreciate you
asking the question because it is clearly one of the strong
items that has been debated around the FHA program since I was
sworn in in July.
Fundamentally--and I want to just show you some data in a
moment--but fundamentally, FHA is not in the layering of risk
business like the private sector was, and even to some degree
the GSEs participated in, where FHA loans are all owner-
occupied, all primary residence, all fully documented, and all
30-year fixed-rate fully amortizing loans.
I don't want that to be understated because the only real
risk variable, aside from lenders adversely selecting FHA and
making sure we have FICO guidelines in place to protect the
portfolio--the only real risk variable at that point ends up
being the equity portion, the downpayment portion, which we
have decades of history on that portfolio and the FHA program.
Can I see which slide we have up there, please? So I want
to show two slides to highlight that. The first one I think you
and I went over in your office last week. This slide, if you
look at the cells on the far left, that shows FICO scores below
580.
And you can see on a relative basis the performance of--and
I want you to look at the upper yellow bar on that chart. It
shows that the relative performance of loans below 95 percent
loan-to-value are worse when you combine it with a low FICO
score. Or, conversely, in the middle bar, the bottom
highlighted area will show you that the performance is better
at higher LTVs if you offset that with a FICO above 580.
And so the point to this slide is merely to say that when
we did our analysis, we looked at making sure that responsible
homeownership would continue, and that we could measure the
performance variables associated with a FICO LTV mixture and
DTI, which is important.
If I could just show one other slide. And which one is--
yes, thank you. So what this chart highlights to you is the
impact of our policy changes. And as you can see, the top line
on that chart highlights that the fallout from our policy
changes, that is the--those are the people who would no longer
be eligible for a home loan with FHA based on our policy
changes.
And you can see that their default rate is extremely high.
It is over 30 percent. That is the portfolio that will no
longer be able to get an FHA loan with our changes. The lower
section--
Mrs. Capito. What is that? I can't see that, and I can't--
Mr. Stevens. It is 31 percent, about 32 percent.
Mrs. Capito. Okay. Thank you.
Mr. Stevens. Excuse me. And that is--
Mrs. Capito. I was trying to show off with my eyesight, but
it was not working.
Mr. Stevens. Yes. And that is the critical component when
we made our decisions going through the analysis, to make
certain that we didn't exclude responsible homeownership in the
changes we made.
But we went further. And unlike the 5 percent downpayment
suggestion that some have made, we believe that downpayment
makes a difference when you have poor credit or credit
histories that don't support a higher loan-to-value.
So we went further than 5 percent. We went to 10 percent
down if your credit score is 580. And we have clear performance
variables to correlate that with the performance histories on
our portfolio through a variety of scenarios.
Mrs. Capito. Well, thank you. And the charts are very
helpful, especially if you can see them. So I appreciate that.
Mr. Stevens. I apologize for that.
Mrs. Capito. No. That is my fault. Thank you.
Chairwoman Waters. Thank you very much.
Ms. Velazquez?
Ms. Velazquez. Thank you, Madam Chairwoman.
Mr. Stevens, the three major credit reporting agencies
found that about 21 percent of the 11.9 million consumers who
obtained subprime loans during the housing boom should have
received prime loans that would have saved them thousands of
dollars. Yet FHA is relying on the same system to determine new
downpayment requirements.
So my question to you is: Why are you relying on such a
terrible way to determine creditworthiness?
Mr. Stevens. I think that is a wonderful question. And it
really helps, I think, juxtapose what we saw during the peak of
the housing boom, with the enormous growth of subprime, and
what caused defaults in that portfolio versus the FHA
portfolio.
And without getting too much into the weeds on all the
complexities between the two, it is--without question, subprime
loans perform 300 percent, 3 times worse, than FHA portfolios
do. And actually, delinquency rates are rising faster even in
Fannie and Freddie portfolios than FHA portfolios are on a
monthly basis.
FICO is not the sole determinant. And I do respect your
question. FICO is one of a variety of determinants,
documentation and other. And FHA does have an alternative
credit program that we have been planning to roll out on a
pilot basis to test that going forward.
But that being said--
Ms. Velazquez. But 21 percent is a huge number.
Mr. Stevens. But the real question is: Of the 21 percent
who would have qualified for FHA loans, would they have even
performed in an FHA mortgage? And to be clear, if you look at
our 2006, 2007, and 2008 portfolios, sub-580 FICO scores have
delinquency rates and expected long-term claim rates that are
north of 25 percent. And in fact, in that lower FICO
distribution, it even goes higher.
So the fact that those subprime borrowers could have gotten
FHA loans, the one question I would ask--and we will go back
and look at it even more closely, but I could show you in the
FICO distribution--would they even have performed in an FHA
loan? And we are seeing that same lower credit score has
extraordinarily high defaults.
And my concern is if we are foreclosing on one in four
borrowers or one in three borrowers as a result of policies
that allow people to get into homes, we are destroying their
credit ratings and describing their wealth-building
capabilities by the mere act of getting them into the
homeownership process too soon or when they are not ready.
So I think there is that sensitive balance that we have to
be very careful of.
Ms. Velazquez. Are you taking any steps to improve the
accuracy of credit scores?
Mr. Stevens. We are. So we have met with all the credit
reporting agencies, and they themselves are also going through
a change in how they model credit. And it actually might be
worthwhile at some point having them come in and talk about it
because today, unlike in past years where the capacity was not
as strongly measured in models, today they are looking at us
each of credit, not just the frequency of repayment.
And we do believe that credit scores today have become more
benchmarked against a real performance than perhaps some of the
inflated credit scores that we saw during that past period. I
don't know if that answers your question.
Ms. Velazquez. Okay. It does.
Mr. Stevens. Thank you.
Ms. Velazquez. Mr. Stevens, many industry advocates oppose
applying FHA's indemnity authority to the direct endorsement
lenders for fear that it will make them overly restrictive in
their lending. Given that lenders in the lender insurance
program are currently subject to this authority, and are
consistently the most prolific of FHA's lenders, how realistic
is this concern?
Mr. Stevens. And this is another important question that we
get out in the open as we talk about it.
So first of all, today we can pursue indemnification. But
LI lenders, which is what we are allowed to pursue today, only
account for about a third of all originations. There are many
other lenders who can get approved by FHA, and the
indemnification ends up being restricted when they ultimately
fund the loan and being able to go direct to them.
So we believe, like with all participants in the housing
finance sector, that we should have the right to be able to
require indemnification from any lender who is approved as an
FHA lender, whether they are a direct endorsement lender or an
LI lender, and hold them responsible for the loans they
originate.
And I think it is critical for all of us, particularly when
we think about many of the underserved communities that FHA has
served, because we saw a propensity for lenders to prey on,
sometimes, those with less comprehensive financial skills. And
it is very important when we think about sustainability and
responsibility, and that indemnification will go a long way to
ensuring those participants understand the rules.
Ms. Velazquez. And to guard against increasing losses, FHA
has proposed to increase the downpayment for borrowers with
FICO scores to more than twice the amount that other borrowers
pay. This is going to have a significant impact on Hispanic and
African-American borrowers.
Are there any other ways for FHA to strengthen the quality
of loans to these individuals without abrogating its mission to
help borrowers who are underserved by the private market?
Mr. Stevens. First, let me try to articulate the answer.
And I can--the one thing that is absolutely certain is your
question was fundamental to the reason why we ended up with the
policy decisions we made. And so let me articulate these. And
this is--again, I will try not to get too technical; what I
will offer up is any follow-up information that you or your
staff would like to have.
Today, the largest financial institutions in the mortgage
finance sector have FICO scores that are well above 580. Most
are at 620 to 640 or higher. And that includes the top five
banks that originate mortgages in America, which today under a
consolidating environment have an enormous impact on the
overall credit availability to homeowners.
The reason why we picked 580 was based on actual loan
performance. And, as I said in my opening comments, one of the
lenses that we ran all our policies through was our mission,
our commitment to the mission of FHA and making sure that all
responsible homeowners, underserved across the country, had
access to available credit.
580 will actually open up the credit box from what has
happened over 2009 via the consolidation amongst these large
institutions. And it is our hope that the large institutions
will actually move back to our policy, which we believe will
expand the market.
Now, I will tell you this, that the 580 does limit--
Ms. Velazquez. Your time has expired. That is what she is
trying to tell you.
Chairwoman Waters. A long time ago.
Mr. Stevens. Okay. I understand the hammer.
Chairwoman Waters. A long time ago. And we can follow up in
writing, and you can respond to the members' questions.
I am now going to call on Ms. Jenkins for 5 minutes.
Ms. Jenkins. Thank you, Madam Chairwoman. I would like to
yield my time to my colleague from West Virginia, Congresswoman
Capito.
