[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] BAILOUT, BUST, OR MUCH ADO ABOUT NOTHING?: A LOOK AT THE FEDERAL HOUSING ADMINISTRATION'S 2012 ACTUARIAL REPORT ======================================================================= HEARING BEFORE THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ FEBRUARY 13, 2013 __________ Printed for the use of the Committee on Financial Services Serial No. 113-2 U.S. GOVERNMENT PRINTING OFFICE 80-868 WASHINGTON : 2013 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking Chairman Member SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York Emeritus NYDIA M. VELAZQUEZ, New York PETER T. KING, New York MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia KEVIN McCARTHY, California AL GREEN, Texas STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri BILL POSEY, Florida GWEN MOORE, Wisconsin MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota Pennsylvania ED PERLMUTTER, Colorado LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama JAMES B. RENACCI, Ohio BILL FOSTER, Illinois ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan MICHAEL G. GRIMM, New York PATRICK MURPHY, Florida STEVE STIVERS, Ohio JOHN K. DELANEY, Maryland STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona MARLIN A. STUTZMAN, Indiana JOYCE BEATTY, Ohio MICK MULVANEY, South Carolina DENNY HECK, Washington RANDY HULTGREN, Illinois DENNIS A. ROSS, Florida ROBERT PITTENGER, North Carolina ANN WAGNER, Missouri ANDY BARR, Kentucky TOM COTTON, Arkansas Shannon McGahn, Staff Director James H. Clinger, Chief Counsel C O N T E N T S ---------- Page Hearing held on: February 13, 2013............................................ 1 Appendix: February 13, 2013............................................ 57 WITNESSES Wednesday, February 13, 2013 Galante, Hon. Carol J., Commissioner and Assistant Secretary for Housing, Federal Housing Administration (FHA).................. 8 APPENDIX Prepared statements: Hinojosa, Hon. Ruben......................................... 58 Neugebauer, Hon. Randy....................................... 59 Ross, Hon. Dennis............................................ 61 Galante, Hon. Carol J........................................ 62 Additional Material Submitted for the Record Garrett, Hon. Scott: Talking Points on Amendments to H.R. 5072, the FHA Reform Act of 2010.................................................... 80 Huizenga, Hon. Bill: Letter to Chairman Jeb Hensarling and Ranking Member Maxine Waters from Fred R. Becker, Jr., President and CEO of the National Association of Federal Credit Unions (NAFCU), dated February 5, 2013..................................... 84 Maloney, Hon. Carolyn: Letter to HUD Secretary Shaun Donovan, dated November 9, 2012 86 Response letter from Elliot M. Mincberg, HUD General Deputy Assistant Secretary for Congressional and Intergovernmental Relations, dated February 11, 2013......................... 87 Galante, Hon. Carol J.: Responses to questions for the record submitted by Representatives Foster, Hinojosa, Luetkemeyer, Ross, and Royce...................................................... 93 BAILOUT, BUST, OR MUCH ADO ABOUT NOTHING?: A LOOK AT THE FEDERAL HOUSING ADMINISTRATION'S 2012 ACTUARIAL REPORT ---------- Wednesday, February 13, 2013 U.S. House of Representatives, Committee on Financial Services, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. Members present: Representatives Hensarling, Bachus, Royce, Lucas, Capito, Garrett, Neugebauer, McHenry, Campbell, Bachmann, Posey, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Cotton; Waters, Maloney, Velazquez, Sherman, Meeks, Capuano, Hinojosa, Clay, Scott, Green, Cleaver, Ellison, Perlmutter, Himes, Carney, Sewell, Kildee, Murphy, Delaney, Sinema, Beatty, and Heck. Chairman Hensarling. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the committee at any time. The Chair will now recognize himself for 5 minutes for an opening statement. The American people deserve and demand a healthy economy. They deserve it today. What they do not deserve is the anxiety of stagnant jobs and paychecks that shrink in the face of higher gas prices, health insurance premiums, and the list goes on. And they particularly do not deserve the anxiety of wondering whether their children and grandchildren will drown in a sea of debt. To my left and to my right, I have up the National Debt Clock. For those who are unfamiliar with it, this Nation has racked up more debt on a nominal basis in the last 4 years than in the previous 200 years. It stands at--at least before we turned it on, it stood at $136,178 per household. For many constituents in the 5th District of Texas, that is more than they will ever amass in savings in their lifetime, and they owe it as their share of the Federal debt. The spending-driven debt crisis that we have today is the great existential threat to our Nation of this generation. For us to have a healthy economy, we must put the Nation on a sustainable fiscal path, and to have a sustainable fiscal path, we must also have a sustainable housing finance system. I have grave fears that FHA, as it is operating today, is an impediment to both, and that is why this committee is holding the second in what will be a series of hearings on the financial health, stability, and mission of the Federal Housing Administration. As was well established in last week's hearing, the FHA is currently facing some tremendous financial challenges stemming from its dramatically increased market share and the dramatically deteriorating economic value of its insurance portfolio. I am very pleased that we have Carol Galante, the FHA Commissioner and Assistant Secretary for Housing at HUD, here today to help us sort through some of the issues that challenge and surround the status of the FHA. In response to the housing crisis of the late 2000s, the FHA has morphed into a mortgage insurer of last resort to a dominant component in our mortgage finance system. In fact, the FHA now controls more than 56 percent of the total mortgage insurance market in terms of new loan endorsements, crowding out its private competitors with extremely low downpayment requirements and expanding its insurance to higher-income individuals and houses in the upper end of the marketplace. The policy of cheap, up-front pricing and elevated maximum loan limits as high as $729,000 has allowed the total size of FHA's insurance book of business to explode by more than 64 percent, up to $1.13 trillion in Fiscal Year 2012, making FHA the largest mortgage insurance company in the United States. And what is the result for the FHA and taxpayers of this unprecedented mission creep? The FHA is broke. The FHA is flat broke, and I fear soon the FHA will prove to be bailout broke. Now, that is not just my conclusion; it is the conclusion of the annual independent actuarial study of FHA's Mutual Mortgage Insurance Fund--the government fund that insures the FHA single-family mortgages--that was released last November. I quote: ``The economic value of the fund as of Fiscal Year 2012 is negative $13.48 billion.'' And the study did not even factor in the FHA's money-losing book of home equity conversion mortgage, and I quote from the same report, ``The economic value of the HECM portion of the Mutual Mortgage Insurance Fund to be negative $2.8 billion.'' Clearly, the FHA is in a dire financial predicament where its projected future insurance claims far exceed its current cash on hand, a situation that ought to concern both critics and proponents of the FHA. So the conclusions of the annual independent actuarial study give rise to several fundamental questions regarding the FHA that I hope Commissioner Galante can shed light upon. As I have said before, hardworking Americans demand a healthy economy, and we cannot have a healthy economy until we have a sustainable path to fiscal sustainability for our Nation, and until we have a sustainable housing finance system that is also competitive. I now recognize Ranking Member Waters for 2 minutes. Ms. Waters. Thank you very much, Mr. Chairman, for holding this hearing this morning, which is the second in your series of hearings about the health of the Federal Housing Administration. We all agree that we need to closely monitor the health of FHA in light of the 2012 report from the agency's independent actuary, and we want to make sure that we remain focused on our long-term goals to help revive the mortgage market, bolster the economy, help qualified borrowers, and protect American taxpayers. As I said at the hearing last week, we must recognize the tremendous value that FHA has contributed to our economy, particularly since the financial crisis. And we must be cautious about moving too precipitously to constrain FHA's role, being mindful of the fact that constricting credit too quickly could harm our housing recovery. Let's be clear about what FHA is and what it is not. Emerging out of the foreclosure crisis that occurred during the Great Depression, the FHA was instrumental in creating the long-term, fixed-rate mortgages that form the backbone of our housing finance system, and that millions of middle-class families have used to build their long-term economic security. In the wake of a 2008 financial crisis caused by poorly underwritten loans from the private sector, FHA was able to ramp up from its tiny pre-crisis market share and provide crucial liquidity. One estimate from Moody's Analytics found that if FHA went out of business in October of 2010, housing construction would have plunged 60 percent, home prices would have dropped an additional 25 percent, and our economy would have lost 3 million jobs and a half-trillion dollars of economic output. So with that in mind, I am eager to hear from Commissioner Galante on how FHA is fulfilling its statutory mission while also taking steps to boost its finances in the wake of the financial crisis. I yield back. Chairman Hensarling. The Chair now recognizes the gentleman from Texas, the chairman of the Housing and Insurance Subcommittee, Mr. Neugebauer, for 2 minutes. Mr. Neugebauer. I thank you, Mr. Chairman. Oversight is an important aspect of what people in America expect from Congress, and this committee has tried to do oversight on a number of agencies, including FHA. An important part of that oversight process is making sure that we have information that is factual and that we can count on. And when we look at FHA, what we notice is that over the last 2 or 3 years, we have had people come and testify that things are okay at FHA, that they are getting better, and yet the facts don't prove that out. And each year, in fact, the projections were missed. What we have now learned is that this agency is in much more terrible financial shape than we were told it was going to be. It kind of reminds me of the story about the doctor who called his patient and said, ``I have some good news and I have some bad news.'' The patient said, ``Well, what is the bad news?'' The doctor said, ``Well, those tests that we did a few months ago, I misinterpreted them, and in fact, it turns out that you do have a terminal illness and you only have 6 months to live.'' The patient asked, ``Well, if that is the good news, what is the bad news?'' And the doctor said, ``Well, the bad news is I should have called you 6 months ago.'' And I think where we are today is that it has been represented to us that FHA is on the course of recovery and being healthier, but in fact, it is not. If a CEO of a major company kept telling his shareholders that things were getting better, and they kept having poor earnings, that CEO would soon be removed. I think what is a cause of concern and hope that we will gain from this hearing today is, what is the true condition of FHA? But more importantly, what steps are being taken to remedy this so that we can put this entity back on track and take the taxpayers off the hook for having to fund another bailout. With that, Mr. Chairman, I yield back. Chairman Hensarling. The Chair now recognizes the gentleman from Missouri, Mr. Cleaver, for 2 minutes. Mr. Cleaver. Thank you, Mr. Chairman. I am extremely pleased that we have the Commissioner here today. I was a bit concerned last week because, whether intentionally done or not, there were those who at least suggested that in part the recession was caused by FHA or that FHA played a major role. And I always think we ought to laud loudly and allege lightly. My concern today is that when you look at the facts, when the recession began we, FHA had almost 4 percent of the market, and I don't know how 4 percent of the market could essentially ransack the entire housing market. But the issue is that FHA, as Mr. Neugebauer said, does come before this committee and we have a responsibility for oversight. And I think we ought to do that. I think that it is important for the best information to be brought forward. And I will just suggest to everybody on the committee that if we eliminate FHA and CRA, we won't have anybody to blame. So let's at least get FHA healthy so that we can blame FHA in order to have somebody to blame. We need a scapegoat, and I think we can probably lay it on FHA. If we give up our power to change things, we do so because we are blaming instead of fixing. Thank you, Mr. Chairman. Chairman Hensarling. The Chair now recognizes the gentlelady from Minnesota, Mrs. Bachmann, for 2 minutes. Mrs. Bachmann. Thank you so much, Mr. Chairman. I think it is important for us to know where we are going, and for us to know where we are going, it seems to me prudent to know where we have been. And if there is anything that the years 2006, 2008 forward has shown us is that it isn't a very good idea for government to be forcing mortgage lenders to make loans to people who either: (a) can't pay the loan back; or (b) aren't willing to pay the loan back. One thing that is very concerning about FHA and its process of insuring loans is that loans that are being made to people who either have bad credit or have nearly no downpayment or nearly no income. And my question is, who is being helped by this situation? Especially when in 2008, FHA had something like 28 percent of all of the mortgage insurance market, now they have doubled that to about 56 percent, and we are seeing that we could be on the hook--the taxpayers--for something like $16 billion at a time when we are the brokest nation in the history of the world. And so it seems to me that we have to get a grip on this because it is deja vu all over again if we are going to continue this practice that could keep putting us back into bailout broke status. It is a good thing to have people at all income levels be able to get into a house, but it is only a good thing if they can keep that house, if they can pay for that house. So it is important for us to look at strategies. Maybe it would make more sense for people to have a little bit more skin in the game when they put money down; maybe it would make a little bit more sense to make sure that their income is stable; maybe it would make a little more sense to make sure that they have a good credit score. We want this industry to absolutely succeed wildly, but what government is doing right now is hurting the housing industry, and let's see how we can turn it around. Ms. Waters. Is it appropriate for me to ask for--to clear up the record on the statement of the gentlelady? Did she say we are the brokest nation in the history of the world? Chairman Hensarling. We could pull the record at a later time for the ranking member, but otherwise that question is not in order unless you want to take it out of the time of your-- Mrs. Bachmann. And, Mr. Chairman, I would love to-- Chairman Hensarling. I understand. I am sure you two could have a wonderful conversation after we get through opening statements-- Mrs. Bachmann. I will be happy to offer substantiation for the record. Chairman Hensarling. --but we do want to get to the Commissioner in due time. The gentleman from Colorado, Mr. Perlmutter, is recognized for 2 minutes. Mr. Perlmutter. Thank you, Mr. Chairman. I think we need to have a little lesson in history here, and I thank the Commissioner for being here, and really I want to thank the FHA for keeping the housing market alive from 2008 until 2011, when the private sector has finally decided to get back into the housing market business. But the abuses under the Bush Administration from 2003 to 2007, when there was zero down, and no income showing, and the private sector was buying these kinds of loans and then we have the crash at the end of 2007, 2008, where the whole housing market shrunk, and the only game in town was to get an FHA loan for most Americans. Without that, there would have been no housing market, and the recession would have been deeper than it was. And so clearly, the book of business between 2003 and 2007 for the private sector or the public sector was bad. In Colorado, we see our housing market coming back pretty substantially. But the private sector still wants the best credit. I don't blame them. They want to make sure that everybody has a 750 or 800 FICO score. I don't blame them. Most Americans don't have a lot of cash to be able to buy that home but they do have an income, and if we don't abuse the system, as we saw in the Bush Administration during those years of 2003, 2007, where people were getting loans that they never should have gotten, then we will have a strong housing market and the FHA needs to play a substantial role. The private sector will grow as the economy stabilizes. But thank goodness loans were being made during the time when the market fell apart. So clearly, like any government agency or any institution, it isn't perfect and there are things that can be fixed, but I just want to thank you for your testimony today in advance of what you have to say. Thank you. Chairman Hensarling. The Chair now recognizes the gentleman from Georgia, Mr. Scott, for 2 minutes. Mr. Scott. Thank you very much, Mr. Chairman. First of all, the American people are pretty much sick and tired of this antigovernment, antigovernment. We need FHA today more than we ever needed it. When this economy went through the turmoil that we went through over the last 4 or 5 years, it was due to the downturn in the real estate market, the downturn in housing. No sector of our economy was affected more than housing. That is what dragged it down. But it was because we had an FHA that we were able to turn this thing around. If we have an example of where government works, FHA is at the center of this. The soundness of FHA is particularly vital to our national housing market. Why? Because it plays a critical role as a backstop to lenders if borrowers are unable to pay their mortgages through no fault of their own. We went through an extraordinary downturn in the employment. Thank God we had an FHA there. The guarantee that FHA offers enables banks to offer mortgages to potential borrowers with less desirable credit scores or lower incomes. This is America. We have a variety of income stratas. In 2010, FHA had a 19.1 percent share of the mortgage market, representing a substantial portion of the housing sector. And FHA is especially critical to minority homebuyers. Listen: No sector of our population was hit as hard as the African-American market, and through no fault of their own. They were steered into abusive lending practices, primarily because they were Black. Now, let me tell you something. In my State of Georgia, we ranked fourth in foreclosure in 2012. Each year in the last 4 years, we gave foreclosure prevention programs. Without FHA, we would not-- Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Georgia, Mr. Westmoreland, for 1 minute. Mr. Westmoreland. Thank you for having this hearing, and I hope that we can get FHA back to the original intent that it was created for: to help the first-time homebuyer and people who might not otherwise be able to attain a mortgage. But at the same time, I hope that we can also get the private sector-- private mortgage insurance writers--into the game because if they ran their business like the FHA has run their business, they would be out of business. And so, while we are trying to make sure that we keep a secondary market or availability for certain homebuyers, I think we need to do more to turn it back over. And I think if you look at what Secretary Donovan said in 2009: ``Based on current projections in absence of any catastrophic home price decline, FHA will not need to ask Congress and the American taxpayer for any bailout. Indeed, because of the quality of loans FHA is making