[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
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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.
[Whereupon, at 1:06 p.m., the hearing was adjourned.]
A P P E N D I X
February 13, 2013
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