Chairwoman Waters. Without objection, it is so ordered.
Mrs. Capito. Yes. Thank you.
A question I have: Along the same lines of increasing the
downpayments, it is my understanding that you are going to
increase--or that the annual--or the premium, the up-front
premium, has been increased to 2.25 percent, which the buyer
can then finance, can still be financed into the mortgage
amount, which then, I think, this approach raises the mortgage
amount facing the borrower and effectively reduces the equity
that the borrower has in on the loan.
Should FHA require some portion of the up-front premium to
be paid in cash rather than allowing it to all be rolled into
the mortgage to then get back to the skin in the game, the more
obligation?
Mr. Stevens. Yes. We considered all aspects of the skin in
the game from the home buyer when they go into a home. The one
variable which we do know from a clear performance
characteristic is when the borrower saves up a 3\1/2\ percent
downpayment themselves, and puts it down for a downpayment,
that we see a clear performance variable that is different from
all others.
The mortgage insurance premium has been financed in the
mortgages going back decades. We looked at it very closely. We
do believe 2\1/4\ percent being financed up-front does pose
some additional risk to the portfolio, which is why one of the
measures we are trying to do through legislation is to lower
the up-front downpayment to 1 percent and then charge--and then
increase the annual so the borrower pays as they go.
That does a couple of things. One, it plays exactly into
your concern, which is a concern we share as well from a risk
standpoint. But in addition to that, it will allow, we believe,
more private segment participants, the mortgage insurance
industry, to return to the market as well, which I think is
fundamentally critical to getting this housing--
Mrs. Capito. Because you are lowering that up-front
premium?
Mr. Stevens. Well, the way private mortgage insurers work
is they typically don't charge a large up-front premium, if at
all. And they charge an annual premium, which is charged
monthly in the payment.
Mrs. Capito. Right.
Mr. Stevens. By us collecting it all up front, financing
the loan, we are really creating a barrier for the private
industry to return to the mortgage finance sector, which is an
absolute priority for us. We need to create an environment
where the private sector can compete, and this premium change
will help them do that.
Mrs. Capito. Okay. In my opening statement, I talked about
the difference between the CBO and the White House's number. I
am not sure I quite followed your explanation of that, if it in
fact it is a $4.4 billion difference there in the calculations.
That is concerning, especially with the capital reserve fund
being as low as it is.
Mr. Stevens. Right.
Mrs. Capito. Have you looked at having an independent
auditor come in and look at this and evaluate it to make sure
your numbers are on target? Because I think this is going to be
extremely important as we move through this year.
Mr. Stevens. Yes. Thank you. Well, first, let me tell you
how our budget was created. An independent actuary firm scores
and looks at the FHA policy changes, and they do their own
independent assessment of what that is going to mean to the
reserves.
That ends up being submitted to the Office of Management
and Budget. OMB then does their own independent assessment of
what we submitted, and in fact, they made a series of changes
to the numbers that the independent actuary firm came up to,
although not as dramatic as the Congressional Budget Office
did.
And they ended up having a different home price forecast,
different severity rates, different prepayment speeds, and a
variety of factors that ultimately ended up scoring it
differently. It was that budget from OMB, that scoring, that
went into the President's budget.
Mrs. Capito. Right.
Mr. Stevens. CBO, which we are looking at closely, looked
at a variety of characteristics. And we are studying those
carefully. We believe that the numbers submitted in the
President's budget are more accurate, and we stand by them.
We look forward to seeing what the appropriating committees
do ultimately in making their decision, and how they weigh the
CBO estimates against the OMB estimates because it is
ultimately their decision.
But again--and if requested, I would be glad to go into
further detail. But there is a variety of characteristics of
the CBO scoring that we believe is worth consideration. But we
stand by the OMB submission.
Mrs. Capito. Okay. One quick question. Would you say the
single most beneficial reform that you are asking for and has
been made up to this date to replenish the capital reserve is
the annual premium option rather than--and then lowering the
up-front premium?
Mr. Stevens. Absolutely. So the annual premium--
Mrs. Capito. $300 million a month?
Mr. Stevens. Yes. The annual premium increase has a very
positive impact, obviously, to increasing receipts. The new,
requested authority to go down to 1 percent and increase the
annual actually produces greater receipts to the fund. Single
greater impact, but I don't want to underemphasize, and I know
you have it in the bill that you submitted as well, the
importance of enforcement.
Mrs. Capito. Right.
Mr. Stevens. Our worst books are what is going to cause
over three-quarters of the losses going forward. And that was
basically by bad lender behavior, preying on our portfolio. As
you know, we have shut down 350 lenders in the 6 months I have
been in the job. That is, you know, far and away multiple times
more than what was done in the previous decade.
We are getting the bad players out. But through authority
by legislation, we will be able to do more. That has a huge
impact on institutions preying on your portfolio that have
equal impact.
Mrs. Capito. Thank you.
Chairwoman Waters. Thank you.
Mr. Maffei?
Mr. Maffei. Thank you, Madam Chairwoman.
Commissioner, thank you very much for being here today. I
first want to just ask about the reduction in the allowable
seller concessions from 6 to 3 percent. I understand the
difficulty with the seller concessions. It increases the amount
borrowed often, and, given a tough economy as we have seen in
many parts of the country, most parts of the country, a
reduction of housing prices can lead to some difficult results.
I guess my question, though, is: Are we being a little bit
reactive in terms of cutting it in half? And particularly
cutting it in half immediately with no phase-in whatsoever.
I am concerned because as we do see the housing market
start to recover, I don't want to, as I said in my opening
statement, have a policy that kind of artificially reduces the
amount of sales that there are, slowing down the housing market
and not necessarily completely avoiding the problem anyway
since you are still going to have seller concessions.
I am wondering where the FHA is at all amenable to some--
either making it more gradual or making it less severe or
something like that over time. And if you can address my
concerns?
Mr. Stevens. Thank you for the question. First of all, let
me just say that this will go out for open comment, and there
will be a 30-day comment period. And you have members of the
National Association of Realtors on the next panel, Charles
McMillan and others, who will express, I am guessing, their
concern about the seller concession.
Mr. Maffei. That might be--yes.
Mr. Stevens. Let me just be very clear that our concern on
seller concessions, in a similar way to other programs that
have involved the seller in the financing of a home, is that we
clearly can correlate seller concessions, high seller
concessions, with performance.
And it is our belief that high seller concessions that are
higher than what Fannie Mae, Freddie Mac, and other industry
players do artificially inflates the value. Or, put another
way, if a seller is going to sell a home, and their bottom line
is $200,000, and they are being asked to pay a 6 percent seller
concession, 3 percent more than they would normally do for any
other lender, we believe that 3 percent extra basically will
ultimately show a $206,000 sales price or something along those
lines.
In other words, when the seller is participating in the
financing of the home, you lose that arm's length independence.
In addition to that, the fact that we are unique in allowing
higher concessions provides opportunity for FHA, and ultimately
the taxpayer, to be adversely selected.
I have spoken to the real estate industry nationally. I
have spoken to home builders nationally. I know there is
concern. But the one thing I will assure you, and I have the
data in front of me: The performance on 6 percent seller
concessions is 1\1/2\ times worse on the total portfolio than
those with 3 percent seller concessions. That turns into very
significant claims numbers for the portfolio with no additional
insurance coverage for FHA.
So the comment period is there. We will absolutely listen
during the comment periods. And I assure you we will be glad to
respond further if there is--
Mr. Maffei. What about--obviously, it maybe needs to be
corrected. But what about some sort of transition period so it
doesn't have an adverse effect on the economy or on
particularly home sales recovering in the near term?
Mr. Stevens. I think you make a very good point. We need
to--in the comment period, if that is suggested, we will take
everything under consideration.
FHA, in my view, coming into this position has multiple
years of deferred maintenance where no changes were made to the
portfolio, and it is suffering the consequences today. We do
not have the luxury to not make the changes that are absolutely
necessary to ensure performance and make FHA a responsible,
trusted financial services vehicle in the system, particularly
since the taxpayer is backstopping it.
The performance is too clear on this. However, again, I am
very open to seeing what comes back during the comment period.
We remain very engaged, and I have an open door policy to the
industry to come in and express their concerns.
So we will listen as we go forward. And I take that, and we
will listen to your recommendations.
Mr. Maffei. Yes. And you may hear from me as well.
On the increase in net worth requirements for mortgage
lenders, this is particularly concerning to some of the
mortgage lenders in my district who tend to be quite small.
They are family-owned businesses, frankly, you know, a couple
of people.
And it is not--it is not that it be raised at all. It is
just that, again, you are going from a dramatic raise of
increased net worth from $250,000 to $2.5 million within 3
years. I am very worried that is going to crowd out smaller
mortgage brokers. I am very worried it is going to reduce
competition.
