[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
MORTGAGE INSURANCE: COMPARING
PRIVATE SECTOR AND
GOVERNMENT-SUBSIDIZED APPROACHES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 13, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-6
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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
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
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
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin CAROLYN McCARTHY, New York
ROBERT HURT, Virginia KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio JOYCE BEATTY, Ohio
C O N T E N T S
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Page
Hearing held on:
March 13, 2013............................................... 1
Appendix:
March 13, 2013............................................... 43
WITNESSES
Wednesday, March 13, 2013
Bazemore, Teresa Bryce, President, Radian Guaranty, Inc.......... 15
Bjurstrom, Kenneth A., Principal and Financial Consultant,
Milliman....................................................... 7
Chappelle, Brian, Partner, Potomac Partners LLC.................. 11
Shapo, Nat, Partner, Katten Muchin Rosenman LLP.................. 9
Stelmach, Stephen, Senior Vice President and Research Analyst,
FBR Capital Markets & Co....................................... 13
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 44
Bazemore, Teresa Bryce....................................... 46
Bjurstrom, Kenneth A......................................... 65
Chappelle, Brian............................................. 76
Shapo, Nat................................................... 88
Stelmach, Stephen............................................ 99
MORTGAGE INSURANCE: COMPARING
PRIVATE SECTOR AND
GOVERNMENT-SUBSIDIZED APPROACHES
----------
Wednesday, March 13, 2013
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Miller, Capito, Garrett, Westmoreland, Hurt, Stivers;
Capuano, Velazquez, Cleaver, Sherman, Himes, Sinema, and
Beatty.
Ex officio present: Representative Hensarling.
Also present: Representative Green.
Chairman Neugebauer. Good morning. This hearing of the
Housing and Insurance Subcommittee will come to order. By
mutual agreement, we will have opening statements, about 10
minutes on each side, as previously agreed. And there may be
members of the full Financial Services Committee who want to
participate in this hearing today, so I ask unanimous consent
that members of the Financial Services Committee who are not
members of the subcommittee and who have joined us today will
be entitled to participate. Without objection, it is so
ordered.
This is our third hearing that we have done on FHA. And the
reason we have had so many hearings is that FHA is an important
component of the housing and the finance markets in this
country. And they have become a larger and larger portion of
the business, in controlling over 50 percent, for example, of
the mortgage insurance premium in this country.
This is no small insurance company. This insurance company
has over a trillion dollars worth of business on the books.
What does that mean? It means that because it is a government-
backed entity, the taxpayers are, in fact, on the hook for over
a trillion dollars worth of mortgages in this country.
But the other aspect of it is that it is disturbing to find
that this entity--as we have learned in previous hearings--is
somewhat in financial straits. It is an entity that basically,
has a negative net worth. And so, you have an over-trillion-
dollar entity that is backed by the American taxpayers that has
a negative net worth.
Now, any other company like that would be in bankruptcy or
receivership. And so, I think that this may be the most
important hearing we have had so far. Because today what we are
going to analyze is if FHA is, in fact, an insurance company,
which they are, then are they operating like traditional
insurance companies? And we are going to hear from witnesses
today who will tell us a little bit about what the profile of a
entity like this should look like if it were in the private
sector. Why is it important that we compare them to the private
sector? It is important that we compare them to the private
sector because they are competing with the private sector. That
is one reason. But the other reason for them to be run in a
financially sound way is the fact that the taxpayers are on the
hook for these mortgages. And so, we need to make sure that the
people who are enjoying the benefits of having an FHA loan in
this country are actually carrying their load, and that they
are not actually putting the taxpayers at risk.
Because for those people who don't have an FHA mortgage or
have a private mortgage, they are, in fact, being penalized
because they are paying their mortgage and they are paying the
risk premium for having a privately-insured mortgage. But at
the same time, they are at risk of also subsidizing the premium
for people who have an FHA loan. So there are a number of areas
where we are going to explore today.
I want to make sure that we have an open and honest
discussion. And one of the things that we want to make sure of
is that as we move forward, we make sure that FHA is operating
within what I think is the congressional intent. It has gotten
to be a much bigger organization, and it is actually growing at
an exponential rate. It is growing faster than it is ever grown
and it is bigger than it has ever been. And the question is, is
this the FHA that Congress intended, and is this FHA being run
in an appropriate way for the American taxpayers?
So, I look forward to the hearing, and I look forward to
hearing from the witnesses today. And with that, I will yield
back my time and recognize the ranking member of the
subcommittee, Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman, for holding this
hearing, and I certainly welcome our witnesses. I look forward
to your testimony.
The bottom line is, I agree with many of the things that
the chairman said. The FHA, we all know, has grown. We have
differences of opinion as to why it has grown and what would
have happened had it not grown. I happen to believe that had it
not grown at the time it did, there would be no housing market
right now. Now, granted, that is past tense in 2008 and 2009
and 2010. The question is, what do we do from this point
forward?
From what I see, things are moving in the right direction.