today, the independent actuary expects this drop to be temporary and return about 2 percent within the next 2 to 3 years.'' And I hope there will be an explanation of why it said minus-- Chairman Hensarling. The time-- Mr. Westmoreland. --44-- Chairman Hensarling. --of the gentleman has expired. The Chair now recognizes the gentlelady from New York, Mrs. Maloney, for 2 minutes. Mrs. Maloney. Thank you. And welcome Commissioner Galante, and congratulations on your confirmation. As one who represents one of the hardest hit areas by Hurricane Sandy, I want to thank you for the steps that you took to help the victims of the hurricane, including moratoriums on foreclosures, rental assistance to those who were displaced, and other significant assistance. We know that FHA was established after the Great Depression to be a backstop to housing, and it was designed to act as a countercyclical force in the market, ballooning in times of economic stress and contracting in times of economic prosperity. And we have seen a great flux in their market share. It has been as low as 3 percent of the market and it is currently 14.6 percent of the market, but very importantly, it is down from 21 percent in 2009. So there is no question that it plays a critical role in our housing finance system. We have a bipartisan, strong support that--and know that FHA fills a very important role for first-time homebuyers. Now, some have expressed some concern about the health of the fund. I share that concern and I wrote the Commissioner in November. I received her response of the steps that they are taking. I would like permission to place my letter and her response into the record and to note that they have taken important steps, specifically: raising the insurance premium 5 times; selling distressed assets at an increased pace; implementing new downpayment and credit score requirements; and making changes to its reverse mortgage program. I would like to note and place into the record a Moody's analysis that has said that if FHA had closed its doors in October of 2010, home prices would have dropped an additional 25 percent, and we would have lost an additional 3 million jobs. No one is keeping the private sector from coming in and helping, but if they are not there, FHA is there to help the housing and first-time homebuyers. Thank you. Chairman Hensarling. This morning, we welcome Carol Galante as our sole witness. She is the Commissioner of the Federal Housing Administration and the Assistant Secretary for Housing of the U.S. Department of Housing and Urban Development. She first joined HUD in May of 2009 as the Deputy Assistant Secretary for Multifamily Housing. Among other things, the Commissioner has direct responsibility for oversight and administration of the FHA's trillion dollar insurance portfolio. The witness will be here until 1 p.m.; thus, I will be very strict with the gavel for all Members. Commissioner Galante, you will be recognized for your requested 7 minutes to give an oral presentation of your testimony. And without objection, your full written statement will be made a part of the record. Commissioner Galante, you are now recognized. STATEMENT OF THE HONORABLE CAROL J. GALANTE, COMMISSIONER AND ASSISTANT SECRETARY FOR HOUSING, FEDERAL HOUSING ADMINISTRATION (FHA) Ms. Galante. Thank you. Good morning, Chairman Hensarling, Ranking Member Waters, and members of the committee. I appreciate the opportunity to appear before you to discuss the FHA and the critical role it has played in our Nation's housing finance system as well as policy changes enacted and needed to further strengthen the Mutual Mortgage Insurance (MMI) Fund. This is an important moment for our housing market and our Nation's economic recovery. There are encouraging signs: housing construction growing faster than it has since 2008, the strongest year of home sales since the economic crisis began, and rising home values lifting 1.4 million families above water in 2012. FHA's programs have been a critical component of this recovery. That should come as no surprise, given the program's goals and history. With the dual mission of providing access to homeownership to underserved and low-wealth populations, and acting as a stabilizing force during periods of economic stress, the FHA is designed to fill gaps in the market. It is clear that FHA has done just that. By ensuring needed liquidity in the Nation's mortgage finance markets, FHA was a vital stabilizing force as we experienced the worst economic decline since the Great Depression. In the last 4 years, the FHA has made homeownership possible for 3.5 million families, including 2.8 million first-time homebuyers, and for 50 percent of all African-American and Latino homebuyers in the last year. And Moody's Analytics estimates that were it not for the FHA's presence during the crisis, home prices would have fallen another 25 percent. While FHA has acted as a critical support, it was not immune to the stresses of falling home values and rising unemployment. According to the independent actuary's annual report on the MMI Fund, in 2012 the capital reserve ratio fell below zero to negative 1.44 percent, representing a value of negative $16.3 billion. Now, we take these findings extremely seriously. As stewards of taxpayer dollars we have, since the start of this Administration, made it a priority to strengthen the fund, and we are continuing to take aggressive action to return the fund to fiscal health, including action discussed in our annual report to Congress as well as additional changes announced last month. It is important to understand, as well, that the actuary's report does not in and of itself mean that it will be necessary for FHA to use its authority to draw from Treasury to reserve for projected losses over the next 30 years. While this is a possibility, it is dependent on several factors, including the estimates in the President's upcoming budget submission and the actions and activities of FHA throughout the remainder of the fiscal year. And let me assure you that: one, FHA has $31 billion in current reserves; and two, we remain committed to taking every action appropriate to protect taxpayers while continuing to ensure that FHA supports the stabilization of the housing market and that families have access to sustainable mortgage credit options. With the help of Congress, this Administration has already taken significant actions to protect and strengthen the fund, including: five separate premium increases; changes to credit policies such as increasing downpayments for certain borrowers, and ending seller-financed downpayment assistance; and better oversight and enforcement of FHA lenders. Were it not for the flexibility granted by Congress to FHA in 2010 in setting premium pricing, the current economic value of the MMI Fund would be more than $2 billion--I am sorry, $10 billion lower than it is today. Additionally, Congress paved the way for us to establish FHA's first ever office of risk management, which has been instrumental in strengthening oversight and implementing policies to better protect the fund. Together, our efforts to strengthen and protect FHA have added well over $32 billion to the fund, to date. As attested to by the actuary in its report and which can be seen in the slide shown here, the strong efforts of FHA to improve the quality of new FHA-insured loans have worked, as loans insured since 2010 are expected to be the most profitable and strongest in the agency's history. The reason for this is that we have made substantial progress in reducing losses from defaulted loans while simultaneously increasing revenues through premium increases and policy changes. These improvements are visible on the next slide, as you see here, as a result of loans insured since 2010 are projected to generate $20 billion in additional value for FHA. However, as the actuarial further protests, with fully $70 billion in claims attributable to the 2007, 2009 books of business, there remains substantial additional work to be done to mitigate the impact of legacy loans insured during that time. That is why we have devoted significant attention to addressing the severe stresses placed on the fund by these loans, employing a number of innovative approaches to enhance the effectiveness of FHA's loss mitigation policies and reduce FHA's losses resulting from nonperforming assets. Under our existing authority, we have confronted FHA stresses at every point in the lending cycle, and in doing so, we have both strengthened FHA for the long term and set the stage for the return of private capital to the market. And in fact, our market share has been declining steadily since its peak in 2009 from a level of nearly 30 percent at that time to less than 15 percent today. At the same time, we recognize that this housing recovery is fragile, that access to credit remains critical to solidifying the recovery, and that FHA must balance these important goals as we proceed with changes that protect the fund. That said, with your help we could do even more to protect the fund while not damaging access to credit for responsible borrowers. We have developed a comprehensive list of additional risk management and lender enforcement authorities that will further enhance FHA's risk management and fiscal health. Many of these were included in the bipartisan reform legislation initiated by this committee and passed by the full House in the last Congress. I sincerely hope that we will once again be able to work together with Congress on efforts that protect FHA and strengthen its programs. Mr. Chairman, in addition to strengthening FHA's financial picture, there does remain a broader question as to FHA's role over the long term as we begin to look to a new system of housing finance in this country. As we work to create a safer, stronger, and more robust system of housing finance, where private capital plays a primary role and taxpayers are protected from unnecessary losses arising from the activities of private lenders, we must consider the place of FHA in that system. It is critically important that this work be done in a coordinated and comprehensive way where all components of the system are addressed in an interrelated manner. I believe that just as it has for nearly 80 years, FHA's mission will continue to remain relevant and important in providing a pathway to the middle class and quality, affordable housing opportunities for American families. And I look forward to working with this committee to strengthen, protect, and equip FHA to play this important role. I thank you very much, and I am happy to answer your questions. [The prepared statement of Commissioner Galante can be found on page 62 of the appendix.] Chairman Hensarling. Thank you, Commissioner. The Chair will yield himself 5 minutes at this time. Commissioner Galante, as bad as the picture appears from the independent actuary report, I fear that the true finances could potentially be even worse. Last week, we had testimony from Mr. Ed Pinto, a resident fellow at the AEI, who said, ``Under Generally Accepted Accounting Principles, FHA has a current net worth today estimated at a negative $26 billion, meaning it has a total capital shortfall today of $47 billion, based on its 2 percent capital requirement.'' Professor Joe Gyourko, who is a professor of real estate finance and business and public policy at the Wharton School of Business says, ``The FHA's main insurance program is materially undercapitalized with the likely amount of capital infusion required being in the $50 billion to $100 billion range.'' Dr. Mark Calabria, who is the director of financial regulation studies at the Cato Institute, said, ``Relatively small changes in the performance of FHA's portfolio could result in significant losses to the taxpayer. Reasonably foreseeable changes to the FHA's performance could easily cost the taxpayer tens of billions of dollars, surpassing the ultimate cost of the Troubled Asset Relief Program bailouts, otherwise known as TARP.'' Are you familiar with the studies and analysis of these economists? Ms. Galante. Some of them, yes. Chairman Hensarling. And do you have a critical analysis of them? Do you find them accurate or inaccurate? Ms. Galante. Mr. Chairman, what I would say is that the FHA is accounting for its projected losses over a 30-year period of time, and that is done under the Federal Credit Reform Act, put in place in 1990, which is when the first capital reserve ratio was also instituted for FHA. So-- Chairman Hensarling. No, I understand that. But do you find the analysis correct or incorrect? Ms. Galante. I would say that they are trying to interpolate, from my understanding, how you would project losses under a totally different accounting system, so-- Chairman Hensarling. Okay. If I could move on, can I have the chart I requested, please? With respect to projections, Commissioner Galante, my concern here is that for over a 4-year period the projections-- and one of these days this committee room will get larger screens--but this is not the first time that we have heard similar testimony. And in fact, last year the HUD Inspector General testified that FHA continues to project that current and future year books of business will be profitable and make up for these past year losses. But we have seen in the past 3 years, it is a troubling trend whereby the point at which the fund is expected to reach its mandated capital level is pushed further into the future. So, if you look at the slope that goes down, that is the actual ratio in the fund, and the four lines that move upward are the predictions. And unfortunately, Commissioner Galante, not only has FHA been wrong, it has been wrong for 4 years in a row, and I started this hearing showing our National Debt Clock. It reminds me of the book written by Professors Reinhart and Rogoff entitled, ``This Time is Different'' about nations who encounter financial crises. And so I guess the question is, after 4 years of being wrong, why is this testimony different? Ms. Galante. Thank you, Mr. Chairman, for your question. Let me be clear about the actuarial projections. First of all, these are independent--it is an independent actuary and they rely on independent economic forecasts that are predicting-- forecasting--30 years' worth of house price appreciation, trends in interest rates, and how those economic forecasts will impact-- Chairman Hensarling. But do you find fault with the audit? Ms. Galante. I would say this: projecting, you could ask 100 different economists in 2008 what the house price projections were going to be and you would get 100 different answers. There are a couple--when you are projecting over 30 years and you are projecting over 30 years at the depth of a crisis, being able to make those-- Chairman Hensarling. I understand that, but it has been 4 years in a row, and I am going to attempt to set a good example. I only have 30 seconds left. The Housing Act of 1934 says that the FHA ``shall ensure that the Mutual Mortgage Insurance Fund maintains a 2 percent capital ratio at all times.'' It doesn't say ``may,'' it doesn't say ``might,'' it doesn't say ``try;'' it says ``shall.'' What should the consequences be that for 4 years running the agency has violated the law? Ms. Galante. Again, Mr. Chairman, the 2 percent capital ratio is a--not meeting it is a finding in our audit. We take that seriously. We have been working as hard as we can to make policy changes so that we can get back to that capital ratio. Chairman Hensarling. I thank you. The Chair now recognizes the ranking member for 5 minutes. Ms. Waters. Thank you very much. Ms. Galante, I am very pleased that you are here today because this is one of the subjects on which we have had so much misleading information. For example: the FHA is crowding out competing with the private market; the FHA has an unfair advantage over the private market. It was suggested in the last hearing that FHA represents 56 percent of the market, but I understand and I think your testimony just a moment ago said it is closer to 15 percent. Is that correct? Ms. Galante. Yes, Ranking Member Waters. Let me just say this: There is the total housing market, which is the refinance and home purchase market, so we have gone from the peak of 30 percent down to less than 15 percent of the total market. On the purchase market, we have also receded--we were higher. We have also receded significantly. And of the private mortgage--of the mortgage insurance market, I think the number quoted of 56 percent, we are now more like--and there is a slide in your deck--slides four and five--that clearly demonstrate that we have been coming down even as a share of the mortgage insurance market down to more like 42 percent, and you can see that the private mortgage insurers are on their way back up. Ms. Waters. Thank you. I think it is important to get that into the record. The other statements we have heard basically--and as our chairman just pursued this discussion--the FHA, and specifically the Mutual Mortgage Insurance Fund, is broke. Now, according to data from the FHA actuarial report in fiscal year 2012, the capital reserve ratio of the agency's primary insurance fund fell below zero to negative 1.44 percent and the fund's economic value stands at negative $16.3 billion. The economic value refers to the amount that would be needed for FHA to meet all its expected claims over the next 30 years if FHA closed its doors tomorrow and had no business to offset those claims. The FHA still has--I will let you say it. How much money does the FHA still have to settle insurance claims as they come in? Ms. Galante. A couple of points on that, Congresswoman. First, we have $31 billion in reserves against those projected losses. And as you stated, there is additional revenue coming in every year from these very profitable books of business from 2010 on. So on an ongoing basis, on a cash flow basis, there is certainly money there to pay the claims. Ms. Waters. And is it true that in addition to the $30.4 billion to settle insurance claims as they come in, you basically have enough cash for at least 7 to 10 years? Ms. Galante. Yes. Again, we have ongoing business and the actuarial, by the design of the way the capital ratio is calculated, does not include any future revenue from future business. Ms. Waters. And finally, the FHA is essentially a subprime lender. That is what some of my friends on the opposite side of the aisle have been saying, that it gives risky loans to low FICO score borrowers. Would you comment on that, please? Ms. Galante. I would just say this: FHA has always been 30- year, fixed-rate, fully documented, serving a broad range of borrowers with a focus on lower-wealth individuals. These are sustainable mortgages for the families who are taking them out. Now, during the-- Ms. Waters. Madam, in the few minutes that you have, where you are being accused of being subprime lender, did you do-no documentation loans? Ms. Galante. No, we did not. Ms. Waters. Do you do resets with teaser loans? Ms. Galante. No, we do not. Ms. Waters. Do you do all of your loans going to jumbos, or how--would you explain exactly what the mission is and what you are trying to do? Ms. Galante. Yes. Again, our mission is dual, both to be a countercyclical force when needed in the market, and also to serve lower-wealth borrowers to access credit and be able to purchase or refinance a home. Ms. Waters. What would you ask this Congress to do legislatively that would make your job easier, to help you fulfill the mission? Ms. Galante. Yes. We have put forth a number of items in our report to Congress, including additional authority to enforce against lenders on a wider geographic basis. There is a whole class of lenders for which we do not have indemnification authority. And I would also add, in particular, we have not talked a lot about the reverse mortgage program, but it has some serious challenges, and we are asking for some emergency authority there. Chairman Hensarling. The Chair now recognizes the gentleman from Texas, Mr. Neugebauer. Mr. Neugebauer. I thank the chairman. Mr. Chairman, just for the record, I wanted to clear that there have been some numbers thrown around. According to GAO, this is the third quarter 2012 FHA's market share of insured market in terms of numbers of loans: the Federal Housing Administration, 56.4 percent; private mortgage insurance, 19.7 percent; and Department of Veterans Affairs, 23.9 percent. So obviously, the taxpayers are the big insurers of mortgages in this country. Ms. Galante, thank you for coming. I enjoyed our