It also could chill sales of homes, which, by the way,
would then keep home values low if they are not selling and
combine to the rest of our problem.
So we would like you to address that, and also if you could
give me your opinion of--the National Association of Mortgage
Brokers, I believe, has a proposal to at least increase the
phase-in period.
Mr. Stevens. We received a large volume of comments during
the comment period on this rule. We have the comment period, it
has ended, and we are planning on releasing the rule here in
the near term.
So I want to assure you that we listen to those concerns.
As I hope you are aware, our rule planned to go to a million
dollars initially, of which 20 percent of that has to be
tangible capital. So our capital rule that we are initially
rolling out is actually far lower than what most institutions
require.
In my role in the private sector, I ran a small mortgage
banker for a period of my career, and we had $7 million in
capital for a fairly low amount of volume because it was
required by our warehouse lender to hold that in reserves.
I feel very confident that the final rule will take into
consideration the concerns the like of which you just
suggested. And while I can't state what is going to be in the
final rule, obviously, because it is not released yet, I think
that point has been heard loud and clear.
Mr. Maffei. I appreciate it, Commissioner. And if the
committee would just indulge me for a minute, my concern,
though, is again, because of the recession, it is a lot harder
to come by capital right now. And so an increased transition
would be very helpful there. Thank you very much.
Mr. Stevens. I appreciate your comments.
Chairwoman Waters. Thank you.
Mr. Neugebauer?
Mr. Neugebauer. Thank you, Madam Chairwoman, and Mr.
Stevens for being here.
I want to go back to the new policy of the 10 percent
downpayment on FICO scores of 579 and, I guess, lower. How many
borrowers--how many loans have you approved with people--let's
just say the first--nearly the first quarter of this year. How
many loans have you approved with FICO scores of 579 or lower?
Mr. Stevens. A very small percentage, and I will get you
the exact figure. But let's assume it is less than 3 percent
today.
But if I could, those books are scoring at very high rates
that even the CBO, which is the most conservative estimate,
expects to produce positive revenue to the taxpayer. What the
problem has that occurred at FHA is we have--a large percentage
of the portfolios from 2006, 2007, and 2008 were well below
580. And they have cumulative default expectations of in the
mid-30 percent range on those sub-580 portfolios.
And my fear is not to tighten up from what is coming in the
first quarter of this year; FHA is insuring the best quality
book it has ever insured in history. In history. But my concern
is that as competition reemerges and lenders do what lenders
do, that they will go back down the credit score chain again,
once again, to compete.
And we saw it so clearly, even, last year when I first got
sworn in. Taylor, Bean & Whitaker was competing at credit
scores well below 580, even though the large institutions
weren't there. And they were our third largest issuer in 2009.
And so what this floor will do is it is not--I don't think
the goal is to stop the quality of borrower coming in today. It
is to protect FHA so that these terrible books from 2006, 2007,
and 2008, which are causing the vast majority of our default
problems, never can reemerge. And that was the purpose.
Mr. Neugebauer. I am glad you brought that up because I
would be interested. I am sure you are tracking this because
you have the numbers. But if you could furnish me a bracket of
FICO scores and your default rate within those FICO scores to
get a handle on that. And also, if you could give us an
origination percentage within those FICO scores.
Mr. Stevens. I would be happy to do that.
Mr. Neugebauer. The other issue is that in 2008, Congress,
as you know, banned third party seller-funded downpayment
assistance to groups that were participating with FHA.
I think you alluded to that a little bit, but I would like
for you to repeat what you just said. That is where some of
your higher default rates are? Is that correct?
Mr. Stevens. That is correct. Seller-funded downpayment
assistance loans account singly for our worst default
experience in the worst book years of FHA. And I do want a
caveat. I have had several meetings with Congressman Green
where he is eager to see if there is a way to look at a pilot
that might reemerge the program.
I can tell you from professional experience in my history
and what is clearly evidence in the FHA portfolio that the
seller-funded downpayment assistance loan was a bad loan. It is
producing cumulative expected claim rates north of 30 percent.
Our current 30-plus delinquency rate on that portfolio alone is
35 percent.
So we are getting close to one in two; we are over one in
three borrowers are in delinquency. And I think that loan
particularly preyed on select communities in this society. It
was not sustainable.
It was bad for homeowners who are going to have their
credit ultimately wrecked by the program. And I thank Congress
for eliminating that program at the beginning--effective the
beginning of 2009.
Mr. Neugebauer. Yes. I think you made a good point. I think
the purpose of FHA was to promote homeownership. But it was
also really designed to promote sustainable homeownership. And,
I think we get focused sometimes on what the owned housing
percentage is and how many Americans own. And certainly that is
the American dream.
But housing is in really two forms. People can rent and
people can own. But I think what we need to focus on, and we
did a great injustice to a number of people, was that--and I
think the United States Congress was as guilty as anybody--is
we have to get that ownership percentage up at any cost.
The only problem with that was is the American taxpayers,
depending on what you are able to do with the fund, may
ultimately have to pick up this tab. But they have already
picked up the tab in loans outside the FHA realm.
So--is my time already up?
Chairwoman Waters. Yes, it is.
Mr. Stevens. Could I make a quick response?
Mr. Neugebauer. Yes, please.
Mr. Stevens. I appreciate your comments--
Mr. Neugebauer. That other information, if you can follow
up with--
Mr. Stevens. We will get you the information.
Chairwoman Waters. Without objection, Representative
Garrett will be considered a member of this subcommittee for
the duration of this hearing.
You are recognized for 5 minutes.
Mr. Garrett. Thank you. And the duration of the hearing
will be probably just 5 minutes, then.
[laughter]
Mr. Garrett. Two or three quick questions. The first one I
think you may have touched on before I came in. I am going to
be going to budget next week--I think you touched on this; I
would like to hear your answer in a little more detail.
OMB has a figure of $6.9 billion. That is a little bit
above what--Ginnie Mae at actually 5.8; CBO has 1.8. I was
watching the TV when someone at the Blair House was saying that
if we can't go by CBO scores and we don't have one place we can
go to that is nonpartisan or is bipartisan and what have you,
as far as relying on their numbers, then we have no place to
go.
Why should we not be looking to the CBO number on this at
1.8 as opposed to the 5.8 that the Administration comes out
with?
Mr. Stevens. Thank you for the question. I have to admit I
am a private sector person who has come into government in July
to take on this role, and facing--
Mr. Garrett. Good luck.
Mr. Stevens. --facing the FHA challenges. So, honestly,
comparing the validity of CBO over OMB, I think, having gone
through the analytics of the FHA portfolio, which we have had
reviewed by multiple participants both within the
Administration and outside, there are varying views on how any
change scores.
And it has to do with prospective views of home price
forecasts, severity rates, default rates--
Mr. Garrett. Prepayment rates.
Mr. Stevens. --prepayment speeds, all those variables, and
interest rates.
Mr. Garrett. And is that all considered by the OMB numbers
in--but obviously--
Mr. Stevens. Yes. In fact, the OMB numbers disagreed with
IFE, who is the independent actuarial firm, a well-known
nonpartisan individual actuarial firm that did the FHA
independent work. And I am sure another firm would look at it
slightly differently.
They all score with positive receipts. Clearly, CBO's is
concerning.
Mr. Garrett. Okay. Along that line--and maybe you have
this--but a recent academic study on the FHA MMI fund report
raised questions about the claims assumption for FHA's
refinanced loans, as well as the accuracy of the actuarial
modeling used by the FHA when they found the MMI fund at below
the 2 percent minimum capital requirements, still greater than
zero.
Additionally, Federal budget documents made clear that the
FHA has consistently underestimated its claims for years, and
that model changes to the FHA actuarial model have had to be
made to account for some $37 billion in reestimated costs.
And so maybe your answer to this one is a quick ``yes.'' Is
the FHA willing to consider an independent review of the
current actuarial models so that Congress can feel more
confident in the numbers that it receives?
Mr. Stevens. Thank you for the question. There is no
question that there is risk in the FHA portfolio.
Mr. Garrett. Right.
Mr. Stevens. I said it when I was being sworn in for this
job, and in testimony. So we are all concerned about the risk,
and we are concerned about variability of outcome. And
certainly if Congress chose to have an independent look, that
would be your purview to do so and we would welcome that.
Mr. Garrett. So even without us taking all the rigmarole of
a congressional action?
Mr. Stevens. I am very open to the idea. I want to make
sure we do it under appropriate controls, and that it doesn't
create another problem, a unintended consequence that I am
unaware of.