The FHA is slowly but surely and steadily, thoughtfully
decreasing its share of the market, and private enterprise is
coming back into the market the way it should. Nonetheless, I
think it is fair and reasonable to ask all these questions. And
also to oversee to make sure the FHA is doing what Congress
wants it to do. I think all that is fine, I think it is good,
and I think it is useful.
And those are the aspects on which I agree with the
chairman. I do have some concern, however, that a lot of these
hearings are being used simply as a setup to make sure that
when the time comes, private enterprise will be able to grab a
larger share than they have ever had in any traditional sense
of the word. We will be a little bit careful of that, only
because I like the housing market that we had for 40 years.
Granted, it got out of whack and we need to put it back in
whack. But I don't want to go overboard and completely
disincentivize the entire middle class from ever being able to
purchase a home. I think that is part of the balance here. I am
also a little concerned that some of the things that are
happening might be used, at some point, to make a political
point. For instance, as I understand the law, the FHA is
required by law to access certain Treasury funds even though
they don't need them.
So I will be asking each witness if you think the FHA will
actually need to borrow Federal dollars this fiscal year
regardless of what the law says. Not access the money, because
as I understand the law they have to, but do you think the FHA
this year will have to access anything outside of their own
funds? And if the answer is yes, you will have to explain to me
why. And that is why I filed H.R. 1028, which simply repeals
the section of the law that requires the FHA to access Treasury
funds when they don't need them.
It is a ridiculous law that I never knew existed until we
hit this particular situation. I guess it is excessive. It is
belt-and-suspenders, and maybe two-belts-and-two-suspenders. It
is a little bit of overkill to make sure that the FHA stays
whole. And I think it is unnecessary and inappropriate. But
nonetheless, we will see if some of my colleagues will help
pass that bill to get the FHA on the footing that it deserves
and to not jeopardize taxpayer dollars unless it is absolutely
necessary.
So I look forward to your testimony today, and I look
forward to making sure, together with the chairman and other
members, that the FHA is doing what we wanted it to do when it
was originally created.
Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the vice chairman of the subcommittee, Mr.
Luetkemeyer from Missouri.
Mr. Luetkemeyer. Thank you, Mr. Chairman. And thank you for
the important salient hearing we are having today.
Regardless of political ideology, there are certain facts
about FHA that can't be denied: one, FHA's market share has
grown considerably over time; two, FHA insures more than $1
trillion worth of mortgages on more than 7 million loans;
three, FHA has the authority to draw funds directly from the
U.S. Treasury; and four, FHA's Mutual Mortgage Insurance Fund,
or MMIF, has a capital ratio that has fallen below the
statutorily-required level of 2 percent.
In fact, during Fiscal Year 2012, the capital reserve ratio
fell to a negative 1.44 percent. Despite these facts, FHA's
book of business continues to grow as the private market is
being forced to comply with stricter regulations and standards.
As someone who has spent many years in the banking and
insurance industry, I respect and understand the importance of
the sound tenets in lending and underwriting. And looking at
the data surrounding FHA's finances, it is clear that they are
not employing sound practices.
What is most disturbing about this is that the taxpayers
are the ultimate backstop for FHA's sloppy work. The simple
truth of the matter is that FHA needs to be examined and needs
to be held to the same standards, high standards, that they are
currently operating under. I look forward to hearing from our
witnesses today, particularly about how we can return FHA to
its original mission, ensure that they follow the sound tenets
in lending and underwriting, and help spur growth in the
private mortgage insurance market.
Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman, and I also want
to recognize that the chairman of the full Financial Services
Committee, Mr. Hensarling, has joined us today. It is good to
have you in the hearing.
Now, I recognize the gentleman from Missouri, Mr. Cleaver,
for 2 minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and I do appreciate
very much the fact that you have called three hearings to deal
with FHA. And I think a part of this committee's benefit to the
entire body is, you have been in municipal government and our
ranking member came out of municipal government. And FHA has
played a role since the Depression in keeping the housing
market in this country sound.
I am not sure I would agree that FHA is crowding out the
private industry. Because when you think about it, before the
housing crisis, there were 10 private mortgage insurance
companies. Almost all of them went bankrupt, almost all of
them. And it was at a time that we needed FHA to step in, and
they did. And with recovery on its way, I think it is on the
horizon.
Private mortgage insurance posted their best year since the
collapse in 2008. I was looking at this report from Inside
Mortgage Finance that they put out, I think, on a monthly
basis. Private mortgage insurance reported $175 billion in
total new insurance written in 2012, more than doubling the
amount of the business they did the year before, according to
Inside Mortgage. So I do think that there may be a need for us
to discuss this and massage it.
But the truth of the matter is, FHA is still providing a
service that we desperately need, and I look forward to
interacting with our panel.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now Gary Miller, the vice chairman of the full
Financial Services Committee, is recognized for 2 minutes.