visit the other day. I really don't know where to start other than in my opening statement, I think the point I tried to make is, do you actually know where you all are? When we see the numbers that the chairman put up there where we see projections, we come back next year and it turns out those weren't the numbers, and you have an entity that, according to the study, actually has a negative net worth, but you reported that you have about $38 billion in reserves, but you are running a $1.1 trillion entity, so you are running an entity that is leveraged 36 to one, and so that is a 2.7 percent capital ratio. Any kind of financial institution in this country that had those numbers would be under some sort of cease-and-desist order. And then you look at the numbers currently right now of your delinquency rates. For example, in 2012: first quarter, it was 12 percent; second quarter, it was 11.89 percent; and third quarter, it was 11.14 percent. So an entity that is making financial transactions with those kinds of delinquencies with, according to the study that was done, has a negative net worth but according to you has a 2 percent net worth. The question is--and I think the other point I would make is, you don't even pay your operating expenses out of that fund. The taxpayers pay the operating expenses. So does the accounting that we are using now allow you to actually manage this entity? Ms. Galante. There are a number of different questions embedded there, Congressman. Let me just talk about the delinquency rates. To be clear, you have to divide this by cohort year, because we have serious--if you look, again, back at that original chart--we have some serious stress from older books of business, and those delinquencies are much higher. The delinquencies in our new book that we are writing insurance on now are extremely low. Mr. Neugebauer. But, Ms. Galante, I don't--I have a limited amount of time. A delinquency is a delinquency. Just because it is not as bad as it used to be, but it is bad over here, I have to look at--my oversight is the entire entity, and so you have some problems here. And the question is, do you have enough reserves to carry that? Some people say that you don't. I question whether you even know what reserves you need, so how do you then price your product if you don't know where you are? Ms. Galante. That is a very good question. Let me just be clear. These long-term economic projections have volatility. That does not mean that we are not monitoring the portfolio for the delinquency rates and getting rid of policies like the seller-assisted finance program that cost $14 billion. We would be above zero. We would have an economic value of almost $2 billion if it weren't for that seller-financed program. So, we got rid of it. We are monitoring the portfolio for that kind of activity all the time. One of our actions that we just took was to ensure that we did not cancel the mortgage insurance premium prematurely, that again was a policy that was being done in the past that negatively affected economic values. So we are, with our new risk management activities, clearly monitoring this portfolio on an ongoing basis. Mr. Neugebauer. Thank you. And I think the question is, the reason accounting is so important--and I am an old bean counter; I have an accounting degree--is that knowing what your product costs is an important part of pricing it. And you have some tools that are available to you that you are not necessarily using. I know you just raised the G.P. about 10 basis points but you actually could have raised it 30 basis points. The up-front premiums--you still have some room to charge additional premium there. I just question, if you don't know where you are, then how can you utilize those tools effectively, and shouldn't--given the financial picture that is painted before you today, shouldn't you be more aggressive in trying to restore this fund to at least the congressionally requested levels? Chairman Hensarling. The time of the gentleman has expired, so an incredibly brief answer, Ms. Galante? Ms. Galante. My answer on the premiums is that we have raised premiums 5 times, and we think that is the right place for the pricing of the risk that we are taking on for these new loans. And we have to be careful about pricing new borrowers to pay for the challenges of the past. We will clearly damage access to credit if we do that. Chairman Hensarling. The Chair now recognizes the gentlelady from New York, Mrs. Maloney, for 5 minutes. Mrs. Maloney. Thank you. I know that FHA worked very hard in response to the devastating effects of Superstorm Sandy, which hurt New York and my district particularly hard, as well as 23 other States, primarily New Jersey and Connecticut. Can you talk about some of the actions that FHA took to respond to help people? Specifically, what did you do to help homeowners who were affected? Ms. Galante. Yes, thank you. You know that Secretary Donovan leads the Sandy Rebuilding Task Force and he is very concerned that we help homeowners and renters alike during this crisis. And FHA, in conjunction with Fannie Mae and Freddie Mac, extended moratoriums another 90 days on both evictions as well as foreclosures that were already in process. And today, I am pleased to say that we are expediting--we are putting out guidance that we are going to expedite processing for multifamily properties that would like to come in for FHA multifamily insurance. So we are doing everything that we can to help the storm victims. Mrs. Maloney. Earlier, you responded to some questions from the ranking member on really abusive practices--predatory practices that came from the private sector and cost many homeowners their homes, which ended up in foreclosures. Another predatory practice that I am hearing complaints about from my constituents is the practice of a--when they do try to pay down their loan, they are getting a prepayment penalty. What is the policy of FHA on prepayment penalties? Do you have-- Ms. Galante. I don't believe we have prepayment penalties. Mrs. Maloney. That is another example of how FHA is really helping first-time homeowners and homebuyers by not practicing these abusive practices. It was not FHA that came out with the no-doc loans; it was not FHA that said you didn't have to put anything down; it wasn't FHA that came out with the predatory practices that contributed so heavily to the financial crisis that FHA is helping us respond to and helping homeowners to stay in their homes. Can you go over some of the steps that you have taken in terms of improving risk management that some of my colleagues seem tremendously concerned about? Ms. Galante. Yes. As I have said, we have increased premiums 5 times. We have revised downpayment requirements for borrowers with 580 FICO scores or below to 10 percent. We recently have tightened on borrowers with credit scores of 620 and under that they need to have a demonstrated no greater than 43 percent what we call debt-to-income ratio without additional compensating factors. So, we have looked at areas where the credit box needs to be tightened a bit. We have also looked at increasing premiums to ensure that we are paying for or compensating for any risks that we are taking. Those are just a few of the actions that we have taken over the past couple of years. Mrs. Maloney. Both the chairman and the ranking member have placed GSE reform as one of the top priorities for this committee to address and try to settle and to make a priority of our work on the committee. Many have said that you can't have GSE reform without a strong FHA program. Could you elaborate on that? Ms. Galante. I-- Mrs. Maloney. What role-- Ms. Galante. I think it is critically important as we go into looking at GSE reform, broader housing finance reform, that we look at the role of FHA simultaneously, and moves that might be made relative to restructuring the housing finance system with respect to the GSEs, that we also ensure that we understand what the role of FHA is as part of that entire system, as opposed to trying to take this in piecemeal. Mrs. Maloney. Thank you. I think your comments are very relevant to the task that we have with GSE reform. Thank you for your service. Ms. Galante. Thank you. Chairman Hensarling. The gentlelady yields back. The Chair now recognizes the gentleman from North Caroline, Mr. McHenry, for 5 minutes. Mr. McHenry. Thank you, Mr. Chairman. Ms. Galante, I certainly appreciate your testimony and thank you for your service to your government. Now, in looking at the FHA delinquency rate, your delinquency rate was 11.14 percent and the seriously delinquent rate was 8.54 percent. Together, that is almost 20 percent. Your delinquency rate is 2\1/2\ times that of the whole mortgage industry, and so added together, that 20 percent delinquency rate means that nearly one in five FHA-insured loans goes into default. In looking at this statistic, I look at something that Senator Elizabeth Warren once said to justify the creation of the Consumer Financial Protection Bureau: ``It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house, but it is possible to refinance an existing home with a mortgage that has that same one-in-five chance of putting the family out on the street.'' Now, since FHA performs no better than that one-in-five chance that Senator Warren references, that unacceptable default rate, how can you justify that FHA is actually helping rather than hurting average homebuyers? Ms. Galante. Congressman, just to be clear about these numbers, because I think we are conflating a couple of different things, our seriously delinquent rate is a little over 9 percent--9.5 percent-- Mr. McHenry. I am sorry. I referenced 8.54 percent, so that is higher. I am sorry. Ms. Galante. But you are adding to that people who are not seriously delinquent, they may be 30 days delinquent, and adding those together to get to your numbers. We have one in 10 who actually fail and go into some kind of foreclosure. So you can be seriously delinquent, you can be 30 days delinquent, and we have loss mitigation programs for folks, we have modification programs. We work with borrowers to get them out of delinquency, and that--just because you have missed a payment and you are ``30 days delinquent,'' does not mean that you have failed in making-- Mr. McHenry. I certainly appreciate your response, but your rate is 2\1/2\ times that of the rest of the industry. That is my comparison. Ms. Galante. I would like to address that. Let's be clear. We don't have as good a delinquency rate as the lenders who will only lend to people at an 800 FICO score and who have lots of wealth to put down--20, 30 percent downpayment, who don't need our help. We do generally focus on a borrower population that still can be very successful but-- Mr. McHenry. I appreciate the fact you don't have the numbers in front of you. But my point of reference here is that for your prime loans--that portfolio of prime loans--and I appreciate getting the message; perhaps you can give more flesh to what you just said--but the comparison for FHA prime loans to the mortgage industry's prime loans, your default--your delinquency rate is 2\1/2\ times that. Is that acceptable? Ms. Galante. Again, FHA is designed to fill in market gaps. We are designed to provide access to credit and-- Mr. McHenry. I understand your design. I have read the law. Ms. Galante. Yes. Mr. McHenry. With all due respect, I have read the law. I am giving you statistics from the DBA Delinquency Survey for the third quarter of 2012. So I understand you are quibbling with my statistics. Tell me what the acceptable delinquency rate is for FHA. Ms. Galante. I would just say this: We have borrowers who ultimately, on average, over time are not successful, so they are subject to foreclosure is a 10 percent number. Mr. McHenry. And is that acceptable? Ms. Galante. I believe that on average, across 40 years, across all different kinds of borrowers--if 90 percent of our borrowers are going to be successful, a 10 percent rate is--we would like to get it lower. It is certainly lower for our new populations moving forward. But I don't think that is unacceptable, no. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentlelady from New York, Ms. Velazquez, for 5 minutes. Ms. Velazquez. Thank you, Mr. Chairman. And, Commissioner, thank you for your testimony. I would like to give you an opportunity to once and for all discuss whether or not FHA forces lenders to make loans or make loans to unqualified borrowers. Ms. Galante. Thank you. Certainly, FHA does not force lenders to make any loans. We make insurance available to lenders who are willing and able to underwrite loans to our standards. I would actually say that one of the biggest challenges that we haven't talked about here today is that we have lenders who won't lend even to the FHA standards, that they are creating lender overlays on top of that because of concerns that they have. Ms. Velazquez. Thank you. The Fiscal Year 2012 actuarial report emphasized that the predicted default within FHA's portfolio was focused on loans endorsed between 2007 and 2009. Would you please explain the characteristics of these loans and the borrowers? Ms. Galante. The characteristics of those borrowers? Ms. Velazquez. Yes. Ms. Galante. So the characteristics of those-- Ms. Velazquez. At risk of default. Ms. Galante. At a risk of default? Ms. Velazquez. Yes. Ms. Galante. I would just say that these borrowers are often in places that have been subject to the greatest economic distress that has occurred in this country, so areas of high unemployment that they were impacted by, where jobs have left and they lost jobs. They are concentrated in areas where there has been the most serious economic distress. Ms. Velazquez. Can we discuss the loans that FHA insured from 2010 onward that have been performing extremely well? Why have these loans insured between 2010 to 2012 been so successful? Ms. Galante. They have been successful for a number of reasons. One, we have increased our premiums so we have more revenue coming in to protect ourselves from the risk. The other reason they have been successful is they are fully underwritten and they are being underwritten at a time when economic circumstances are better, and they are successful for those reasons. Ms. Velazquez. And do you believe that the success of these types of loans between 2010, 2012 insured by FHA can be replicated in future business? Ms. Galante. Yes, I do. And again, I would just go back to say one other element, which is, to some extent we would like to see lenders lend to a broader range than they are currently lending to in terms of the overall FHA population of loans. Ms. Velazquez. Many critics of FHA believe the private sector can effectively duplicate the agency's mortgage insurance services when it returns to the market. Do you believe that this is the case, particularly for low-income, minority, and first-time homebuyers? Ms. Galante. I do not believe that the private market can fully take care of all the borrowers that FHA takes care of, and I think you are going to witness that at the height of the crisis. That private capital fled and it really was FHA that was there for minority homebuyers. Home purchase mortgages dropped 50 percent for the entire White population. It dropped 65 percent for African Americans and Latinos. Those borrowers were even more negatively impacted than the broader market. Ms. Velazquez. During the hearing last week, some of the witnesses argued that FHA is crowding out private investors. Do you believe that is the case? Is the private sector in fact ready to return to the market? Ms. Galante. I think that the private market is starting to return and they are starting to return because they are seeing some economic recovery. They are seeing some strength in the housing market and that is a positive sign. And I think the charts that I have showed indicate that is continuing to come back. But one point that I think is really important here is that the total market shrunk during this crisis and it has not come close to coming back. So while FHA went up a little bit and now it has come down, there is a whole area we didn't step into but no one else has either. Ms. Velazquez. Thank you. I yield back. Chairman Hensarling. The Chair now recognizes the gentlelady from Minnesota, Mrs. Bachmann. Mrs. Bachmann. Thank you so much. I really was troubled by these delinquency rate numbers that Mr. McHenry brought up, because it really concerns me when I am reading that the MBA Delinquency Survey for all loans nationwide is 7.4 percent, and then you look at the FHA and it is over 11 percent, 2\1/2\ times the rate of prime loans, and the seriously delinquent rate is 8.54 percent. Delinquency is a big deal, because in my home State of Minnesota, we had 13 private banks that fell below their capital requirements, and when that happened the FDIC came in, and they were put in receivership. But when the FHA has fallen below their capital requirements, their market share has only grown. So this makes me very, very nervous and I think it is making taxpayers very, very nervous. And so my question is, is the FHA meant to be funded by the taxpayers? Ms. Galante. Thank you, Congresswoman. FHA is intended to, again, price its risk and be able to-- Mrs. Bachmann. But your funding. Are you intended to be funded by the taxpayers? Ms. Galante. Over the long term, we are intended on a day in, day out basis to be able to be self-sustaining. Mrs. Bachmann. But you would agree that you are not self- sustaining right now? Ms. Galante. What I would say is that we have a negative capital ratio, right-- Mrs. Bachmann. And that is what makes me nervous. Ms. Galante. Yes. Mrs. Bachmann. So what I want to know is, what percentage chance do you think that taxpayers will have to bail out the FHA sometime in the next 15 years if this trend continues on defaults? Ms. Galante. First of all, again, we have been--we have talked about this. The trend is much, much better than it was as a result of the economic crisis, and now that we are in recovery those trends are-- Mrs. Bachmann. But the trend on default isn't good. The trend on default is over 11 percent. Now, let me ask you this: The FHA does have risk assessment practices, right? Ms. Galante. That is correct. Mrs. Bachmann. You have them. That would include things like credit scores, downpayments, people's income. I would assume those are things that you take into account? Ms. Galante. Yes. Again, lenders make these loans under our requirements. Mrs. Bachmann. Right. And you said that you changed these risk requirements about 5 times, I think you said. You increased premiums and you talked about the FICO score, if they are below 580, they have to have a 10 percent downpayment; if they are 620--so you are talking about those scores. But when you look at conventional lending, usually your credit score has to be above 700, a minimum 650, usually with 20 percent down. So if the FHA is going to keep on taking risks by insuring so many people who have low credit scores, almost no downpayment, and almost no income to pay for a mortgage, how does the FHA differ from predatory lending practices? Ms. Galante. Again, Congresswoman, FHA is designed to deal with lower-wealth borrowers and it is appropriate for us to be taking different kinds of risks than the private market in and of itself would do. That is the point of having an FHA. Mrs. Bachmann. But wouldn't you agree that poor people are better off if they could be able to hold onto their home and stay there and live there? And wouldn't you agree that it would be far better practice for our government if we would want to help people to own the assets that they put in their home so that we are rewarding people who are able to pay their bills? Because wouldn't you agree that it really hurts a person to lose their home and it hurts their credit? Ms. Galante. It is devastating for a person to lose their home, and I just want to be clear: Again, 90 percent of our FHA borrowers are ultimately successful. You cannot look at what FHA does and who it helps and not see that we have really helped millions of families-- Mrs. Bachmann. But your default rate is 2\1/2\ times worse. That is really what the problem is, isn't it? Because it is devastating right now and we are looking at putting the taxpayers on the hook for that unconscionable level of default. That is what we are nervous about is this trend and trajectory that it seems like you want to continue because your lending practices are in the realm of predatory lending