But I really do encourage people to have access to our
information. And just in relationship to the study that was
recently done, an academic study, the one that I am guessing
you are referring to, it is interesting. It is another one of
many.
I have seen a lot of studies done that raise concerns about
the FHA. Nobody is more concerned about FHA risk than Bob Ryan,
Vicki Bott, and myself, and the new team who have come in to
look at this.
That is why we have put so many changes in place that have
been the most aggressive changes that have ever been done at
FHA in my professional history to try to get FHA back on the
right track. And it is broad and far-reaching and has budget
impacts.
I do believe there are many flaws in this particular study.
And not only do I, but we have had it reviewed by a variety of
other academics who feel the same way. But I don't want to
understate the fact that what this study does, as well as many
others, is it points out that given the variables in the FHA
portfolio, there are concerns to be had.
Now, I just believe this study has some very unique flaws
to it.
Mr. Garrett. Let me get to the other point--I only have
about a minute left--and that is with the downpayment
requirements, initially, when I proposed legislation to raise
those downpayment requirements, the pushback I heard from the
Administration was there is basically no correlation, it is not
necessary to do that. We can make some of these other
adjustments in other areas prior to your tenure here, perhaps.
And now I am glad to see that there is some admission that
there is some degree of correlation here, and you are going to
look at it with low FICO scores with higher downpayment
requirements. So that is the first step in the direction of
saying that there is a correlation between default rates and
downpayment requirements.
The question then is: Have we gone far enough in that
regard that--we know the FICO score is something that can be
manipulated. All you have to do is turn on the TV and you will
see people say how to improve your scores and what have you. So
that is not a true figure and an accurate 100 percent barometer
in all sense.
So is there potential to move even further in this
direction towards a consistent level of downpayment
requirements in light of the fact that FICO is just one
variable?
Mr. Stevens. Yes. And Congressman--
Mr. Garrett. Can you answer that? Just answer that in the
next 10 seconds?
Chairwoman Waters. Yes. You may take a minute to answer.
Mr. Stevens. The answer is we are absolutely open, and
believe that risk controls need to be in place appropriately.
And we have taken the most aggressive steps to get responsible
borrowers only approved in the FHA portfolio. And that has
concerns a variety of participants in the industry.
Would we consider going further? We absolutely would
consider anything necessary to get the FHA portfolio on the
right track. I actually would say to your--the 5 percent
proposal, I mean, that is why we went further and went to 10
percent. But we do know that FICO has a relationship.
I would love the opportunity to come in and meet with you
and your staff. I recently met with many of the staff of the--
Mr. Garrett. Right.
Mr. Stevens. --Republican members on the committee, and I
am--our team would love to come in and talk through the data
with you because we believe that it is very important to have
the responsible decision-making needed to keep this FHA
portfolio on track.
Mr. Garrett. Okay. Great. I appreciate it, and look forward
to it. Thanks a lot.
Chairwoman Waters. Thank you very much, Mr. Stevens. Thank
you very much. We appreciate your being here today. 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 30 days for
members to submit written questions to Mr. Stevens and to place
his responses in the record.
This panel is now dismissed. I thank you very much for
being here, and I would like to welcome our second panel. Thank
you.
I am pleased to welcome our distinguished second panel. Our
first witness will be Mr. Mike Anderson, vice chair of
government affairs, National Association of Mortgage Brokers
and president, Essential Mortgage.
Our second witness will be Ms. Graciela Aponte, legislative
analyst, Wealth-Building Policy Project, National Council of La
Raza.
Our third witness will be Mr. Andrew Caplin, professor of
economics, co-director of the Center for Experimental Social
Science, New York University.
Our fourth witness will be Mr. John A. Courson, president
and CEO, Mortgage Bankers Association.
Our fifth witness will be Mr. Charles McMillan, president,
National Association of Realtors.
Our sixth witness will be Mr. John Taylor, president and
CEO, National Community Reinvestment Coalition.
And our seventh witness will be Mr. Mark Alston, first vice
president, Consolidated Board of Realtists, on behalf of the
National Association of Real Estate Brokers.
I thank all of you for appearing today. I am especially
appreciative--Mr. Alston, I know that the Realtors just had a
convention. You just left. But you graciously decided to come
back, and we are very appreciative of that.
Without objection, your written statements will be made a
part of the record. And we will start with our first witness,
who will be recognized for 5 minutes, Mr. Mike Anderson.
STATEMENT OF MIKE ANDERSON, CRMS, PRESIDENT, ESSENTIAL
MORTGAGE, AND VICE CHAIRMAN OF GOVERNMENT AFFAIRS, NATIONAL
ASSOCIATION OF MORTGAGE BROKERS
Mr. Anderson. Good afternoon, Chairwoman Waters, Ranking
Member Capito, and members of the subcommittee. I am Mike
Anderson, a certified residential mortgage specialist, and vice
chairman of the government affairs committee for the National
Association of Mortgage Brokers.
In addition to serving NAM as a volunteer member, I am a
licensed mortgage broker in the State of Louisiana, home of the
New Orleans Saints, Super Bowl champions--had to throw that
in--and I have over 31 years of experience.
I would like to thank you for this opportunity to testify
today on the changes being proposed by FHA. My written
testimony addresses the full range of policy changes happening
at FHA, but I will focus my remarks this afternoon on just a
few of the specific changes proposed.
I would like to thank Commissioner Stevens for his
dedicated efforts to strengthen and protect the FHA loan
program and the FHA insurance fund. NAM applauds his efforts
and looks forward to working with the Commissioner going
forward.
However, we are worried that there could be unintended
consequences, and we believe there might be better approaches
to certain aspects of the policy changes proposed in the FHA
Reform Act. NAM hopes to work with HUD and this committee to
attempt to resolve some of these issues.
First, we would like to work with HUD and this committee on
the increased mortgage insurance annual premium fees of 1.55
percent. NAM believes a blanket increase, like the one proposed
in the Reform Act, may stifle the housing recovery and could
increase foreclosures even further by depleting the available
pool of home buyers.
The MIP increase unnecessarily targets all buyers in every
area of the country. The increase will lead to increased
payments and reduce qualified borrowers We are particularly
concerned that low-income and minority home buyers will be most
negatively impacted.
NAM proposes that the FHA institute fee increases, if at
all, based on actual risk posed by areas of the country that
have high levels of defaults and experience substantial
declines in home values. Why should the housing markets that
restrained themselves during the boom years have to pay for the
irrational exuberance of those who did not?
Another issue that NAM would like to work on is the
appraisal ordering. We believe that an FHA appraisal ordering
system should be put into place to guarantee complete
portability of appraisals so that consumers can save money.
NAM has advocated for many years for the removal of the
unnecessary audit and net worth requirements for mortgage
brokers' participation in the FHA program, provided that
brokers are safe and compliant. Legislation introduced last
Congress by Representative Miller and cosponsored by
Representatives Sherman and Baca required such changes that are
now being advocated by the FHA.
However, NAM believes it is important for loan
correspondents to maintain some status with HUD and with FHA,
and to regain access to the FHA system. Specifically, NAM
believes loan correspondents must be able to obtain case
numbers for FHA loans and communicate directly with FHA.
Inability to communicate with the FHA or access FHA Web sites
will make it virtually impossible to determine whether a
borrower is even eligible for FHA financing.
Finally, NAM supports statutory changes to the permanent
increase to the FHA conforming loan limits so that all
consumers can benefit from the program, including those in
high-cost areas such as California. Too often, in the wake of
our current financial crisis, we have seen new rules
promulgated that do not reflect measured, balanced, and
effective solutions to the problems facing consumers and our
markets.
NAM commends HUD for its work to strengthen and protect the
FHA program. But we believe there is still work to be done in
order to avoid some of the same pitfalls and unintended
consequences that have resulted from other recent policy
changes.
NAM appreciates the opportunity to appear before this
committee, and we look forward to continuing to work with you
and with HUD to craft solutions that are effective in helping
consumers but do not unreasonably disrupt the market or
competition.
And I would just like to make it clear that if these
proposed changes are what it is going to take to fix FHA, we
are willing to work with everybody involved. Thank you.
[The prepared statement of Mr. Anderson can be found on
page 50 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Aponte?
STATEMENT OF GRACIELA APONTE, LEGISLATIVE ANALYST, WEALTH-
BUILDING POLICY PROJECT, NATIONAL COUNCIL OF LA RAZA
Ms. Aponte. Good afternoon. My name is Graciela Aponte. I
handle NCLR's legislative and advocacy work on issues critical
to building financial security in Latino communities. For more
than 7 years, I have been working on issues that impact low-
income communities, and prior to joining NCLR, I worked as a
bilingual housing counselor.
NCLR is the largest national Hispanic civil rights and
advocacy organization in the United States. Last year, our
network of HUD-approved counseling agencies served more than
50,000 families. I would like to thank Chairwoman Waters and
Ranking Member Capito for inviting us to share our views on
this important topic.
In my testimony today, I will discuss changes proposed in
the FHA Reform Act of 2010. I will also provide recommendations
on how to further strengthen the FHA program. Overall, FHA
stands out as a major success of the Administration's recovery
efforts.
My comments today will focus on three questions that we use
to evaluate the bill. Number one: Does it create new barriers
for Latino home buyers? Number two: Does it protect FHA
borrowers against predatory lenders? Number three: Will it
promote sustainable homeownership?
On the first question, we found that the legislative
changes will not likely create new barriers to affordable
credit for modest income Latino families. However, more must be
done. For example, FHA did not address the issue of expanding
homeownership opportunities to underserved communities.
Measures that would address this concern include more
flexible lending products, increased efficiency in
underwriting, and incentives for borrowers who seek pre-
purchase counseling. For example, NHN counselors are reporting
difficulty securing mortgages for borrowers who use
nontraditional credit, including timely rent payments, utility,
and other payments.
Counselors also report that the FHA underwriting process is
taking too long, affecting home buyers' chances of purchasing
REO and short-sale properties. These inefficiencies allow
investors, instead of first-time home buyers, to snatch up
properties.
Also, NCLR is disappointed that FHA did not take this
opportunity to create an incentive to encourage pre-purchase
counseling for first-time home buyers. Counselors play a key
role in preparing families for homeownership. Families who
participate in counseling are less likely to default on their
mortgage. Clearly, this would have the added benefit of
preventing foreclosures and future claims.
On the second question, we recognize that some steps have
been taken to protect home buyers. However, FHA needs to do
more in this area. For example, in an initial review of FHA's
Neighborhood Watch early warning system, the online tool was
not user-friendly.
We hope to work with HUD to improve this site, including a
portal for the public to submit and view complaints. The true
test will come over time when HUD demonstrates its willingness
to enforce its own provisions.
On the third question of sustainable homeownership, FHA did
not take any steps to boost foreclosure prevention efforts to
help stabilize communities. FHA has strong loss mitigation
tools that have successfully kept millions of families in their
home. However, these services are of little use to a family who
does not receive them.
While HUD mandates that FHA servicers aggressively pursue
loss mitigation, few resources are dedicated to enforcing this
provision. In a recent survey, we found that 76 percent of
housing counselors rate the knowledge of lenders of FHA loss
mitigation tools as fair or poor.
Ultimately, NCLR supports the changes proposed in the FHA
Reform Act of 2010 to provide future financial stability to the
program. However, a reinvigorated and assertive FHA program is
critical to stabilizing the housing market and the broader
economy.
In that spirit, NCLR makes the following recommendations to
strengthen the FHA program, restore homeownership
opportunities, and protect homeowners and taxpayers: increase
transparency and enforcement in FHA lending; provide incentives
to borrowers who seek homeownership counseling; increase access
to flexible lending models; make loss mitigation accessible to
all FHA borrowers, and enforce its proper implementation by
servicers; and increase funding for HUD-approved housing
counseling agencies.
In my written testimony, you will find specific details
about each of these recommendations. I will be happy to answer
any questions. Thank you.
[The prepared statement of Ms. Aponte can be found on page
62 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Caplin?
STATEMENT OF ANDREW CAPLIN, PROFESSOR OF ECONOMICS, CO-
DIRECTOR, THE CENTER FOR EXPERIMENTAL SOCIAL SCIENCE, NEW YORK
UNIVERSITY
Mr. Caplin. Chairwoman Waters, and Ranking Member Capito, I
am honored that you invited me to this hearing. The Federal
Housing Authority, which has for so long done wonderful work to
support housing affordability, is currently being placed at
risk.
The limitations of FHA data infrastructure, which are of
long standing, have in the current environment raised risk to
an undesirable and perhaps unsustainable level. Therefore, with
all due respect, I cannot agree with Commissioner Stevens' view
that it would take a catastrophic fall in house prices for FHA
to require a taxpayer-funded bailout.
Recent research indicates that the actuarial review on
which the Commissioner relied in making his assessment
understates FHA risk, while we do not have access to the data
needed to gauge the full extent of this understatement. While
we are here to discuss proposed FHA reforms, I am here to
caution you that the impact of these reforms on a mutual
mortgage insurance fund is impossible to assess.
The problems in the actuarial review first came to my
attention when Joseph Tracy, who is vice president and senior
advisor to the president of the Federal Reserve Bank of New
York, noticed that FHA prepayment behavior changed radically in
2009. Many mortgages that were significantly underwater
suddenly started to prepay at an unprecedented rate. It is as
if a group of particularly sick patients at a hospital suddenly
appeared cured.
As is so often the case, if it seems too good to be true,
it is. Joe and I were able to discover the cause of this
apparent miracle cure, which turns out to be poor recordkeeping
when one FHA mortgage is streamline refinanced into another.
To use the hospital analogy, very sick patients were moved
to a new ward for treatment, yet were recorded as having been
cured and discharged from the hospital. They were then logged
into the new ward as if they were relatively healthy new
patients without new intake measurements and without reference
to their prior history.
The more this hospital moved patients between wards, the
higher its apparent success rate. Unfortunately, FHA did the
equivalent in its recordkeeping, as a result, overestimating
its success rate.
The actuarial review has other shortcomings detailed in our
joint research. For example, it analyzes only final claims to
the FHA's mutual mortgage insurance fund, and ignores
delinquency rates. It also ignores mortgage modifications,
which are increasingly prevalent, costly, and of unknown
efficacy. This is like tracking a disease by monitoring
mortality rates while ignoring information on rates of initial
infection, hospitalization, and post-intervention outcomes.
It is hardly surprising, then, that the most recent
actuarial review began by listing reasons that the prior review
had underestimated losses. There is every reason to expect this
pattern to recur.
Three proposals by way of conclusion.
One: FHA must immediately update its risk assessment and
its risk assessment methodology. Until this is done, it will be
impossible to assess the impact of FHA reform proposals on FHA
risk.
Two: FHA appears unable at this stage to assess the quality
of its actuarial review. It must open its books to outside
analyses to upgrade its risk assessment.
Three: Some 12 years ago, Joe Tracy and I helped co-author
a book called, ``Housing Partnerships: A New Approach to a
Market at a Crossroads.'' We proposed introducing equity
capital into the real estate finance equation to encourage
risk-sharing.
Unfortunately, the opposite path was taken, and recent
investigations in housing finance instead acted to increase
leverage and to amplify risk. It is time to go back to the fork
in the road.
Dating back to the Great Depression, the U.S. Federal
Government has a positive track record of encouraging
innovation in housing finance. Now is the perfect time to
reinvigorate that tradition by ceding development of equity
finance as a far safer method of raising housing affordability.
[The prepared statement of Professor Caplin can be found on
page 70 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Courson?
STATEMENT OF JOHN A. COURSON, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, MORTGAGE BANKERS ASSOCIATION
Mr. Courson. Thank you very much, Madam Chairwoman, and
Ranking Member Capito. I appear before you today not only as
the president and CEO of the Mortgage Bankers Association, but
also as a former chair of MBA and an FHA lender for over 40
years. MBA is pleased to see the attention that the Financial
Services Committee, and this subcommittee in particular,
continues to play to the Federal Housing Administration, its
programs, and its finances.
Today, FHA finds itself at a critical crossroads. Last
November's actuarial report was a wakeup call to us all, and it
highlighted the very real threats to FHA's continued solvency.
All of us here today support FHA and the important role it
plays in promoting homeownership. However, that role could be
greatly diminished, even disappear, if we don't get FHA's
fiscal house in order.
HUD Secretary Donovan and FHA Commissioner Stevens should
be commended for the proactive steps they have taken to protect
the mutual mortgage insurance fund. They have made improvements
to FHA's appraisal procedures, its streamlined refinance
program, the process for approving lenders, and they have kept
in place the prior Administration's ban on seller-funded
downpayment assistance.
More recently, the Obama Administration put forward a
package of reforms, some of which are being implemented
administratively while others require legislative action. I
would like to comment on these changes from the perspective of
MBA's very diverse membership.
First, MBA supports HUD's proposal to increase the cap on
the annual mortgage insurance premium for FHA's single-family
program. Raising premiums is never desirable, but if done
prudently and if coupled with decreases in the up-front MIP,
this step has the potential to strengthen FHA's books while
actually lowering closing costs for many borrowers.
HUD also proposes to expand and extend indemnification
requirements for all FHA salary lenders. The initial reaction
from our members has been largely positive, but we would also
urge great care in how this change is implemented.