that we have been trying to mitigate against. Ms. Galante. You really--I am sorry, but you have this backwards, okay? We have had higher defaults through the economically distressed books of business where default rates are higher. You trend those forward, you blend those with now what are very, very low delinquencies, and our borrowers are going to be even more successful moving forward because we got rid of-- Chairman Hensarling. The time of the gentlelady has expired. The Chair now recognized the gentleman from California, Mr. Sherman, for 5 minutes. Mr. Sherman. Thank you. Just a couple of opening statement remarks. Yes, but, my colleague in Minnesota, you can close down this or that bank because it doesn't have the capital. The depositors are insured and people needing banking services can just walk down the block and go to a different bank. If we shut down the FHA--if we had done that, we would have had a 25 percent further decline in home values, a cost to American families of well over $3 trillion, a double-dip recession, and the effect on our debt would have been so big that when the chairman put up the debt on the screen, we would need to equip this room with bigger television sets, if you imagine what our debt would be if there was no FHA, if there was an additional 25 percent decline in home values. You have indicated to us that you would like additional tools to manage the risk of the Mutual Mortgage Insurance Fund, but many of those tools were in legislation passed by this committee and passed by the House. Could you just quickly outline what are the tools that you need and were most or all of them in that bill? Ms. Galante. Yes, thank you. Most of them were in that bill, and again, that includes indemnification authority for certain lenders so that we can hold lenders accountable if they don't follow our underwriting standards, a greater ability to terminate FHA approval of lenders on a larger geographic basis than just individual areas, more flexibility in how we deal with our compare ratio, so again, we can hold lenders accountable. So those are the actions that we are asking for, and then to deal with the reverse mortgage program. Those are the actions we are asking for moving forward. The reverse mortgage program one was not in the prior reform bill but is something that we are asking for today. Mr. Sherman. This recession is something beyond what most Americans have lived through in the past, but in the 1980s, in the big oil-producing States, we had a big downturn in the 1980s, not for the whole country but for Texas, Oklahoma, and Louisiana. And isn't it true that at that time the FHA was the primary lender in those States? The FHA helped stabilize prices and over time the private market returned on its own? Ms. Galante. Yes. My understanding is that is correct and it is a perfect example of FHA staying in a market when others leave and receding as appropriate. Mr. Sherman. So, like the gunslinger--like the hero of western movies, you came into town--a place like Texas or Oklahoma--restored order, and pretty much left town. Ms. Galante. I like the image. Mr. Sherman. Now, some say that the FHA has gone beyond its mission, but aren't you actually serving exactly what your mission is designed for, and that is to serve private market when the private market is unable or unwilling to participate? Ms. Galante. Absolutely. And I think if you were to look at slide 5 on the deck that I handed out, if you look at how private capital literally precipitously just fell off in 2007 through 2008 and FHA was there to pick up as much of the volume as we could in that very short period of time, and that is exactly what we were designed to do. Mr. Sherman. I represent an area that the statisticians would say is a little wealthier than the rest of the country. It is really just our--the home prices are higher, and one of the 12 high-cost areas in the country where your limit is at $729,000. If it wasn't for your limit being that high, all the nicer homes in my area would have dropped precipitously in value and then the homes a few blocks or miles away would have also dropped as well. Are you pricing your current guarantees, and particularly for those up between $625,000 and $729,000, high enough so that you are charging a bit more than the risk you are taking and making a profit for the Federal Government? Ms. Galante. Yes, sir, we are. And, again, we--it is a bit of an aberration that FHA has those high limits but it was necessary during the crisis. And we have instituted both higher premiums than the rest of our book of business for those higher loans, and we also just recently increased downpayment requirements for those loans as well. Mr. Sherman. So you are making money for the Federal Government that-- Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Alabama, the chairman emeritus, Mr. Bachus, for 5 minutes. Mr. Bachus. In the first 20 years of FHA's existence, there were 5,000 claims made. In other words, 5,000 mortgages fell into default or foreclosure, and that was out of almost 3 million that were made. Today, you are making--there are over 7 million mortgages outstanding and yet you are having 12,000 claims every month. You had 5,000 in the first 20 years of existence of FHA, so you are actually having more about every 10 or 12 days than you had in the first 20 years. And let me show you--I don't know if you can see--you have in front of you two charts. One shows that the default rate--now, this is on the 2010--that families with FHA mortgages are defaulting at about what appears to be over 10 times the amount of Fannie mortgages and the same for MGIC. Does that greatly disturb you--that foreclosure rate? Ms. Galante. Again, I am not sure which chart we are referring to. On this one with the large spike, one thing that troubles me about this chart is it is not to a reasonable scale. You have left off 1967 through 2006-- Mr. Bachus. No, 1967 is--this is all in there. Didn't it start going up in--when did it start--when did you take this chart increase? Ms. Galante. I think that if you put this on a proper scale, it is not as sharp an increase as it would otherwise appear-- Mr. Bachus. Let me ask you this: From 1954 to 2003, it was less than two. Now on any scale it is above--it is above 18 today. Is that not correct? Ms. Galante. I am not sure that is correct. Mr. Bachus. So you are saying-- Ms. Galante. Again, I am just looking at this for the first time so it is a little hard to look at these numbers-- Mr. Bachus. So you are saying there has not been a great increase in foreclosures? Ms. Galante. Again, you have to look at this over time. Were there significant-- Mr. Bachus. I am trying to do that. Ms. Galante. --increases in foreclosures at the height of the economic crisis? Absolutely. Mr. Bachus. Let's go to the second one, then, okay? Let's just take 2000--let's just take the 2010 book. Now, you don't have a problem with this chart, do you? And it shows a delinquency rate of above 5 percent. Ms. Galante. Yes. Again, I don't know the definition of the seriously delinquent in this chart compared to the way we do seriously delinquent-- Mr. Bachus. If you will see up there, it defines it. It is 5 percent. Do you consider that 5 percent of the insured loans in the 2010 book is a serious delinquency? If it is not above 5 percent, it used to be almost, as you can see from this first chart, even in 1954, it was almost nonexistent. But what is the delinquency rate today of the 2010 book? And that is the last one I think we have any records of. Can you-- Ms. Galante. So again, our overall seriously delinquent rate is 9.4 percent-- Mr. Bachus. 9.4? Ms. Galante. --today. ``Seriously'' means 90 days. But I do want-- Mr. Bachus. So the way I computed it, actually it is greater than--and I was trying to be conservative. Ms. Galante. I am just--I am trying to be direct with you here. Again, I will go back to the point I made to Congresswoman Bachmann. Seriously delinquent, 90 days late, does not--is not a failed loan. It is not a loan that ultimately goes into foreclosure. That is a different rate. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from New York, Mr. Meeks, for 5 minutes. Mr. Meeks. Thank you, Mr. Chairman. Commissioner, it is good to see you. And I am walking in and this is the second hearing that we have had, and I know if it wasn't for FHA, I might not even be sitting here, because my experience was with my parents when they first bought their home if it wasn't for FHA--their mission was to get individuals. We were in public housing and it was the dream of my parents to own a home, and they could not get a conventional loan or anything of that nature. The only way that they were able to own a home was through an FHA loan. And I understood that was the mission of FHA, to help individuals who may otherwise not be able to enjoy or live the American dream, help make that happen. And so they did that and my parents never missed a mortgage payment and going forward. So just listening back and forth sometimes I get confused. Has the historical role of FHA--has that changed or is that still the same today? Ms. Galante. It has not changed. Mr. Meeks. So it is still today, and could you give us an idea of what the housing market would look like today, particularly for a family like mine, an African American who comes from public housing, or a Hispanic who--their parents are working hard every day trying to make a living--what would that market look like today? Would my parents have a chance today to get a mortgage or something of that nature without an FHA? Ms. Galante. Again, today 50 percent of all African- American and Latino families are using FHA in order to purchase a home, so we are a very large share of credit availability for the minority community. Mr. Meeks. And what about individuals, no matter what their ethnicity is, this is their first time they want to buy a house? They have been struggling and they just got out of college, and just got married or something, and the first time they want to buy a house--is the FHA--will they--is that part of their mission, too? Can they be helpful in that? Ms. Galante. Absolutely. First-time homebuyers are very much a part of our mission. Close to 80 percent of the mortgages we make in the purchase area are for first-time homebuyers. Mr. Meeks. So, and that also, then, stimulates the economy, wouldn't you say? That, in fact, I think that there was a Mark Zandi from Moody's who said that in 2010, without the FHA, we would have had 3 million fewer jobs and a 2 percent decrease in GDP, and that in 2011, approximately half of all African Americans and Latinos who purchased homes did so, as you have indicated, through FHA. So it is clear, I think, then, that FHA has been playing a positive and supporting role in helping and moving the economy forward and making--I think you just testified that the Federal Government, at least while President Obama has been President, has been making a pretty good return on its rate to the taxpayers and to the Federal Government. Is that not correct? Ms. Galante. Yes. Again, the loans we have been making and the premiums that we have been charging for those loans since 2010--again, with the help of Congress, in order to be able to increase those premiums, are extremely profitable and are projected to be extremely profitable for the Federal Government moving forward. And we really just have this challenge of dealing with the crisis and the challenges that remain from there. And just to go back to Congressman Bachus' point for a minute, our seriously delinquent rate overall is 9.5 percent. It is now much lower. For 2010, it was 5 percent; it is even lower for 2011 and 2012. Mr. Meeks. Let me ask--at last week's hearing also, one of the witnesses questioned the necessity of having FHA provide a 100 percent insurance guarantee and suggested that Congress reduce the guarantee to 25 or 50 percent, which is currently the policy used by the V.A. Could you discuss some of the key factors for why it is important for the FHA to provide a 100 percent guarantee and some of the key differences between the FHA and the V.A. programs? Ms. Galante. Yes. So the V.A. program obviously is limited to eligible applicants from the--from Federal service in the military and so they are a smaller population of people who are eligible for the V.A. I think the idea of how much a government guarantee should be on any particular loan, there is a reasonable conversation to have there in terms of the pros and cons, right? And I do believe that the V.A. has a totally different structure for how they underwrite their population. Mr. Meeks. Thank you. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Georgia, Mr. Westmoreland, for 5 minutes. Mr. Westmoreland. Thank you, Mr. Chairman. And, ma'am, my first two questions are just simple yes or nos. Are you familiar with the GAO high-risk list? Ms. Galante. Yes. Mr. Westmoreland. Is FHA on that list? Are they included in the high-risk category? Ms. Galante. Not today, no. Mr. Westmoreland. Let me say that there is some type of misconception that maybe this side wants to do away with FHA. We do not want to do away with FHA. We really agree with your statements about phasing out the countercyclical role of reducing FHA's footprint in the marketplace. We agree with the President when he says that going forward, we will coordinate reforms of Fannie Mae and Freddie Mac with changes at FHA to help insure the private market, not FHA fills the market opportunities created by reform. But for some reason, the other side seems to think we want to do away with FHA. We want to strengthen FHA. We want to make sure FHA is there. I am a builder by trade. I want FHA there. I want people to buy homes. And so, that is some type of misconception. We just want it to be on good, sound footing, just like you do and just like the President does. The other comment that the President made in the White Paper that he issued on GSEs in 2011 says the Administration will make sure that creditworthy borrowers who have incomes up to the medium level for their area have access to these mortgages, but we will do so in a way that does not allow FHA to expand during normal economic times to a share of the market that is unhealthy and unsustainable. Now, last night in his speech, he said that today our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in 6 years, home purchases are up nearly 50 percent, and construction is expanding again. Do you think that was what he was saying last night, that we are getting back to normal economic times? Ms. Galante. I do. I think we are clearly on a path of recovery, both in the housing market and the economy overall, but it is fragile and we do need to ensure that we understand that and manage to that fragility at this moment as we proceed. Mr. Westmoreland. So your goal is to get back to where typical FHA has been in the private mortgage insurance. Is that correct? Ms. Galante. We are looking forward to receding over time here, and we have--we--as I have mentioned in my testimony now several times, we have done that. But we do need to do it in a careful way, given where the economy is going. There are still risks to the economy, including something like sequestration, which would clearly be a risk to the economy and a risk to FHA. Mr. Westmoreland. So you agree that FHA having 56.4 percent of the market share private mortgage insurance outsized the role of FHA and should be decreased, right? Ms. Galante. I do, and it has declined. I think it is about 42 percent today. It was higher than 56 percent at the peak, so we are steadily declining. Mr. Westmoreland. Now, let me ask you another question. Supposedly in 2013, FHA--the President had put in his budget a bailout of $688 million, but according to the DOJ settlement, you were put in for $1 billion. So you are not projecting a shortfall for 2014? Ms. Galante. The President's budget is not out for 2014, so I-- Mr. Westmoreland. It was due last week, wasn't it? Ms. Galante. I am not in charge of putting out the President's budget. But I would just say, back to your comment about last year, yes, we did get settlement dollars that helped offset what would have been a potential draw from the budget, but that was not what really impacted us. We made premium changes, we made policy changes, we ended up actually having $3 billion more. Mr. Westmoreland. Okay. So you haven't requested a--FHA hasn't requested anything in the President's budget? Ms. Galante. The President's budget is not out-- Mr. Westmoreland. But you have made your request to the budget, right? Ms. Galante. We have made--direct appropriations requests are part of the budget-- Mr. Westmoreland. Mr. Chairman, one final question. Do you believe that FHA should be considered on the high- risk list? Chairman Hensarling. The time of the gentleman has expired. The gentleman from Massachusetts, Mr. Capuano, is recognized for 5 minutes. Mr. Capuano. Thank you, Mr. Chairman. Thank you, Madam Commissioner, for being here. I think you actually answered all the questions pretty clearly and pretty fairly and openly, and I will tell you that the questions I have really are more repetitious, to clarify a few things more than anything else. First of all, the delinquency rate. Everybody--not everybody, but some people are pointing out this 9.4 percent rate. Am I wrong to think that most of that rate is made up of loans made in the 2007 and 2008 years and that since that time the delinquency rate is well below that number? Ms. Galante. That is correct, and thank you for saying that. I think I got a little jumbled there earlier, but yes, that is the overall seriously delinquent rate, which takes into account the whole book of business-- Mr. Capuano. I guess I want to be clear, too, about FHA's mission, or what they have historically done, not necessarily even what they are doing now countercyclical. In the normal course of events, before the current crisis, did FHA compete with prime lending entities? If I was able to--if I had a score of 800 and had a gazillion dollars in the bank would FHA take me on or would I just go to a private entity? Ms. Galante. Theoretically, we could take you on, but from a price perspective and from an underwriting perspective it was much better for you to go somewhere else. That is right. Mr. Capuano. The mission of FHA, as I understand it, has always been to the more moderate-income people who might have difficulty getting into the housing market or are maybe on the cusp, not necessarily the most difficult because those people can't afford to buy a home no matter what; that is what public housing is for. But the people on the cusp is where FHA has been at the sweet spot for historical purposes. Is that a fair statement? Ms. Galante. Yes. That is a fair statement. And again, our loan limits are one of the things pre-2008 that would--which keeps FHA in that sweet spot. Mr. Capuano. At any given time, your delinquency rates or your seriously delinquency rates, or whatever term you want to use, have always been and will always be higher than prime lenders. Is that a fair statement? Ms. Galante. I think that is a fair statement. Mr. Capuano. Because you are dealing with different clientele. You are dealing with people who are working-class people as opposed to people who are clipping coupons--well, Wall Street coupons, different kinds of coupons. And that is my understanding of it as well. I guess I also want to talk about the $30.4 billion or $31 billion you have. It is my understanding that if you were to close your doors today, which, of course, I think is a ridiculous assumption--if I lost my job today, I couldn't afford to pay my bills either, but I guess for the purposes of discussion, for a nice, aesthetic discussion, we will presume that you close your doors--it is my understanding that $31 billion would still last for about 7 years to pay off the normally expected bills if nothing else were happening. Is that a rough estimate? Ms. Galante. That is correct. And again, we do ongoing business, so we pay out claims but we have new money coming in-- Mr. Capuano. I have always thought that was a ridiculous assumption at all levels to presume any government entity is going to shut down because we have to have fully funded pensions, we have to--we are not shutting down, period, so therefore it is a ridiculous assumption, but I also know that we have to make it for the purposes of making our accounting friends happy. At the same time, it is my understanding that the current Federal budget rules might require you to access certain Treasury funds at some point, as opposed to actually needing and using the money. Is that the right assumption? Ms. Galante. Yes. Again, under the Federal credit reform accounting, we would potentially need to draw from Treasury to put money in reserves to add to that-- Mr. Capuano. Money that you would not use--you would not need to use? Ms. Galante. We would not need to use, again, if we are continuing to have ongoing business. Mr. Capuano. So the current Federal budget rules are kind of like the original bailout where we forced certain people to take some money. And therefore, why don't we just change some of these rules to make it so that--it is one thing to have the full faith and credit of the Federal Government behind you, which I think is a good idea. It is another thing to make you access money that you don't need. I actually think that is a stupid rule, and whoever put that rule together should change it. You should be able to access money when you need it, not before you need it. Who do I talk to about that? [laughter] Ms. Galante. Maybe yourself, I guess. [laughter] Mr. Capuano. Jeb and I will have a long discussion. If that is the case, certainly I think it is something we should be considering, because again, I believe in the full faith and credit of the United States Government being behind the FHA; I don't believe in forcing people to take loans that they don't need. And my fear is that at some point if you are required by our budget rules to access money, some will call that a bailout. I call it ridiculous because you don't need the money. If you need a bailout we will have our debate and we will-- some of us will support it, and some of us won't. But if you don't need a bailout, you shouldn't be accessing taxpayer dollars, and you shouldn't be required to do so by some ridiculous accounting rule. Thank you, Mr. Chairman. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Missouri, Mr. Luetkemeyer, and asks that he yield to the chairman for a brief moment? Mr. Luetkemeyer. I will yield to the chairman for a brief moment. Chairman Hensarling. Ms. Galante, quickly, you were asked the question about whether or not FHA qualifies for GAO's high- risk series. You said, ``Not currently.'' Do you believe, as you understand the definition, that it should? Yes or no, or do you have any knowledge of that? Ms. Galante. Pardon me? Chairman Hensarling. Does FHA qualify for GAO's high-risk series? Yes or no, or do you not know? Ms. Galante. I am not sure what you mean by, do we qualify? I understand the GAO is releasing a report tomorrow-- Chairman Hensarling. Okay, so you have no knowledge that GAO considers you a high-risk agency? Let me move on to the second question, then: In the President's last budget request, he did request a taxpayer bailout. I understand you do not write the President's budget. You have no knowledge that the President in his next budget submission will request a taxpayer bailout for FHA, or do you have any knowledge? Ms. Galante. I do not. Chairman Hensarling. Okay. Thank you. I yield back to the gentleman from Missouri. Mr. Luetkemeyer. Thank you, Mr. Chairman. Ms. Galante, I am just kind of curious here. Your book of business has grown exponentially over the last several years and the top loan is $729,000 now. Whenever you look at a loan of that size, is it really fulfilling your mission to be making loans of that size? Ms. Galante. Congressman, that was a loan limit increase that was done in 2008 as part of the Housing Recovery Act, and those loan limits were extended by Congress last year. They expire at the end of this year. I do not think that is a typical traditional place for FHA but we are implementing the congressional mandate to have those-- Mr. Luetkemeyer. Okay. If you don't believe it is a traditional place for FHA, then where do you think it should be? Ms. Galante. Again, I think loan limits should recede over time. I think they should go back to the $629,000 first, and I think as we proceed we-- Mr. Luetkemeyer. It has doubled from what it was back in 2008, I believe--is that a good place to go back to, $363,000, is that a-- Ms. Galante. Again, I think these are questions that we should work on together. I think that the loan limits should recede over time, and an appropriate role and an appropriate way of constraining FHA's ultimate market share, loan limits is a good way to do that. Mr. Luetkemeyer. This is a concern of mine. It seems like, with the book of business that you keep talking about, which is improving now as we go along, which is great, but I have some questions about that. Number one, the book of business you are taking on are these higher loans, which are not necessarily what I believe and you just admitted to as--and testified to as not really where your mission should be, number one; and number two, it looks to me like you are using these larger loans as a way to underwrite and pay for a lot of the smaller loans that are where the problems are at. I think this is something that we need to get back to. I am not arguing with your mission. I think you have a mission and I know I would like to see FHA get back into that niche or where you need to be. That being said, in your testimony you made the comment twice on page three that you think we need to be financing creditworthy borrowers, and to me that--and qualified borrowers is another term that was used. And I agree with that. If we are doing that, I think that we are looking at a borrower who can afford to make the payment. And when you are looking at people who are getting homes of this size, they are not low-income individuals. With a $729,000 loan, you are looking at somebody who is going to have to make probably a $3,000-a-month payment. That is not a low-income person. Even if you go back down to where we need to be with this, we still need to get back to the sound tenets of lending. People have to be able to pay for what they are going to get involved in, and if we don't do that, would you agree that we have a problem, that we have a moral risk there, a moral responsibility to people to not put them in something they can't afford? Ms. Galante. Certainly. But I think what we really need to focus on together is what does that prudent underwriting look like? What is the right-- Mr. Luetkemeyer. Let's be honest here now. When you look at people who don't have a downpayment, why do they not have a downpayment? Are they somebody who is just getting into the market, somebody who just got out of school, somebody who doesn't have a job? Is it somebody who has had a financial hardship, a medical problem, and suddenly all their money is gone? Are they somebody who can't physically manage their money, and then they can't save anything? Or are they just somebody who is struggling to make ends meet and don't have the wherewithal to get there? Those are all different scenarios. Some of them are worthwhile, some of them aren't, but I think the moral responsibility that we have is to provide that service but not to put people in homes who can't afford it, and I think we have--we are doing that. Chairman Hensarling. Regrettably, since the chairman took some of his time, the time of the gentleman from Missouri has expired. The Chair now recognizes another gentleman from Missouri, Mr. Clay, for 5 minutes. Mr. Clay. Thank you, Mr. Chairman. Thank you for conducting this hearing. And this gentleman from Missouri has a different take on the FHA than the previous questioner. And let me thank the Assistant Secretary for coming today. Critics of the FHA falsely state that loans insured by the agency are just like subprime loans. Can you help us to debunk that notion? And moreover, how did FHA's market share change during the subprime boom and what is FHA's current market share? Ms. Galante. FHA did not do low-doc, no-doc, no documentation for a loan. We did not do loans that reset. We do 30-year, fixed-rate, fully underwritten mortgages. During the subprime boom years, those other kinds of instruments were available to people, and what happened is that, frankly, FHA's market share went to about 2 percent because people were solicited and took these very abusive loans rather than coming to the FHA. So that is what happened in the ramp-up to this crisis that frankly engendered the crisis and put the whole economy at risk. So when that bubble burst, FHA was there again to help a broad range of borrowers be able to buy a home and to refinance, sometimes out of those very toxic mortgages that they had, unfortunately, gotten themselves into. Mr. Clay. So the FHA is now experiencing an uptick in loans during this recent bounce-back of the U.S. housing market? Ms. Galante. I would say this: FHA, during the depths of the crisis, took on more activity. We are now receding. Our loan volumes have been going down as private capital starts to come back to the marketplace. So we are now down to about 15 percent market share. Mr. Clay. And currently, FHA has an active portfolio of $1.13 trillion in insured loans. Can you discuss whether you think FHA has the appropriate level of resources and staffing to manage this book of business both in terms of lender enforcement, servicer monitoring, and oversight of the firms that handle REO management? Ms. Galante. We could certainly use additional financial resources. We are working on technology changes so that we can do our business better and we could certainly use some additional enforcement authority to both monitor our portfolio and our lenders. Mr. Clay. Okay. Thank you. And how does the low interest rate environment impact FHA's finances? Ms. Galante. Yes, well, under the actuarial report, if the interest rates remain as low as they are, frankly, we do see some people refinancing out of FHA into other things or so there is a--there can be, actually, a negative if the low interest rates--to our total economic value as a result of low interest rates. But low interest rates are a good thing for current borrowers and, frankly, helps them absorb some of the mortgage insurance premiums that we have needed to put on our new loans. Mr. Clay. Thank you for that response. And how have both the annual and up-front mortgage insurance premiums at FHA changed since this Administration took over in 2009? Do you believe that the FHA is changing its pricing to facilitate a return of private capital to the market? Ms. Galante. I do believe that the pricing changes that we have made over time are increasing private capital availability and essentially, for most borrowers now, our rates are, frankly, high, and that is helping facilitate private capital coming back for those who can go there. Mr. Clay. And so competition is good? Ms. Galante. Yes. Mr. Clay. Thank you for your responses. Mr. Chairman, I yield back. Chairman Hensarling. The Chair now recognizes the gentleman from Ohio, Mr. Stivers, for 5 minutes. Mr. Stivers. Thank you, Mr. Chairman. I appreciate you holding this very important hearing. I do believe that FHA poses a risk to taxpayers because they mispriced their risk--the premiums they charge for their risk. And you said in your testimony that you have raised your premiums, but I am curious about a few things. I have a few questions. Number one, does FHA charge the maximum premium that is authorized by law? Ms. Galante. We charge the maximum premium on the very large--the loans over $629,000. Mr. Stivers. But for these other risky loans that you talked about, does FHA charge the maximum amount authorized by law for all loans? Ms. Galante. We do not charge the maximum premium, but we believe we are priced now appropriately for the risks that we are taking on. Mr. Stivers. And second, the FHA has had the authority to use a tiered pricing structure for more risky loans. For example, condos are more likely to default than single-family housing. But has FHA in that instance charged more for the more risky loans, such as condos? Ms. Galante. I think you are making an assumption that condos are inherently more risky. Certainly, our data doesn't-- Mr. Stivers. The historical data backs that up though, doesn't it? Ms. Galante. Not the FHA data. Mr. Stivers. The historical data in the broader marketplace does back that up. Go ahead, ma'am? Ms. Galante. So again, we don't charge a different premium based on the geography or the loan type. Mr. Stivers. But you are authorized to by law? Ms. Galante. I am not certain that is the case, but-- Mr. Stivers. You have been since 2008. The next question: In answering Mr. Luetkemeyer's question you admitted that you have sort of strayed from your basic mission of affordable housing, and in 2006 FHA controlled about 4.5 percent of the new purchase market; today, give or take, it is about 30 percent--might be 28, 29, but almost 30 percent of the new purchase market. What is the right amount for your niche market that you are supposed to serve and what is your transition plan to get there? Ms. Galante. I don't think we have strayed from our mission. We have a dual mission, including playing the countercyclical role. Congress asked us to take on loans up to the higher limit and we have done that, and we have done it in a way that still tries to get those loans to go to the jumbo market. So we have played that role and we do believe that over time, we should be receding. But those loan limits are authorized--not authorized, required by Congress at this time. Mr. Stivers. So what do you think is the average income of somebody who buys a $725,000 house? Ms. Galante. I would have to do the math, but probably $100,000. Mr. Stivers. And would you call that person somebody who is low- to moderate-income? Ms. Galante. Again, our incomes are based on area median income, so whether you are low- or moderate-income depends on the area median income of your jurisdiction. I am from the San Francisco Bay area where the moderate-income definition probably is $100,000. Mr. Stivers. And certainly, that $700,000 in San Francisco is not what it is in some other places, but it is still a very expensive home by American standards. The next question I have is about your mortgage insurance. You now write about 50 percent, in round numbers, of the mortgage insurance market. Is that correct? Ms. Galante. We are down to 42 percent. Mr. Stivers. Okay, so almost 50 percent. And what are you doing to make sure that the premiums that you charge are less than what is charged in the private mortgage insurance market. Is that correct? Ms. Galante. Again, the private mortgage insurance market prices their insurance differently than we do. And, by the way, it is a different product. It is a top loss; it is not a full mortgage insurance. So they price it differently than we do. And you have to combine that pricing with securities pricing to really get to any kind of appropriate comparison. Mr. Stivers. Sure. Do you think it is appropriate to have-- to insure dollar one losses and not have any insurance and insure up to 100 percent, unlike the private mortgage insurance market, that usually insures about 20 to 30 percent of the loss--you insure 100 percent of the loss? Ms. Galante. I'm sorry, what is the question? Mr. Stivers. Do you think that is appropriate? Ms. Galante. We do insure 100 percent of a loss and we have just changed a policy to ensure, for example, that we keep our mortgage insurance premiums in place for the totality of the period of time that insurance is in force. Mr. Stivers. My time has expired. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Georgia, Mr. Scott, for 5 minutes. Mr. Scott. Thank you, Mr. Chairman. And thank you, Commissioner and Assistant Secretary Galante. Let me also thank you and FHA and HUD for your strong support with me in our efforts. Each year, as you know--I think you were at one of our home foreclosure prevention events in Atlanta, Georgia. I appreciate you for doing that. As you know, I represent seven counties around Atlanta, the suburbs, which is the epicenter of so much of the home foreclosures. So I appreciate your involvement with that. I want to go back for a moment, because I don't think you were given the necessary opportunity to really respond to Mrs. Bachmann's, my colleague from Minnesota's, concerns, and you made the statement that you felt that she had gotten it backwards. And I sort of agree with you on that, with all due respect. Let's get the record straight on this in terms of your mission and your role. I think it is profound--and these statistics I am about to give I want you to concur with, and very revealing so it helps tell the whole picture, and that is this: In the last year--in Fiscal Year 2011 is it not true that over half of all African Americans who purchased a home--not in one area but 52 percent, over half of all African Americans who purchased a home in the United States of America and 50 percent of all Hispanics who purchased a home in the whole Nation of America did so with FHA financing. Is that correct? Ms. Galante. That is correct. Mr. Scott. And also, 78 percent--nearly 80 percent of all FHA borrowers were first-time buyers. Is that not correct? Ms. Galante. That is correct. Mr. Scott. That is phenomenal. Now, I would like for you to kind of elaborate on this, because these statistics are very telling. Why is this so? Why is it that one agency, the FHA--if it were not for the FHA, where would the African-American community be in homebuyership? First-homeowners? And the Latino community? And is it not other factors that are at play here so that we can tell the full story on the mission and the role that FHA--and you have the opportunity to set the record straight on how this relates to the FHA mission. Would you please? Ms. Galante. Yes. Thank you. There are a couple of points I would like to elaborate on. The first is that FHA has played a particularly strong role in this crisis in particular. Again, home purchase mortgage availability dropped for everyone, but it dropped more for African-American and Latino homebuyers. It also dropped more for low-income neighborhoods. It has fallen off 75 percent in low-income neighborhoods, 50 percent for more middle- and upper-income neighborhoods. So again, as the private market left, FHA stayed in the market, continued to be there to serve this broad clientele. Mr. Scott. Now, I want to talk to you about, because there have been some other significant misunderstandings about FHA's market share and how that has shifted over time. For example, at the hearing last week it seems that as if some members on our committee have not fully recognized how FHA has reduced its footprint in the mortgage market as we have slowly but surely recovered from the housing crisis. Can you please explain to the committee, first of all, traditionally what kind of market share has FHA had? Ms. Galante. Historically, FHA has been 10 percent, maybe a little bit less, maybe a little bit more. Pre-ramp-up to the bubble, as I had mentioned earlier, we dropped to maybe a 2 percent market share as people went to the subprime, toxic mortgage market, unfortunately. So we do think--and again, market share is a funny statistic as well, because you have to look at the fact that the entire market dropped during these past number of years. Mr. Scott. And finally, before the hammer comes down on me, many of my colleagues have said they are interested in helping continue to support FHA, which I am glad to hear on the--on my Republican side. But let me ask you your fear of sequestration. Chairman Hensarling. I am sorry. The time of the gentleman has expired. The proverbial hammer did come down. The Chair now recognizes the gentleman from Wisconsin, Mr. Duffy, for 5 minutes. Mr. Duffy. Thank you, Mr. Chairman. I don't come from a wealthy part of the country. There are a lot of my constituents who have used FHA to purchase a home. They are low- and moderate-income individuals. And I have seen the program work for a lot of people. So I--what we talk about here today, I don't want that to be taken away. It has been a helpful program. But over the last several years there have been a lot of questions that have been asked from this committee and others about the solvency of FHA. Some have compared it to Fannie and Freddie and have inquired as to whether FHA is going to need a Federal taxpayer bailout. And so as those questions have been asked, many have come in and told us not to worry. The program is fine, it is solvent. Be assured, we are not Fannie and Freddie. For instance, Secretary Donovan was testifying before the Senate Banking Committee in 2009 and he indicated that within 2 to 3 years the capital reserve would be back up to 2 percent. Last year, in