Lenders take indemnification very seriously. If lenders
fear unreasonable standards or penalties, they could become
overly cautious. The details of any proposal in this area will
be critical, and we urge the subcommittee to move carefully to
ensure that responsible lenders are not discouraged from
participating in the FHA program.
The third legislative change sought by the Administration
would give FHA authority to suspend a lender nationwide on the
basis of the performance of one of its regional branches. We
all support rooting out fraudulent lenders. They hurt
borrowers, put the MMI fund at risk, and they are a stain on
our entire industry.
At the same time, suspending a lender is a very serious
action and should be undertaken cautiously and only when
justified. MBA urges this subcommittee to ensure that this
policy allows lenders ample opportunity to remediate any
problems within a field office before receiving a nationwide
sanction. These policy changes should be clear, transparent,
and apply to all lenders.
I want also to comment briefly on some of the non-
legislative changes proposed by FHA. MBA supports increasing
the downpayment to 10 percent for FHA's riskiest loans, loans
where a borrower has a credit score below 580. However, we
would caution policymakers to resist imposing an across-the-
board increase in the FHA downpayment, as this would have a
chilling effect on the ability of FHA to meet the credit needs
of the very borrowers it is intended to serve.
MBA is also concerned about the 50 percent reduction in the
maximum seller concessions, which are typically used to cover
closing costs. This change will primarily impact low- to
moderate-income first-time and minority home buyers, the very
populations FHA is designed to serve.
One step FHA has yet to take, but should take, is to
examine its total scorecard underwriting system. Such an
evaluation should review the thoroughness of the scorecard's
borrower risk assessment capabilities.
Finally, I can't stress enough the importance of ensuring
that FHA receives adequate funding for upgrading its antiquated
technology and hiring additional staff for both its single-
family and multi-family programs. The House has already passed
H.R. 3146, the 21st Century FHA Housing Act. And with
appropriation season just around the corner, we need to
redouble our efforts to make sure FHA gets the needed funding
appropriated.
Madam Chairwoman, Ranking Member Capito, there is no
sugarcoating the unsafe position in which FHA finds itself
today. We simply must take the strong and necessary steps to
protect its vital programs, the MMI fund and, ultimately, the
taxpayers who stand behind it.
MBA stands ready to work with you, Secretary Donovan, and
Commissioner Stevens in this important endeavor. Thank you.
[The prepared statement of Mr. Courson can be found on page
78 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. McMillan?
STATEMENT OF CHARLES McMILLAN, CIPS, GRI, IMMEDIATE PAST
PRESIDENT, NATIONAL ASSOCIATION OF REALTORS
Mr. McMillan. Thank you, Madam Chairwoman.
Chairwoman Waters. I am sorry, I pronounced your name
incorrectly. How do you pronounce your name again?
Mr. McMillan. My name?
Chairwoman Waters. Yes.
Mr. McMillan. ``McMillan.''
Chairwoman Waters. Oh, okay. Thank you.
Mr. McMillan. You pronounced it correctly.
Chairwoman Waters. Thank you.
Mr. McMillan. And thank you, Madam Chairwoman, Ranking
Member Capito, and members of the subcommittee. I am Charles
McMillan, the immediate past president of the National
Association of Realtors. I thank you for your invitation to
give testimony today.
I have been a Realtor for more than 25 years, and am
director of Realtor relations and broker of record for Coldwell
Banker Residential Brokerage in Dallas/Fort Worth. I am here to
testify on behalf of 1.2 million members of the National
Association of Realtors on the importance of the Federal
Housing Administration mortgage insurance program.
Since it was created in 1934, FHA has provided more than 37
million American homeowners with safe, stable financing in all
markets. And while the program is experiencing shortfalls in
its excess reserves due to our economic crisis, FHA remains
financially strong, in our opinion, and is critical to our
economic recovery.
In 2009, FHA insured nearly 30 percent of the single-family
mortgage market. In 2009, more than 50 percent of first-time
buyers used FHA. And during the same time, approximately
835,000 borrowers refinanced into lower interest rate FHA-
insured loans, saving an estimated $1.3 billion.
Historically, FHA's market share has hovered between 10 and
15 percent of the market. When the private market is strong
enough to return, we welcome a reduction in FHA's market share.
However, in the meantime, we support FHA's efforts to fill the
gap that private lenders have left.
We have testified previously about the reasons that the FHA
audit showed they had fallen below the 2 percent capitalization
ration, and I won't repeat that information except to say that
we believe FHA has continued to require prudent understanding,
and has sufficient controls against risk. Today, I will focus
my remarks on FHA's new initiatives and what Congress can do to
help strengthen this important program.
First, FHA has increased the up-front mortgage insurance
premium from 1.75 percent to 2.25 percent. Home buyers are
already facing increased fees from appraisal and other closing
services. Increasing the up-front premium for FHA loans just
adds to the problem.
We support legislation to reasonably increase the annual
premium in order to replace FHA's capital reserves. However, we
believe FHA should then decrease the up-front premium to help
borrowers at the closing table.
Second, we understand that FHA intends to propose a rule to
decrease seller concessions to 3 percent. In States where
closing costs are high, like my own State of Texas, seller
concessions are often higher than 3 percent.
Such concessions help many borrowers with closing costs,
allowing them to purchase a home without depleting all of their
savings, and, I might add, allow many borrowers the first and
almost only opportunity to get one foot on the bottom rung of
the housing homeownership ladder. Again, we are concerned that
such a decrease in concessions could put homeownership out of
reach for many buyers.
Third, FHA has proposed that borrowers with a credit score
below 580 be required to have at least a 10 percent
downpayment. NAR does not believe FHA should make loans to
borrowers who are unable to repay. However, we are concerned
about the disparate impact that credit scores have on
underserved buyers.
Other ways Congress can help strengthen FHA: We strongly
support H.R. 2483, the Increasing Homeownership Opportunities
Act. This bill would make the current loan limits permanent,
and we urge the committee to quickly consider this.
Second, we strongly oppose H.R. 3706, the FHA Taxpayer
Protection Act of 2009. This bill would increase FHA's
downpayment, and again have the aforementioned action. NAR
believes in the importance of the FHA mortgage insurance
program. With solid underwriting requirements and responsible
lending practices, the FHA has avoided the brunt of defaults
and foreclosures facing the private mortgage lending industry.
We urge the Administration and Congress to move cautiously
before making these changes. I thank you again for the
privilege of providing this testimony, and of course would be
willing to answer any questions.
[The prepared statement of Mr. McMillan can be found on
page 86 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. John Taylor, I understand that you are having your
conference here this week, and I hope everything is going well.
Mr. Taylor. Everything is going very well.
Chairwoman Waters. We welcome you on the panel today.
STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Taylor. Thank you, Chairwoman Waters, and thank you,
Ranking Member Capito, for the opportunity to testify today. My
name is John Taylor, and I am the president and CEO of the
National Community Reinvestment Coalition.
We are an association of some 600 community organizations
spread out across America whose primary job is to try to
increase fair and affordable banking services, banking
products, investments, great affordable housing, job
development, and overall to promote vital communities across
the country.
And I, too, agree with the notion that FHA has been one of
the Obama Administration's success stories. I had some doubts
about Mr. Stevens when I first met him, but any of those have
pretty much dissipated.
His work around appraisal procedures, the LMI fund, rooting
out in particular frauds and scams and really going after some
of the folks who really give the industry a bad name in
general, has been pretty impressive.
And what is ironic is normally I am here at these hearings
coming up to criticize FHA for either discriminatory lending
practices or for what it is not doing in LMI areas. And I have
to say, I think this Administration and this Commissioner are
quite committed to trying to be very effective on that score.
In fact, the truth of the matter is, and anybody who is
paying attention knows this, if it wasn't for FHA, we probably
wouldn't have any lending going on in America's low-income
communities.
So hopefully, though, I would love to see--and I think
Commissioner Stevens supports this--the day when they begin to
reduce the size of their portfolio and get the private sector
back in there.
Because while FHA is better than subprime, they are not as
good as prime. There is a premium that folks who go through FHA
pay. It is about 3/4 of a basis point difference. And it is the
cost that people are going to pay to be part of that program.
But nonetheless, I think what they have put in in the way of
safeguards throughout this program is something that is in fact
helping many people across the country.
Let me say that we support FHA's proposals relating to
adjustments to the annual and up-front premiums. We support
their combination of FICO scores and downpayment requirements.
And I can talk about all these in more detail if there is a
desire to, but it is in my written testimony.
We support the reduction of allowable seller concessions,
and we support the discussion draft language of the FHA Reform
Act to allow HUD to require that all FHA lenders, not only
those with permission to approve loans without pre-endorsement
review, but that all lenders reimburse HUD for fraud and
misrepresentation.
In addition, HUD should have additional authority under the
Credit Watch initiative to shut down lender operations in
geographic areas of various sizes, as well as shutting down the
entire FHA operations of a lender. These proposals, I think,
would increase safety and soundness and shore-up the secondary
reserves of FHA.
But we also have a couple of recommendations. First,
similar to my friend Graciela Aponte from La Raza, we think
that you need to increase the role of the nonprofit counseling
agencies. NCRC understands that HUD has the authority to reduce
the up-front premium if the borrower receives counseling from a
HUD-approved counselor.
HUD, however, does not have the authority to reduce the
annual premium amounts if a borrower has counseling. NCRC
recommends that Congress grant HUD this authority since
counseling has proven to be effective, and since reductions in
premium amounts will assist in increasing the affordability of
FHA loans for those borrowers receiving counseling.
NCRC also recommends bolstering fair lending enforcement.
FHA has played an important role in preserving access to credit
in this difficult economic environment, yet evidence suggests
that when controlling for lender, borrower, the neighborhood
characteristics, communities of color received a
disproportionate amount of FHA loans. And as I said, those are
simply just more expensive than the prime market.
Increasing the fair lending enforcement would promote more
competition among lenders and lower prices by prosecuting
redlining by traditional lenders and any targeting of
communities by FHA lenders.
HUD and the Federal banking agencies should consider the
use of match paired testers in its enforcement efforts. The
testing could be conducted by a nonprofit organization with
civil rights enforcement expertise.
Just a brief comment about HAMP, and that is FHA has a
sensible and affordable HAMP program, but NCRC's counselors
report that it is not being used by lenders at a meaningful
level. HUD and Treasury should encourage lender use of FHA
HAMP.
In closing, FHA was created in 1934 to heal the U.S. market
during the Great Depression. And for decades, it has turned a
profit for taxpayers. Today, it is more critical than ever that
FHA remain a strong gateway for responsible underwritten credit
in communities where they serve.
Thank you very much for the opportunity.
[The prepared statement of Mr. Taylor can be found on page
113 of the appendix.]
Chairwoman Waters. You are welcome.
Mr. Mark Alston.
STATEMENT OF MARK ALSTON, FIRST VICE PRESIDENT, CONSOLIDATED
BOARD OF REALTISTS, ON BEHALF OF THE NATIONAL ASSOCIATION OF
REAL ESTATE BROKERS
Mr. Alston. Thank you, Chairwoman Waters, and Ranking
Member Capito. My name is Mark Alston. This testimony is to
present the National Association of Real Estate Brokers'
position with regard to the proposed changes.
My testimony is going to be presented from the loan
originator, the point of sale originator, mortgage
professional, and consumer point of view. My background has
always been in residential real estate, mostly in what has been
considered underserved neighborhoods. I have over 22 years of
experience.
The first change we would like to address is the
downpayment and FICO changes. It is our position that these
changes will help create sustainable homeownership. A 580 FICO
score falls well below the threshold that most of the lenders
that we deal with will approve. For most lenders that we deal
with, it is 620 to 640. A 580 score is a good threshold for
responsible homeownership; 500 to 579, with 10 percent down,
that offsets the risk. I don't know anybody who will approve
it, but we support these changes if it is there.
What is concerning to us are today's tendencies for these
guidelines not to be administered and designed as designed by
funding institutions. Almost unanimously, institutions impose
stricter underwriting overlays that exceed FHA guidelines, and
exclude families for whom these programs were designed.
With regard to the next change, the increase in the annual
mortgage insurance premiums, we have serious concerns. This
change--keeping in mind the requirement for FHA to maintain a 2
percent reserve, and we want to be mindful of the decisions
that are made and their impact at the consumer level. We are
not sure that what may need to be addressed is the amount of
the reserve or how it is calculated.
I was instrumental in the design and implementation of a
Fannie Mae pilot program designed to reduce the disparity
between minority ownership and majority ownership in 2001. At
the time, majority ownership was around 78 percent; minority
ownership was around 44 to 48 percent.
One of the principal players in this program, this pilot
program with Fannie Mae, were the mortgage insurance companies,
the PMI companies. What ended a great program was when they
raised their annual MMI or PMI.
When it went to 1.5 and higher, it priced people out of the
market and opened up the door for the subprime market. It
became cheaper to go 80/20, and so a lot of people went that
way.
FHA is expensive. I have heard it said that FHA wants to be
in a more competitive position with the private companies. The
private companies have the monthly insurance. They don't have
the up-front as well as the monthly insurance.
When you have someone--I have sat with clients. You are
trying to explain to them what their payment is going to be.
You have a $200,000 sale. They put $7,000 down. They have a
$193,000 balance, or so they think. With FHA, their balance is
actually going to be closer to $198,000. It is going to be
$4,500 more for mortgage insurance. Then you go through the
payment, and you have another mortgage insurance premium. They
are paying twice. FHA is just really expensive at the consumer
level.
In increasing the annual fee from .55 today, on a $250,000
house, that amount would be $110.57. If they raise it to .85
percent, the amount of the monthly payment for mortgage
insurance will go to $179.80. They go to 1.55 percent, it goes
to $311.61, or $201 more than the .55 amount.
One of the hardest things we do in our area is to qualify
borrowers. Our ratios are already high. We are not operating at
the 29 over 41 percent guidelines. Our housing load is more
like 45, 46, 47 percent to get people in, even though prices
have dropped by half. Our average price was 580; now it is 250,
260. It is still tough for people to qualify.
In addition to FHA, the GSEs have been the largest source
of mortgage capital for minority home buyers in the country.
While Fannie Mae and Freddie Mac have faced significant losses
in recent years and have required a significant infusion of
taxpayer dollars, these institutions' critical role for
minority home buyers cannot be underestimated.
However, in order to keep homeownership affordable, we urge
Fannie Mae to rescind their adverse market delivery charge, as
well as the series of loan level price adjustments; and Freddie
Mac to rescind their post-settlement delivery fees, as well as
market condition and indication score loan-to-value pricing
adjustments. The former fee--
Chairwoman Waters. Could you wrap it up, please?
Mr. Alston. Yes. We at NAREB are extremely concerned by any
change that will significantly impact the cost of
homeownership, while at the same time we recognize the
importance of having FHA to serve our home buying community. We
appreciate the opportunity.
[The prepared statement of Mr. Alston can be found on page
40 of the appendix.]
Chairwoman Waters. Thank you very much.
I would like to share with this panel that I am very
appreciative for your testimony here today. What I am gleaning
from your testimony is that everybody would like to have a
sound and stable FHA performing in the way that it was intended
to perform, and making opportunities available for low- to
moderate-income home buyers. Everybody agrees on that.
Some of you agree with all of the changes that are
proposed, some agree with some of the changes that have been
proposed, and some have additional advice about what should be
done to make all of this work.
I am very appreciative that the Secretary appears to be
open, and it is important for us to get our information in
during the comment period so that we can help to guide FHA in
its attempt to comply with the law, to be safe and sound, and
to have the capital requirements that are mandated by law.
I want to ask just a few questions. One is on the
requirements for the lenders. I heard some discussion about
that today, that the requirements for capital for lenders is
too low, that it should be increased. But it appears that the
increase is too much.
Who would like to respond to that? Yes, sir?
Mr. Courson. I would be more than happy to respond on
behalf of the Mortgage Bankers Association. Obviously, we have
put together a task force, and our membership is very diverse.
We have really from the largest of the large financial
institutions to the very smallest, as the Congressman was
saying earlier, the very small local mortgage originators.
And through this group and a lot of discussion, we came out
and we do support the increase of the net worth to $2.5
million, but--and we have commented back to the Department--
that we feel like there needs to be an extended period of time
for lenders and mortgagees to be able to increase that net
worth.
Our comment was that over--and our analysis by this diverse
group was that over a period of 5 years, even the small members
would be able to grow into that $2.5 million. And the reality
is, Madam Chairwoman, that today, with the markets, without
those kinds of net worth, those lenders are not going to be
able to get warehouse lines or financing to fund loans, in any
event.
But we are asking and commented that we would like a longer
period of up to 5 years to earn their way into the $2.5
million.
Chairwoman Waters. I appreciate that. I must admit I am a
little bit worried about this. I know that many of these small
loan initiators are much smaller than $2.5 million. I suppose
there is some amount that is too small.
But to jump from, what is it now, $250,000? What is it now?
What are--
Mr. Courson. Currently, to be a mortgagee, it is $250,000.
To be able--a direct endorsement and underwrite FHA loans, it
is a million dollars.
Chairwoman Waters. Okay. To jump to $2.5 million.