February, you were here and you told us that we expect to be at a capital reserve of $8 billion by the end of 2013. And so, as I am looking at the statements that have been made in regard to the questions that have been asked, I have some concern now that we have a shortfall of $16.3 billion and a negative capital reserve of 1.44 percent. And as I sit here I wonder, have we been misled in Congress? Have you in HUD been negligent? Incompetent? How can we ask these pointed questions that we had concerns about, outside individuals had concerns about, and we have not been given the appropriate information until today? What is it? Is it incompetence? Have we been misled? What has the issue been? Ms. Galante. There are two different analyses of FHA's book of business, so you have to start with--this is, unfortunately, more complicated than any of us would like. The actuarial studies which you are referring to in terms of the economic value and the capital ratio, done independently on long-term economic forecasts and long-term projected losses. Set that aside. Whether we need to draw any funds from Treasury is based on the President's budget, which is done by different economic analysis and comes up with a budget re-estimate. And again, even if we needed to draw, it is to put money into reserves. So to be clear, this is totally different than a Fannie or Freddie that were private entities taking private risk, taking profits privately and giving them to shareholders, and then the government comes in years later after they have spent those funds-- Mr. Duffy. I want to be clear--I only have 2 minutes left. Ms. Galante. Yes. Mr. Duffy. You are saying it is complicated, okay? Ms. Galante. Yes. Mr. Duffy. And you are the Commissioner. Listen, there are outside people who don't have the access to information that you have, who have been raising the red flag saying, ``Hey, we have a problem at FHA.'' They have come in, we have had hearings on it. So how can you come in and tell us, ``We don't have any problems. We are going to be fine?'' And outsiders who don't have your information knew that we were going to have this very problem that we are talking about today and you didn't share that with us. That gives me great concern. Have you talked to the President about needing dollars in his budget? Have you communicated with him? Ms. Galante. No, sir, I have not. Mr. Duffy. So if the President is going to offer money to FHA as a way of a bailout, he is going to be shooting in the dark. Or has the agency talked to him about dollars that are going to be needed for him in his budget? Ms. Galante. Congressman, I just want to say a couple of things. We have been totally transparent with this committee; we have been totally transparent with Congress. We have an actuarial study. We describe in that actuarial study the risks of going one way or another. We have-- Mr. Duffy. What happened in the last year? Last February, you were here, and you were telling us that we were going to have a reserve of $8 billion by the end of 2013. And lo and behold, we are $16 billion short. How did you get it wrong in a mere 12 months to have this analysis completely wrong? Ms. Galante. Congressman, we didn't get it wrong. Mr. Duffy. You didn't get it right. Ms. Galante. We provided you an actuarial study that had a range of things that could happen depending on economic circumstances. The economic circumstances--house prices--did not match what the independent actuary predicted would happen. These are long-term forecasts that they make and we are reporting to you those results. Mr. Duffy. You got it wrong. Outsiders got it right. That makes me concerned about how honest or competent you guys have been. I yield back. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Texas, Mr. Green, for 5 minutes. Mr. Green. Thank you, Mr. Chairman. And I thank the ranking member, as well. And I would like to assure those persons who are viewing this at home that we really do love FHA and that we really do want to save FHA. FHA, seriously--let me ask a question so that you may say it, Madam Commissioner. Has FHA ever been bailed out before, ever? Ms. Galante. I want to be clear that FHA has what we call permanent and definite budget authority, so these are 100 percent guaranteed loans by the government. We have been self- sustaining through the 80 years of our existence. Mr. Green. Founded in 1934 or 1935, and since that time you have not received what is being called a government bailout. Is this correct? Ms. Galante. Again, I have a challenge with the whole concept of thinking about any potential draw from the Treasury being a ``bailout.'' Mr. Green. Yes, ma'am. Let's continue with another proposition. One of the things that you are trying to correct and you are correcting has to do with your premiums and the fact that you at one time, after a buyer had a certain amount of equity there was--it had an impact on the premiums paid. Is this correct? Ms. Galante. That is correct, yes. Mr. Green. Could you kindly and quickly explain this circumstance? Ms. Galante. Yes. When borrowers pay a mortgage insurance premium--we had a previous--we had a policy that we just changed last month, but prior to last month, when your loan automatically self-amortized down to essentially 78 percent loan-to-value, we would be cancelling that premium even though we still were 100 percent-- Mr. Green. Let's do this, if I might ask, Madam Commissioner, explain to us what cancelling means. What does that mean to the borrower? Do you continue to pay the premium or do you cease to pay a premium? Ms. Galante. If the premium is cancelled, it means you cease to pay the premium. Mr. Green. And as a result, the borrower would now have more money in his pocket, of course, but FHA would have less money to capitalize it. Is this correct? Ms. Galante. That is correct. Mr. Green. And you have now changed this, and as a result are you projecting that this will help you to stabilize FHA? Ms. Galante. That is correct, and we are--we obviously continue to have the risk of that loan. Mr. Green. You have the risk of that loan but you have made that change? Ms. Galante. Yes. Mr. Green. And you are making other changes to stabilize and secure FHA, correct? Ms. Galante. That is correct. Mr. Green. Would you give us one additional significant change that you are making, please? Ms. Galante. Yes, one additional change is that we are now requiring that if you have a 620 FICO score or credit score or less, we require no more than a 43 percent debt-to-income ratio, and without additional compensating factors for that borrower. Mr. Green. Now, much has been said about how FHA has been a benefit to persons in this country who are known as minorities. Quite frankly, it is a term that I don't particularly like, but I use it to communicate. But is it true that the overwhelming majority of the loans in your portfolio are held by Anglo-Saxons? Ms. Galante. That is correct. Mr. Green. Would you guess that of the loans in your portfolio that are held by people who we in this country call White, would you guess that it is probably upwards of around 70 percent or more? Ms. Galante. I think it is more in the 60s, 60-plus percent range. Mr. Green. 60-plus percent. So FHA is not a welfare program, is it? Ms. Galante. It is not. Mr. Green. Okay. It has been a program that has been of great benefit to people across all lines--it wasn't designed to accommodate any particular ethnic group, was it? Ms. Galante. No, it was not. Mr. Green. And FHA, throughout its history, has pretty much complied with the will of Congress, has it not? Ms. Galante. Absolutely. Mr. Green. So if FHA is making loans at $729,000, it is doing so because of Congress, correct? Ms. Galante. Correct. Mr. Green. And I mention this to you because listening to this argument, one would think that FHA has been a renegade, you have just been out there doing all sorts of dastardly things, you created the yield spread premium, you created 3- 27s, 2-28s, no-doc loans, prepayment penalties that coincided with teaser rates, that you have just been ugly. But this is not true, is it? Ms. Galante. No, it is not. Thank you. Mr. Green. Thank you. I yield back. Chairman Hensarling. The time of the gentleman has expired. The gentleman from Michigan, Mr. Huizenga, is recognized for 5 minutes. Mr. Huizenga. Thank you, Mr. Chairman. And I would like to submit into the record a couple of things. One is a letter from the National Association of Federal Credit Unions, and I wanted to talk a little bit about the content there. And another is an ad called, ``My FHA,'' regarding FHA mortgages, and I would like to submit that into the record. Chairman Hensarling. Without objection, it is so ordered. Mr. Huizenga. All right. Thank you. Commissioner Galante, I appreciate you being here. My background is in real estate and developing. My family is still involved in construction. And I have a couple of concerns and I think we were hearing two lines of discussion from two friends over there, Mr. Green and Mr. Scott, about who actually benefits from these programs. And it seems to me that as we are looking at claims, half of all of the loans are to African Americans, half are to Hispanics, is what you had said earlier, and when I got my REALTORS license, the Elliott Larson Act says that we cannot discriminate. One of those things that it says is we cannot discriminate on race and creed. Low- and moderate-income is not a Black issue, it is not a White issue, it is not a red issue, and it is not a yellow issue; it is a green issue. And what I learned is you are green when you come and make that application. Can you afford it or can you not afford it? Do you have enough green to buy that product that you are out trying to buy? And I am concerned that we have seen sort of both sides of the argument on the other side of the aisle that this is sort of meant to benefit, or at least the implication is that it benefits one particular race over another, and I just want to make sure that we do not accept--because I believe that the-- certainly the law demands it, morality demands it, and we must have equal treatment under the law. And if we are not doing that, then we cannot allow some sort of separate but equal system occurring here, which seems to be the implication from Mr. Scott's line of questioning. Now, on to this advertisement--and I know you don't encourage these ads or particularly control them at all, but I am going to read this to you: FHA bad-credit home loans. Many people don't realize that FHA loans can help people with bad credit. Need a home mortgage but concerned about bad credit? You have come to the right place. An FHA mortgage can get you into a new home even if you have bad credit because the loans are insured by the Federal Government. If you have had accounts forwarded to collections, if you have filed bankruptcy in the past, if you have high debt, you may still qualify for an FHA loan. And it says at the end, if you--there are much better choices in very expensive financing that banks call subprime. And it seems to me that, based on some of the questioning that we heard earlier from Mrs. Bachmann and others, I am afraid that this industry--people with bad credit are being encouraged to go in and use FHA as a vehicle for a subprime type of loan. And I have to believe that cannot be acceptable, because we know how devastating losing a home is. We know how devastating that can be. And the letter from NAFCU here, the Federal credit unions, we know that FHA's current policy with respect to strategic default, which--strategic default would be someone literally making the choice to default, to walk away--is barring such borrowers from obtaining an FHA loan for a minimum of 3 years. So they are barred from getting another FHA loan for 3 years. Comparatively, Fannie Mae has instituted a policy that would prohibit such borrowers for 7 years. Can you explain to me why you would have a 3-year gap versus Fannie Mae having a 7-year gap if we are trying to make sure that people aren't compounding bad decisions? Ms. Galante. Let me address both of your points. You are correct that we do not condone the kind of ads that you talked about there that you have seen on the Internet, and I just recently issued to our lenders a reminder that we will enforce against any FHA lenders for advertising. We do require borrowers to meet our credit criteria, so we want to be very careful about that. We will refer people to the I.G., to the Department of Justice-- Mr. Huizenga. I have 30 seconds left, just quickly, if you can address the 3 years versus 7, and then I want to hear your opinion: If this was a private company, would it be in receivership? Because my suspicion is that it would be. Ms. Galante. On the 3-year versus 7-year, again, our requirements are at 3 years, you can apply to return--or to come into the FHA but you still have to meet our credit criteria, including the restrictive credit criteria that I have mentioned that we have tightened up on--the 620, the 43 percent DTI as an example restriction. So not anybody can come back into--or come into FHA as a result of having been through--and let's be clear, particularly in this recent circumstance, some of these folks have been through a very devastating experience and they are not-- Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Delaware, Mr. Carney. Mr. Carney. Thank you, Mr. Chairman. And thank you, Commissioner Galante, for coming in. I have found in the 2-plus years that I have been sitting on this committee that the most challenging thing is to seek some light with all the heat that has been going on, and I thought we had arrived at that point when my friend, Mr. Westmoreland, was speaking and he started off by saying that we on their side didn't want to do away with FHA. We recognize that there was an important role in the marketplace. We want to make it stronger; we want to protect the taxpayers. And I think those are things that both Democrats and Republicans on the committee agree on. Mr. Duffy started off the same way and then went off on a little bit of a rant about the--you and the FHA not being straight-up with the committee. It is my understanding that we had hearings last year and legislation that was passed here by the House to address some of these issues that we are talking about today. Isn't that the case? Ms. Galante. That is the case, and I think there are many things that all sides of the aisle can agree on with respect to strengthening FHA. And I really appreciate that. Mr. Carney. We had a couple of witnesses last week who came in and they had a whole list--I asked my staff to put it together and it is two or three pages--of things that they suggested, policy proposals to help address the financing issue that FHA faces. Is there anything among those ideas on those lists that got your attention that we should really think about as Democrats and Republicans who care a lot about FHA and its important mission? Ms. Galante. I would say this: What we are focused on in terms of strengthening FHA right now are immediate actions that we can take, like the enforcement with lenders, like the emergency authority for the dealing with the reverse mortgage program. I think there are other ideas, some of them that are on this list, that are worth talking about in terms of future conversation--where is FHA play in the broad new housing finance system? And so I want to spend time on a number of those, whether it is looking at our appraisal board versus the way we currently do appraisals. Those are quite interesting things for us to go back and take a look at. Mr. Carney. So let's talk about that in the 2\1/2\ minutes that I have left. You mentioned this at the top about looking more broadly about housing finance in this country and the GSEs and somebody before me said that is a priority for both sides. Where do you see FHA fitting into a new framework for housing finance in this country? Ms. Galante. So again, I think this could be a longer conversation-- Mr. Carney. Obviously. Ms. Galante. --amongst all of us, but we have been very clear, the Administration has been clear that we do believe that FHA should be playing a smaller role, a more targeted role, that loan limits should come down over time, and that we should focus on those more targeted credit needs in the country. Mr. Carney. What might they look like--more targeted-- Ms. Galante. Yes, more targeted. So back to, again, an area home price, something in a range around the median home price, a little above, a little less, that is the typical-- Mr. Carney. That was one of the suggestions that one of the-- Ms. Galante. Yes. Mr. Carney. --folks last week talked about. How about market share? I think it was maybe Mr. Green or somebody else who mentioned, what do you see as the appropriate market share for FHA? Ms. Galante. So again, I hate to--market share I think really is a difficult challenge but-- Mr. Carney. You mentioned 10 percent as a historical number or something in that-- Ms. Galante. 10 percent is a historical number. Again, it changes over time, and I think you want a--you want the ability to be in a range in 10, 15 percent of the market. Mr. Carney. So I see a little bit lower than--by the way, I think this chart that you provided is a great illustration of the appropriate role of FHA insurance where you see the PMI just dropping right precipitously off the table and FHA moving in at a very critical time in the housing market and filling that void. But it looks like the historical level was somewhere above 15 percent and below 30 percent. Any sense of where it might be in an ideal world going forward? I guess it would depend on economic conditions as well. Ms. Galante. Yes. And again, that particular chart is for a small portion of the overall mortgage market. It is for purchase only and only mortgage insurers, so it is a particularly shrunken piece of the overall pie. Mr. Carney. Thanks very much. Chairman Hensarling. The Chair now recognizes the gentleman from Indiana, Mr. Stutzman, for 5 minutes. Mr. Stutzman. Thank you, Mr. Chairman. And thank you, Ms. Galante, for being here. It has been a very informative hearing. First of all, my question is, do you understand why all of the red flags around FHA? Do you understand why we are so concerned about FHA? And I think one of the big red flags is that the President is suggesting including money for FHA in his budget. Ms. Galante. I think it is absolutely reasonable and important to look at FHA's long-term financial health, and the actuarial gives some indication about what kind of money we need over the long term and that we are short of that under the actuarial. So this is--absolutely we understand the importance of this. Mr. Stutzman. Okay. You said earlier that you think the low limits should recede, and I appreciate that. What I am concerned about--and I am new to this committee, but as I sit here and listen and try to absorb what is happening, it seems that FHA is outside of its original charter, and a lot of that is due to the recession and the housing collapse. But what I-- it seems to me that as FHA is trying to get out of this hole that it is in, it is now moving outside of its original intent. As I look at this chart here that compares FHA's operations in 2008 compared to today, the average FICO score in 2008 was 647, and today it is 696. Is that roughly correct, do you know? Ms. Galante. Sounds correct. Mr. Stutzman. To me, that says that we are trying to move-- that FHA is trying to move into market area that it is not designed to be in. Also, the loan sizes have moved up. What I think that is happening here is not entirely your fault, but is the result of policies on a macro level where we have now seen--since 2009, when President Obama took office, we have seen a huge decline in median household income. In 2009, it was $55,198; today, it is $50,678. You talked about the premium increases and I guess I don't--I understand you are going to those you are serving and increasing the insurance premiums, but do you understand, when median household incomes are dropping and the increase on premiums are increasing, we are squeezing people to where they are going to be put in a position where they cannot afford to be in their homes. Any comment? Ms. Galante. Again, you have made a number of points there. Let me say a couple of things. First of all, on the credit scores of FHA borrowers going up in this recent period of time, we would be, frankly, delighted if lenders would lift some of their credit overlays that they have been putting on top--FHA enables loans to creditworthy borrowers but at lower credit scores than lenders are currently lending to, so this is not something that FHA is trying to induce. This has to do with a broader concern on the part of lenders and that is something that we want to work with them on to ensure that they are giving access to FHA loans to as broad a prudent population as possible. So that is one point I want to make. The other thing is that again, we do think that these premium increases have been important for the health of the fund. They have also been important in terms of ``pricing our risk correctly.'' We do believe that because interest rates are so low, borrowers are able to absorb those increases. Mr. Stutzman. But when you are asking for only 3.5 percent down, people are getting into homes very possibly that they just cannot afford. Mortgage insurance premiums go up, median household incomes decline. You said earlier that you think we are on the road to recovery. The President said the same thing last night in his State of the Union address. What I see coming from the Midwest is that maybe the DC Metro area is doing fine, but the rest of the country is not, and so my comment to you is that we have to get back to your original charter which you are originally designed for, lowering the caps and really helping those who do need the help. With that, I will yield back, Mr. Chairman. Chairman Hensarling. The Chair now recognizes the gentleman from Florida, Mr. Murphy, for 5 minutes. Mr. Murphy. Thank you. Commissioner, thank you for your time and your service and for answering our questions today. I ran for Congress because I believe in a smarter government, and at the same time, my background in the construction industry informs me of the critical role the housing market plays in my own State of Florida and across the country. Whatever we do to resolve the problems at FHA must be done with a mindful eye on how it could affect middle-class homeowners, as we have discussed today. Two years ago, the Obama Administration outlined its proposal to limit GSE involvement in the housing market while preserving the Federal Government's role in a more limited capacity. Commissioner Galante, do you think that the answer to the problems faced by the GSEs and FHA is as simple as narrowing the scope of borrowers? Ms. Galante. I think it is much more complicated than that, but that is part of the issue. Mr. Murphy. There has been talk of the max loan size. Would you agree that this isn't a one-size-fits-all? That this should be tied to some sort of a formula for maybe the location, for the market, for the location of that house? Ms. Galante. Yes, absolutely, and to be clear, the high loan limits that people have been talking about, the $729,000, that is only for higher-cost areas, and to be clear, that only represents about half a percent of FHA's business at the moment. Mr. Murphy. So, the million-dollar question or I guess because of the size of what we are talking about, perhaps the trillion-dollar question is, how do we help stabilize the overall market faster to reduce the expected future claims on FHA, but most importantly to restore the dream of homeownership that has fallen out of reach to so many middle-class families because of this recession? Ms. Galante. Thank you for that question. One of the things that we are doing that we have not talked much about today, so I appreciate the question, is what are we doing to ensure that with policies that we currently have in place and are putting in place, the best thing that is going to help FHA in terms of moving forward is to deal with these legacy loans and we have very substantial policies in loss mitigation and asset management activities being able to dispose of distressed assets, distressed loans more quickly. All of that will help our recovery. All of that will help FHA's dollar recovery, which will help FHA in terms of its overall financial picture. Mr. Murphy. Do you mind outlining a couple specifics there for what you are doing not only to help what happened but to prevent it from happening again? Ms. Galante. Yes, so there is both. There is both dealing with the damage that has been done and on that front, again, we are making it easier for borrowers to do a short sale when they are in distress for example. We are making loss mitigation and doing modifications easier for people to get. So we are selling our distressed loans in the market faster. We have an overhang. Moving forward, we have increased premiums to price risk appropriately for the risk that we are taking on with borrowers. We have made some underwriting changes that I have talked about here today in terms of ensuring that borrowers are prepared for the financial obligations they are taking on. Mr. Murphy. Thank you, Commissioner. I yield back. Chairman Hensarling. The Chair now recognizes the gentleman from South Carolina, Mr. Mulvaney, for 5 minutes. Mr. Mulvaney. Thank you, Mr. Chairman. And thank you, Commissioner Galante. I have a couple of questions. I heard a lot over the last couple of hearings about the dual mission of the FHA, and I have been able to find one. I have been able to find the one that says you are supposed to serve as the lower economic groups, the first-time homebuyers, provide gaps where private credit markets don't exist, and I can find that. I can't find any legal justification, any basis for what everyone talks about is the second half of the mission, which is this automatic economic stabilizer, this countercyclical mission of the FHA. Where are you drawing that from? Ms. Galante. Congressman, if you go back and look at the original founding of FHA, you can see quotes from the Federal emergency administrator talking about the purpose of that, so the congressional intent talking about the purpose of FHA at the time was actually to get the economy back on its feet again-- Mr. Mulvaney. It is fair to say it is not in the statute, right? That mandate is not in the statute. It is implied perhaps in many of the things that we do, from having hearings like this to raising the borrowing rates, but it is not the same as the other mandates. Ms. Galante. It probably isn't in the wording of the statute, that word countercyclical, but the fact is that it was created to be a source of credit availability when nothing else was there so that it would be steady and available. Mr. Mulvaney. But I think you would agree with me that in an ideal--while that first mandate to serve that underserved market is consistent and permanent, the countercyclical mandate is supposed to come and go, right? Ms. Galante. Yes, but again, underserved, you can be underserved at different points in different ways, right? So underserved because capital has left or underserved because capital is never interested in a particular whether it is a rule-- Mr. Mulvaney. But there was no countercyclical purpose to the--it was not serving that mission during the first half of the 2000s, right, the first decade? You were not serving a countercyclical mission when the market was overheated, were you? Ms. Galante. That is correct. Mr. Mulvaney. Okay. Ms. Galante. And in regional distress, we have played a countercyclical role-- Mr. Mulvaney. So let me ask you, as the housing market comes back, and we understand that it is and we are hopeful that it continues to do so, what affirmative steps are you taking to lower your market share? Ms. Galante. We have already taken a number of affirmative steps, as I think you have heard today, including raising premiums 5 times on new borrowers moving forward. That certainly is helping private capital come back in to, and if you read the Washington Post over the weekend, and you can see quotes from all kinds of mortgage brokers, et cetera, they are very concerned that FHA-- Mr. Mulvaney. All right. So you have raised rates a couple of times. I understand that. I have put a graph up that the chairman used earlier. I have also provided you with a copy so that you can actually see it, and I recognize the fact that you have some concerns with some of the previous estimates. Are you more comfortable with the estimate of 2012, the line that is shown in dotted red? I recognize that the fact you said you had a difficults because of the difficulty of making a 30-year projections and so forth. Granted, this is only a 5- or 6-year projection, not a 30-year production, but are you more comfortable with a 20-year graph curve on this graph? Ms. Galante. So again, I would just say, I am not sure where these numbers are-- Mr. Mulvaney. This is the independent auditor report. You have seen this several times today. Ms. Galante. Yes. This is an actuarial report projecting based on economic conditions. This economic-- Mr. Mulvaney. Are you comfortable with it? Ms. Galante. I don't think that economic conditions are ever going to be exactly as what was predicted-- Mr. Mulvaney. Do you do your own projections? Ms. Galante. We do--not to the level of complexity that are done-- Mr. Mulvaney. Can we see the projections that you have done? Everything you have given us today is backward-looking. It stops in the second quarter of--third quarter of 2013. Can we see your projections? Ms. Galante. So, again, we don't do long-term-- Mr. Mulvaney. I am not interested in long-term, I am interested in short-term. You said you are going to get back above the 2 percent line in the next couple of years. Can we see those projections? Ms. Galante. Those are based on the actuarial report. Mr. Mulvaney. So you are relying on this line? Ms. Galante. The-- Mr. Mulvaney. You said you had concerns with this line, but when you say that we are going to be back at 2 percent in the next couple of years, you are relying on this graph. Ms. Galante. To be clear, we are statutorily required to do an independent, to have an independent actuarial done and to present that information and what it shows in terms of the economic value of the fund based on that independent actuarial and to provide that to Congress. Mr. Mulvaney. Does this graph assume that you go back down to a historical level of roughly 10 percent market share? Ms. Galante. The actuarial report does over time project that we go back down. I don't know to what volume. Mr. Mulvaney. Does this report assume that you have what you called a roughly 10 percent failure rate relatively; that your average failure rate. I think Mr. McHenry asked you about seriously delinquent. Does this assume that you maintain a roughly 10 percent failure rate? Ms. Galante. Yes. Mr. Mulvaney. Thank you. Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from Maryland, Mr. Delaney. Mr. Delaney. Thank you, Commissioner, and thank you for your service during this very important time. Housing is obviously central to our recovery. My first question relates to the standard that we hold FHA to, and there is something that has confused me across this hearing and the prior hearing that some of my colleagues mentioned, and I think this started with Mr. Pinto's testimony. There seems to be a sense that FHA is a private business and it should be held to public company standards. As someone who ran a large financial services company that was publicly traded, which I started, I think I understand how people think about private businesses and how they think about public company standards, and in addition to running it ethically and in a responsible manner, you focus on your shareholders and you have a profit motivation and you have all kinds of incentive structures in your management team to pursue those objectives. Did I miss something? Is FHA a private company that is held to public company or private company standards? I just want to give you an opportunity to respond to that because perhaps I missed that somewhere. Ms. Galante. No, you are correct. FHA is part of the Federal Government. Mr. Delaney. Got it, because I think it is important when people talk about a private company or a public company that they have an understanding as to what that means. And I think one thing you may want to mention in future testimony is that practically every publicly traded financial services company trades as a multiple of its projected earnings, which inherently means people are looking at the future prospects, which is one of the things I think you are looking to, to buttress some of the losses you have incurred. And so even if you were to be held to a private company standard, I think this notion that doesn't exist, which I think was in Mr. Pintos testimony, is flawed. So just a comment there. My second question is, do you have economic data to show that if FHA would have stayed at its historical market share and not increased its market share and housing prices would have inevitably continued to fall, what the overall economic impact would have been on the taxpayers, and how that relates to the additional costs FHA clearly incurred by stepping into the breach after the financial crisis? And we should be reminded that across the financial crisis, 19 of the 20 largest financial institutions in the United States either failed or required massive government support. So it was not an inconsequential breach. It was a never- seen-before breach. So I was wondering if you have economic data to show what FHA actually saved the economy by stepping in the way that the way it did. And if so, maybe you could provide that to us or if you have any comments on that? Ms. Galante. Yes, I would just say that Mark Zandi of Moody Analytics has done a certain amount of that work. I don't have detailed projections, but clearly, house prices would have declined further. So not only would have FHA been hurt by that, but the broader economy would have been hurt by that. Mr. Delaney. Do you have a sense as to the multiples? In other words, if we think about the additional losses in the book of business that you, that FHA underwrote during a time of declining housing prices, which is definitionally something a private market participant would never do, and you clearly incurred losses higher that you, than the organization would have liked. Do you have a sense as to what the payback has been to the economy? Ms. Galante. I don't have specific numbers on that. Mr. Delaney. It might be relevant to put some of these things in context going forward. And then my last question is-- because I am concerned about this notion of crowding out the private market because I do think we want to leg into a much more robust private market. And it seems to me the private market hasn't been participating in the mortgage industry for two reasons. The first is credit, meaning they were concerned about how prices were falling when you come from an industry where prices had historically rose across all the data you could measure, there were no real underwriting models to allow these institutions to step into a falling home price market. That, I think, in many markets we are starting to get away from that. Housing prices are stabilizing, improving. There is a lot more work to do. So we may be past the credit concerns that these institutions have. The second concern is that they have this pricing. In other words, it may not be economical for them to compete at the levels you, in the GSE's are, and that is a product-specific analysis, right, it relates to single-family; it relates to multifamily. Do you have a sense as to how far the private market is off your pricing and where pricing would need to be for them to be more robust players? Ms. Galante. I would say where this gets a little complicated is some of the private markets charge different pricing for different kinds of credit characteristics for most borrowers to whom they are interested in lending. So for higher credit score borrowers, for example, we believe we are priced higher than they are at the present time. So I don't think it is a pricing issue at this point. I think it goes back to credit quality, credit concerns, housing, housing market recovery concerns-- Chairman Hensarling. The time of the gentleman has expired. The Chair now recognizes the gentleman from California, Mr. Campbell. Mr. Campbell. Thank you, Mr. Chairman. And Commissioner Galante, for all of the kind of sparks and so forth, I think I heard at least one area of general agreement that something you said in response to a question from the other side of the aisle that although FHA, as you know, went to a really low market share for a while and then for very high market shares and we know the reasons why, but you said, and I wrote this down as close as I could, that you would like to see it go to a smaller, more targeted role and that loan limits should come down. Correct? Ms. Galante. That is correct. Mr. Campbell. Okay. So now let us talk a little bit about how we do that. And I guess the first question is, would you see that as being somewhere around a historical 10 to 15 percent area? Ms. Galante. Ten to--of market share? Mr. Campbell. Yes, market share. Ms. Galante. I think that is a reasonable assumption, yes. Mr. Campbell. Okay. I really don't think there is much debate about that anywhere, so let us talk about how to get there. First of all, where are we? GAO said in what they said was the latest available third-quarter 2012 that FHA had 56.4 percent of the insured market. I think I heard you say 40 or 42 percent. Is GAO wrong? Because I have that they said 56.4 percent in the third quarter of 2012. Ms. Galante. Our data that I am using shows us at 42 percent. We would have to do a double check with that data if that is coming from the GAO. Mr. Campbell. Is that over the same period of time? You can look at the sheet-- Ms. Galante. I think our-- Mr. Campbell. I think you have to--I know how that works. Ms. Galante. I am not sure what quarter of--it is in 2012, but I am not sure what quarter our data is from. I think it is the third quarter. Mr. Campbell. Okay, I would like to suggest, Mr. Chairman, that is something we ought to try and figure out. That is not a small discrepancy, 56 to 42 percent. So it would be nice to know where we are and where we are actually beginning. Chairman Hensarling. Would the gentleman yield? Mr. Campbell. Yes, I would be happy to yield. Chairman Hensarling. Just for the record, this comes from HUD's U.S. Housing Market Conditions report. Mr. Campbell. From the GAO, yes. Okay. So apparently, you are saying the GAO numbers are wrong, so we need to talk to somebody to figure out where we are starting from. But then, when we look at other things, if you look at private insurance, they have to have a 25:1 leverage ratio. You guys are at 36:1. We have QM and QRM from which FHA would be exempt from underwriting and risk retention requirements. Might that not be a place to start in order--and I know the gentleman from Maryland who I guess left now mentioned he is concerned about FHA crowding out the private market, and so if the private mortgage insurance market has much tougher standards then you are required to have, isn't that going to crowd them out to some degree? Ms. Galante. I think the only rule that we have right now is the Qualified Mortgage standard and so I am not quite sure and again, that is not a place yet, but I am not quite sure what you are referring to in terms of how that affects the private market versus FHA. Mr. Campbell. Okay. Under the QM and QRM proposals, FHA would be exempt from various risk retention, elements of that and some of the underwriting provisions. So FHA wouldn't have, an originator wouldn't have to have risk retention, and you wouldn't have to follow certain underwriting principles. Wouldn't it be better if that were not the case if you were following similar rules to the private mortgage market if we want--and again, keeping you at your original mission, but if we want private mortgage insurance to start to step in and take over where you are right now in some places. Ms. Galante. Again, the only rule that we have is the Qualified Mortgage and FHA will be writing its own qualified mortgage standard. The QRM is still under discussion in terms of, in rule making so I can't speak to and we don't know what the terms and conditions of those QRMs will be. Mr. Campbell. Okay, but regardless of where they are, should you have a different standard than the private mortgage insurance market on things like risk retention, et cetera? Ms. Galante. Again, we are a government agency. We don't have the same kind of capital requirements. We are not borrowing, we are not getting equity from private entities that we need to pay a return on. So to-- Mr. Campbell. No, but you are getting equity from the taxpayers, and you don't need to pay a return, but we