Mr. Alston, how does that play down in southern California?
Mr. Alston. For our neighborhood, for my neighborhood, it
is tough. There are a couple of proposals on the table. One is
to eliminate the mini, which allows brokers to--where HUD
approves brokers, allow them to operate as Fannie Mae and
Freddie Mac with lenders.
If you increase that capital requirement, you get rid of a
lot of the small players. We don't have the capital to qualify.
And so we'll have to just be brokers, small warehouse lines or
being direct lenders and being able to open that way. We won't
be able to do it.
Chairwoman Waters. Ms. Aponte, how would this impact the
constituency that you represent?
Ms. Aponte. Well, what we are hearing from our counselors
specifically, the issues that they are facing, is mostly the
efficiency in FHA underwriting. They are trying to purchase REO
properties. They are trying to purchase short sales. They are
taking more and more time to access credit for those products.
Chairwoman Waters. What about the capital requirements for
loan initiators?
Ms. Aponte. I would have to get back to you on that. I am
not sure.
Chairwoman Waters. Anybody else on this issue? Yes, Mr.
Taylor?
Mr. Taylor. You know, in this day and age of everybody has
to have skin in the game, I think they should as well. And
particularly where we have seen this proliferation of scams and
fraud, if you go after somebody and they have absolutely no net
worth, they don't have value whatsoever, the government cannot
recoup in the event that they have created costs and created
harm.
So I think it is important to have some level of skin in
the game. What that would be, you could probably debate that
for a while. But I think that it has to be significant enough
for them to be something other than, you know, a fly-by-night
where you can just print up some papers, call yourself a
broker, get a license as easy as you get--brokers are not going
to like this--a membership at the Y, and then start doing FHA
loans.
I think we need to have a little bit more professionalism
and skin in the game, so to speak.
Chairwoman Waters. So do you think the proposal to spread
it out over a 5-year period of time would help those who are
serious about being loan initiators to try and achieve that
level of capital in order to participate? Anybody? Does that
help? We had that suggestion.
Yes, Mr. McMillan?
Mr. McMillan. I would offer an opinion, yes, because as I
sit here and listen to the testimony, there must be balance. As
Mr. Taylor said, you will have fly-by-night people with minimum
capitalization, they get censured, they move away.
But it also has a tendency to disenfranchise many
principled lenders that serve underserved neighborhoods, and
the 5-year grace period would give them an opportunity to come
up with it as opposed to shutting them out of the system.
Chairwoman Waters. All right. Thank you very much.
Ms. Capito?
Mrs. Capito. I thank all the witnesses. And first of all, I
would just like to make a statement on one of the recurring
issues that we have heard in the subcommittee and several of
you alluded to in your testimony, and that is the lack of
technology and computer expertise at FHA and at HUD in general.
In this day and age, that should not be a reason that we
are not delivering the product, getting the information, or
being able to work expediently. And we have worked together to
try to make sure that FHA has the dollars and the manpower to
be able to move forward, and HUD at the same time. So we will
keep trying to work on that.
Mr. Caplin, in your testimony, you basically were raising
some major red flags as to the actuarial review of FHA, some of
the data points that have been brought forward. Now, you know
that FHA--and he was here earlier today with the
administrators--hired a risk management officer.
I am wondering if the studies that you did were before they
have--no, it was after the risk management officer has been--
could you speak to that in terms of how you think that is going
to help the process, if at all?
Mr. Caplin. Right now, my image is that they simply are
caught unawares by the changes in the marketplace. So what
happened is there was a major switch in termination behavior of
the loans. They didn't catch it the first time around.
That is--in a way, I don't know where to hand
responsibility. It might be IFE. It might be that the people
reading from FHA should have picked that up. It seems that it
is endemic that nobody quite has enough data on hand, or enough
of it gathered together, to be able to answer the questions in
the correct way.
That persists today. Now, I don't blame those who have just
come in.
Mrs. Capito. Right.
Mr. Caplin. That is, they really are new. But I do believe
that the right response is, oh, some problems have been
identified. These are genuine problems; they need to be
rectified.
In the process of rectifying them, I believe one would
uncover what the system needs to be for effective risk
management in the future. And currently, it is just not in
place.
Mrs. Capito. Do you think this, in part, is an explanation
for the difference in the two figures that we were discussing
earlier? I don't know if you were here for the first panel, but
the two estimating figures, the White House and then the CBO,
there is a vast difference between what the estimated revenues
would be. I mean, it is like a $4 billion difference.
Is that playing into the same scenario that you are
speaking about?
Mr. Caplin. That is just the beginning; it is much larger
than that, if you go forward and simulate out with different
models. The differences are massive.
Mrs. Capito. All right. Thank you.
Mr. Courson, we have talked a little bit about--and there
have been some differing opinions on the proposal to go below
579 and increase the downpayment to 10 percent.
Are many of your members currently doing FHA loans with a
FICO score of 579 and below?
Mr. Courson. No, they are not, Congresswoman. And I would
like to comment on that. We have talked a lot about FICO scores
today, and the comment has been made that even at 580, there
are not a lot of loans being made.
Underwriting--having been in this business for more than 40
years--is an art. It is not a science. And we keep talking
about numbers, a 580 or a 620.
We have said, and we believe, that in addition to FICO
score--which is an indicator--that what really needs to happen
here to look at the credit and who is creditworthy is to look
at the FHA's automated underwriting system, Total Scorecard,
that they came out with a number of years ago.
But I find it interesting that through these hearings, we
are not talking about looking inside their automated
underwriting system and looking at what the indicators are in
there. That is what lenders are using to make credit judgments.
It is not just the FICO. There are a lot of factors that make a
decision as to whether that loan is an appropriate loan to be
made.
I have mentioned this to Commissioner Stevens, and we are
going to be working with him, hopefully to get inside this
underwriting system for a more robust decision as opposed to
just a FICO-based decision.
Mrs. Capito. Ms. Aponte, I am curious. We have had this in
several other hearings, certainly with the foreclosure
mitigation, different programs that we have dealt with.
Millions and millions, probably billions, of dollars going to
housing counseling.
Is your organization one of those nonprofits--and Mr.
Taylor, I am sure you know many as well--that are getting
either the stimulus dollars or other dollars? Can you quantify
that for me, how much La Raza is presently getting this year
for housing counseling?
Ms. Aponte. Sure. We are one of, I would say, about 15 or
so. There are national HUD intermediaries.
Mrs. Capito. Right.
Ms. Aponte. So we do receive funding through HUD. And we
also through the NFMC program, which is specifically for
foreclosure prevention, I believe last year it was $1.3
million, and the highest amounts that folks were receiving were
$3.5 million. So about five other organizations received that
amount, and we are at about $1.3 million for the last year.
Mrs. Capito. Is the increase in that--do you think it is
having any effect in terms of not the origination, maybe, so
much, but keeping people in their homes? Are you finding some
success with the housing counseling, since we are putting a lot
of dollars into it?
Ms. Aponte. Yes. There are a lot of other factors that go
into foreclosure prevention. So just because the MHA numbers
are showing that loan modifications are difficult, there are a
lot of trial period modifications. Counselors are able to help
families with different options for foreclosure prevention.
There are short sales that--some people don't qualify for a
loan modification. They need help to get a short sale. Some
people will need to get a deed in lieu. Some people will go
into foreclosure, but the counseling agency is there to help
them--there are support groups that are developed through these
community-based organizations--and to help them rebuild their
credit and get back on their feet.
Mrs. Capito. Well, thank you. Just in closing, I would like
to thank everybody, too. I think we have gotten a lot of good
perspectives. And I would like to encourage you all to take a
look at the bill I just dropped yesterday, and any input that
you would care to give me and all of us, I would certainly
appreciate it.
I think certainly the safety and soundness of FHA is
extremely critical to many, many people across this country.
And to you all and your businesses, certainly, but these are
families in homes with futures. So thank you very much.
Chairwoman Waters. I also would like to thank all of you
for your participation here today. I have also learned an awful
lot.
I really would like to encourage you to participate in the
comment period, and to continue to talk with us. Call us. Meet
with us. Meet with our staffs in our offices to further support
your position as it relates to the changes that are being
proposed by FHA.
And I would like to talk with some of you about the
appraisal system and some complaints that I have had about
consolidation in that area and a few other things. So we are
going to rely on you and your expertise to help us do it right.
Thank you all very much.
The Chair notes again that some members may have additional
questions. Yes, without objection, we have a communication from
the Manufactured Housing Association for Regulatory Reform to
be entered into the record.
Those are the only written statements that we have. I thank
you, and this hearing is adjourned.
[Whereupon, at 4:04 p.m., the hearing was adjourned.]
A P P E N D I X
March 11, 2010
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