need to protect that money. We need to be as judicious with it as possible, understanding the mission of FHA. Ms. Galante. And again, we have our requirements under Federal credit reform in terms of what kinds of capital we need to be reserving for. Mr. Campbell. Thank you, Mr. Chairman. Chairman Hensarling. The Chair now recognizes the gentleman from Washington, Mr. Heck, for 5 minutes. Mr. Heck. Thank you, Mr. Chairman. I wasn't sure this would happen until April or May, but I appreciate it very much. Commissioner Galante, again, thank you very much for your service. I would just like to start by noting that it was 40 years ago this year that I bought my first home with the help of the FHA. I would like to ask you a little bit about the reverse mortgage activity, and I am prompted to do so because in your testimony you set forth what appears to be a significantly disproportionately negative impact on your balance sheet as a result of activity in that area. So, if you could please briefly describe utilization of this over the last 5 to 10 years, briefly describe what actions you are taking today to ameliorate that negative impact, answer whether or not you need congressional action in order to take additional action, and if so, will you be seeking it? Ms. Galante. Yes, thank you. The reverse mortgage program I think has a very important mission objective, which is to help seniors who have limited income but some equity in their homes to be able to stay in their homes. Having said that, over the past number of years, for a variety of reasons, we have gotten into a situation where seniors are taking out up-front in a fixed lump sum much more money than they frankly can afford over the period of time and not having money on an ongoing basis for property taxes and insurance and important elements of maintaining their home. The actuarial projects that even though the reverse mortgage program, which was put into the MMI fund in 2009, is only 7 percent of the portfolio, it is generating 17 percent of the losses or 17 percent of the negative economic value. So that is a major problem, and it needs to be fixed, moving forward. We issued a mortgagee letter, guidance where we essentially disallowed those large up-front draws on a fixed-rate basis moving forward and that goes into effect this spring. Frankly, there are more things that we would want to do including financial assessments of borrowers, whether they can afford to pay the taxes and insurance or set aside for the taxes and insurance, and we can do those via regulation, but that takes a year-and-a-half or more to go through that regulatory process. So what we are asking Congress for is authority to make those through guidance mortgagee letters and come back and do the rulemaking over time and that would help is very much in terms of putting this program on the right foot moving forward. Mr. Heck. And I began with asking, what has happened to utilization over time of this program? Ms. Galante. The utilization actually went up over the past few years and it has started to come back down again. I don't have the numbers right in front of me-- Mr. Heck. Thank you. Ms. Galante. --but I can get them for you. Mr. Heck. I yield back. Chairman Hensarling. I am always happy to have those 2 minutes back. The gentleman from Virginia, Mr. Hurt, is now recognized for 5 minutes. Mr. Hurt. Ms. Galante, thank you. And Mr. Chairman, thank you. Mr. Chairman, one thing I wanted to point out is the figure that we have been using, and I think this committee has been operating on, comes from HUD's US Housing Market Conditions quarterly report, which indicates in the third quarter of last year, the FHA percentage of the mortgage insurance market was 56.4 percent. Now, that is what we are dealing with, and it doesn't seem like you know where your 42 percent comes from, but I think I would ask the chairman to follow up to make sure that we know what the correct information is. That is very important, I think, for the work of this committee. I come from Virginia's 5th District and we have, I think by your figures, 13,500 citizens, people who are in my district who are in or have benefited from the FHA program. Of the 13,500, it appears to me when you add up 30-, 60-, and 90-day delinquencies, foreclosures, and bankruptcies, we are talking about 17.2 percent of that 13,500. So you have about 2,300 people who are in those 5 categories; understanding that is a wide variety. I think when we talk about the full story, which we have heard a lot about or heard mentioned here today, I think it is important to remember that the American dream of owning a home does not derive from Washington, D.C., and I think if you spend enough time in this room and around these vaunted halls, one might think that is what drives homeownership in this country. It is working 16 hours a day; it is working 80 hours a week. It is having two jobs or three jobs to be able to achieve that dream. That is, if you ask the people, probably the 13,500 people that FHA affects and all the other homeowners, and thousands of others who reside in my district. If you asked them about homeownership, that is what they would tell you, and I am sure you know that, but I think it makes your mission particularly important because what we are dealing with are those people and their dreams, and I think that encouraging people, having policies that encourage people to do things that are not in their best interests and that they can't live up to hurts them far more than it helps them. And I think if you asked those 2,300 people in my district who face these circumstances, they would say that they are not better off, and I would assume that you would agree. But talking about the big picture as you seem to have invited the conversation of the big picture, I was just wondering, from a big picture, we talk about the FHA wanting ultimately to have 10 to 15 percent of the market share, is that correct? Ms. Galante. I am not saying we want--that is an important point. I am not saying we want to have 10 to 15 percent. I think naturally through--we were down to 3 percent and that is okay with us to when that happens, when private capital is there to do it. Mr. Hurt. But you are--as the Commissioner, I assume you have goals. Do you have a goal to reach 10 to 15 percent? Is there a goal that you have in mind? Ms. Galante. Just to be clear, we have a goal to reseed to 10 or 15 percent-- Mr. Hurt. Okay, that is what I am asking. Ms. Galante. --but not to try to always stay at 15 percent. We don't have an upward goal, I guess is what I am trying to clarify. Mr. Hurt. So you have a goal to get down to 10 to 15 percent, maybe even more, but at the same time you say that as an agency, you would like to believe it should also be a goal to be self-sufficient. Is that right? Ms. Galante. That is correct. Mr. Hurt. Can you do those two things at the same time? Can you be have only 10 to 15 percent of the market and have the private market come in and take up the slack, which I think we all want, and I think you want? Can you still be self- sufficient and be at 10 to 15 percent? Are those things inconsistent? Ms. Galante. They are not inconsistent. Again, if you look at FHA over time, historically, except for regional ramp-ups because of an economic distress, we have had historically a lower market share. We are not trying to drive that market share up in order to be ``self-sustaining.'' Mr. Hurt. But you say you have taken steps to drive that market share down. Ms. Galante. We have, yes. Mr. Hurt. And you will continue to do that? Ms. Galante. Yes, we will. Mr. Hurt. Do you believe the private sector better prices risk than the public sector, than FHA as a maxim? Ms. Galante. I would say this crisis would teach us that no, that has not actually been the case and I would-- Mr. Hurt. If that is the case, then why do we want to have the private sector get more of the marketplace? Ms. Galante. Again, the private sector can do what it will to come in in front of the public. Why wouldn't you want the private sector to be taking that overall risk? Mr. Hurt. Thank you. I yield back what I don't have. Chairman Hensarling. The Chair now yields to the gentleman from New Jersey, the chairman of the Capital Markets Subcommittee, Mr. Garrett, for 5 minutes. Mr. Garrett. And I thank the chairman. One of the points that was raised about whether you are a private entity or not, and of course you are not a private entity, and I agree with that, but you do have shareholders, and the shareholders of course are the American taxpayers. And so one point is, I really see no reason why this entity should not have to comply with and abide by and be examined by the same accounting standards as any other private entity would be. Do you agree with that? Ms. Galante. I do not. Mr. Garrett. You think that there should be an exception because you are a public entity serving the public good? Ms. Galante. It is an ``exception.'' It is that the FHA follows Federal credit reform which is how loan guarantee programs, credit programs for all Federal Government guarantee programs are done and that does calculate appropriately for the FHA's-- Mr. Garrett. We can have a discussion on that because we are looking to move to provide for more transparency within the FHA to the public as far as what their potential losses are in the future. But since you are a public entity and you are supposedly doing good for the American public as opposed to harm, can you tell me how many people the FHA loaned to back in 2009 and 2010, and how many of those are now in foreclosure? How many loans? Ms. Galante. I don't have the exact numbers for 2009 in front of me. I can-- Mr. Garrett. You can get that? Ms. Galante. --probably grab those. Mr. Garrett. And could you also find out how many of those foreclosures were for minorities? Ms. Galante. We can get you those statistics. Mr. Garrett. And you can--how many of those loans went into foreclosure also for people who fell below the watermark as they say, underwater within a year of receiving the loans. In other words, you issued them a loan and then 12 months later, they are already underwater. Do you know how many that is? Ms. Galante. You would have to have the external market data for that particular point in time to do that. Mr. Garrett. But isn't that--that would be something you would want to know as far as the loans you are giving to people if they are actually falling underwater a year after, within a year after year you are losing them. Isn't that something you would like to know as far as being a public entity? Ms. Galante. We track all kinds of statistics. Certainly it is important. In this economic crisis, there were a lot of people-- Mr. Garrett. But the point here is if you are a public entity trying to do more good than harm, you are not really doing good to them if you are, if the number of foreclosures that are out there is high and the number between minorities is high and yet you are putting people into loans that they cannot afford and they are underwater within a year. Is that not part and parcel of the problem, that you provide for loans with loan downpayment requirements in a declining market? Ms. Galante. So-- Mr. Garrett. That is what you had in 2009 and 2010. Ms. Galante. Again, as part of our countercyclical role, as home values were declining, people didn't know exactly how far homes-- Mr. Garrett. So the market is going down and you are helping people to get into the market so they can see 6 or 7 months later that their house is worth less. Is that good for the people or is that bad for the people? Ms. Galante. We help people get into the market. We didn't have perfect vision about where home prices were going-- Mr. Garrett. So you really don't care-- Ms. Galante. --we help people refinance out of bad mortgages, so there was a lot of countercyclical work that was important for us to be doing in that period of time. Mr. Garrett. It seems like the answer to everything we say is that it is countercyclical. So it is okay for the government to help somebody to get into a mortgage that you know they can't afford, even though it is a declining market, and 12 months from now they will actually be underwater and go into foreclosure. Is that maybe the reason why when this committee tried to provide some degree of reform for FHA back in 2009 and 2010, and with the Chair's permission, I would like to put this in the record-- Chairman Hensarling. Without objection, it is so ordered. Mr. Garrett. --this is talking points or lobbying points by--not by you because you weren't here but by some of the people who are with you here--I had an amendment, which has downpayment requirements of 5 percent, and a prohibition of financing by closing cost. The chairman had an amendment, a moratorium of FHA insurance until the MMIF meets capital ratio requirements. I had other requirements--one, two, three, four other amendments that we were trying to make sure that since you didn't have a view towards the future that you would not find yourself in the situation that you are finding yourself today. Do you think it was appropriate that FHA came and lobbied against reform to the FHA in 2009 and 2010? Ms. Galante. Let me be clear. We do believe that you can do quality, low-downpayment loans successfully. Over our history, we have done that. Mr. Garrett. Let me just give you one example. I was out of the room. Somebody asked you whether you would be able to give a loan for $755,000 to somebody making--you were asked what was the median income for somebody getting that loan and you said about $100,000. Is that correct? Ms. Galante. I believe that is what I said, yes. Mr. Garrett. If you make $100,000, your take-home pay is around $6,500 a month, and that means your mortgage and tax payment on that is almost $4,000 a month to pay for that loan. Is that type of loan that you want to put somebody into, especially during a declining market? Ms. Galante. Again, we are dealing with the loan limits that Congress has-- Mr. Garrett. I am not talking about the loan limits. I am talking about your underwriting practices to put somebody who makes $100,000 into a house that is worth almost $800,000; $755,000. Is that a prudent use of taxpayers' money? And is it fair to put the person into that home when you know that he cannot afford $4,000 a month on a mortgage when he is only making $6,500 a month? Is that good? Ms. Galante. So again, I was guessing at the median income required to make that mortgage payment-- Mr. Garrett. The appropriate level of income, I would assume under the standard rule, would be around $250,000. If that was the level, would you think that would be appropriate then to help somebody making $250,000 to buy a $750,000 home? Ms. Galante. If we are asked by Congress to go to $729,000 in high-cost areas, and we prudently underwrite that loan based on a debt-to-income ratio, based on the longevity of employment-- Mr. Garrett. The question, Mr. Chairman, is whether that would be a prudent loan, I would assume. Chairman Hensarling. The time of the gentleman has expired. In order to accommodate Ms. Galante's schedule, the last questioner will be the gentleman from Kentucky, Mr. Barr. Mr. Barr. Thank you, Mr. Chairman. And Commissioner Galante, thank you for your testimony today, and let me apologize in advance if I am covering territory you have already covered. I had to step out for a little bit, but I wanted to just get your feedback on some statements made by other regulators in the financial services sector. A press release from the Consumer Financial Protection Bureau (CFPB) in January of this year indicated that it was the government's policy to make sure lenders offer mortgages that consumers can actually afford to pay back. I would assume you agree with that basic government policy. Ms. Galante. Yes, it is the Ability-to-Pay Rule. Mr. Barr. Right, exactly. And the same release stated that, ``Unaffordable loans helped cause the worst financial crisis since the Great Depression.'' Would you concur with that statement? Ms. Galante. Yes. Mr. Barr. And in addition, the CFPB release stated that, ``Lenders should not set up consumers to fail.'' I also assume you would agree with that basic statement? Ms. Galante. Certainly, and when you talk about unaffordable and unsustainable, the CFPB clearly has written rules so that we don't get into this situation that we have gotten into today, not FHA, but as a society of no documentation and high rates-- Mr. Barr. No. I understand, but as a general policy obviously the government shouldn't be doing anything to set consumers up to fail. That is a policy that this Administration has advocated. Ms. Galante. These policies are to assure that no one sets up consumers. Mr. Barr. Sure, sure, and as I understand it, there are now, according to the GAO, 16 financial literacy programs across the Federal Government and there are 4 homeowner counseling programs across the Federal Government. I take it that the FHA is supportive of these financial literacy programs. Is that correct? Ms. Galante. Absolutely. We actually have an Office of Housing Counseling. Mr. Barr. Right, and so in just doing a little bit of homework on some of these financial literacy programs, I was looking at the Web site www.money.gov which is presumably a Web site set up as a part of the Office of Financial Literacy, a new government agency that was established as a result of Dodd Frank. Is it fair to say that you support these efforts to counsel individuals and make sure that people are measuring their ability to repay before undertaking the obligation of homeownership? Ms. Galante. We do, and we actually announced--and I don't know anything about that one-- Mr. Barr. Okay. Ms. Galante. --so I am not endorsing whatever that site is, but we actually have in our report to Congress indicated that we want to bring back what FHA had many years ago: a robust housing counseling effort for new homebuyers to FHA. Mr. Barr. In one of the links on this www.money.gov Web site, this new Web site I suppose, there is no substantive guidance for the consumer, but it does redirect the person to the FDIC site, which has the section on there to buy or not to buy a home. And I will just read it to you and have you respond to it. ``Homeownership may not be for everyone. It is a big financial commitment starting with the initial shock of your purchase including a downpayment and fees followed by years of monthly mortgage payments, real estate taxes, property, insurance, and maintenance costs.'' That is the advice that the Federal Government is giving prospective homeowners. Do you agree with that advice? Ms. Galante. Yes. Mr. Barr. Okay. So the follow-up question then is--and I understand your testimony earlier. I did have the benefit of hearing what FHA is doing in part to address the negative capital ratio and some of the reforms that you are by administrative measures taking to try to deal with some of the challenges that the agency faces. I think you testified that there is some credit box tightening and premium changes and whatnot, which I applaud the agency for taking the steps. But generally speaking, do you think that encouraging lending to individuals in this category, the category of low credit scores, people who can barely get by on cheap up-front pricing, the 3.5 percent downpayment, the low downpayment requirements, do you believe that encouraging lending to that category of individuals is consistent with the advice that the Federal Government is giving across all of these financial literacy programs? Ms. Galante. Again, to be clear, FHA provides 30-year, fully-amortizing, fixed-rate loans, underwritten to borrowers' qualifications. Again, have we tightened up some in terms of how much income you need to have, how much after payment of debt that you need to have? Absolutely, and these are, including low downpayment, very sustainable mortgages for these families over time and we think these are affordable and appropriate. Now, I am not saying there aren't further things that we should look at in terms of overall credit quality, but these are affordable, sustainable mortgages. Chairman Hensarling. The time of the gentleman has expired. There are no other Members in the queue. I would like to thank Commissioner Galante for coming today, and again, thank you for your service to our country. The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness and to place her responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. Without objection, this hearing is adjourned. 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