Mr. Miller. Thank you, Mr. Chairman. I don't think that we
can argue that we must respond to the reality the FHA wasn't
prepared to have the pressure it faced during the downturn
crisis. But we also face the reality that the private sector
and FHA are somewhat different. FHA was driven by a mission
structure. The private sector is driven by a profit structure,
which is most appropriate. But let's look at fair competition.
I guess the question we need to ask is, was the FHA
crowding out, or was there no crowding-in by the private
sector? I think that is something we don't have an answer to
right now. And I think we need to look at the structure that
caused the lack of crowding-in. If you look at Basel QM--QRM,
we are doing everything from a structural perspective from
Congress to basically make sure the private sector does not
come in when they should be.
And if you look at the FHA, they play a countercyclical
role. They grew when the private sector didn't come in. But now
it is time to look at how do we ratchet back the FHA and other
groups to let the private sector come in. That is something we
need to really look at. And the latest actuarial review makes
it clear that FHA wasn't fully prepared for the strains they
faced during the downturn. They had five increases in fees.
Were they appropriately timed, could they have moved in
quicker?
We need to explore the mechanics of the private sector
mortgage market and ask, how do we evaluate their operational
structure and apply that to FHA, determine where reforms are
needed, to make sure FHA can play this countercyclical role
they are intended to play? But we need to respond to certain
things that FHA has done to make sure they can perform their
function in the future. We need to ensure their management
system and technology are appropriate to do the job they are
supposed to do.
We need to make sure that they ensure that appropriate
credit quality is preserved in the system. I have introduced
legislation in the past to make sure they would do that and,
for some reason, that is not occurred. And we need to demand
that FHA remain adequately capitalized. There are a lot of
questions and a lot of concerns I have, and I am sad to say my
time has expired.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from California, Mr. Sherman, is
recognized for 2 minutes.
Mr. Sherman. Yes, indeed, FHA's market share has grown, as
the gentleman from California points out. That is FHA's
mission, to step forward and play a larger role when we have a
downturn, in this case the largest downturn in the housing
economy in modern times. FHA has lost money on the guarantees
that it made of mortgages in 2007 and 2008. Who hasn't?
Very few people realized we were headed for a huge decline
in home prices. And even the most carefully selected mortgages
made in 2007 and 2008 had a higher than expected default rate,
as people became unemployed and as they were unable to sell
their homes at a profit when they were forced to sell them by
unemployment or divorce or whatever. Moody's Analytics
estimated that if the FHA hadn't stepped forward, then by 2010
we would have seen another 25 percent decline in home prices
around this country.
That would have been terrible for our economy, and even
terrible for the private mortgage insurance industry. I look
forward to restoring a more orderly market, one in which
private mortgage insurance will be playing a bigger role, and
FHA will be playing a smaller one, as we stabilize this economy
and stabilize home prices.
Finally, I come from a high-cost area, where $729,000 is
still a middle-class family. And to have Fannie Mae and Freddie
Mac shut out of that market, but the FHA in it, I think is
unfair to the private mortgage insurance industry. People with
those mortgages ought to be eligible for a combination of
private mortgage insurance and Fannie Mae and Freddie Mac. I
look forward to restoring the situation where Fannie and
Freddie have limits at least as high as FHA.
And I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman, Mr. Westmoreland, is recognized for
2 minutes.
Mr. Westmoreland. Thank you, Mr. Chairman. I have said this
many times before: The FHA is insolvent. If FHA were a private
mortgage insurance company or one of my community banks, it
would have failed a long time ago. We don't want FHA to fail.
We want it to do what it was created to do. Instead of focusing
on fundamentals like shrinking their portfolio, reducing risk,
and charging a premium that is in line with risk, FHA has
advanced a policy that can only be described as out of bounds
from its original intent.
In fact, the administrator admitted to this committee last
month that people earning over $100,000 are eligible for an FHA
loan. Are these the low-income borrowers FHA is supposed to be
serving? FHA is in markets and arenas that they don't need to
be in. Further, Dodd-Frank, the QM, and Federal housing
policies are driving businesses to FHA rather than away from
the private sector. The list of FHA advantages over the private
market is long, and I have fought to bring private mortgage
financing and PMI back into the market.
We need to reduce the 100 percent guarantee to 25 to 50
percent to be in line with the VA program and what private
mortgage insurance offers. We need to reduce the loan limit to
be in line with the area medium income, and tie FHA loans to
the income. We need to restructure FHA premiums so that they
can recapitalize their fund. And we need to be sure FHA uses
the same standards for underwriting that are used in the
private market.
I hope Chairman Hensarling and Chairman Neugebauer work
towards a conservative bill that ends these subsidies and
refocuses FHA on its core mission to serve first-time and low-
income borrowers.
Thank you, Mr. Chairman, and I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentlewoman from Ohio, Mrs. Beatty, is
recognized for 2 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member. I, too, join my colleagues in looking forward to
continuing to discuss FHA's financial position and, in
particular, the notion of government crowding out private
mortgage insurance from the residential mortgage insurance
market.
FHA has, indeed, become a much more significant player in
the mortgage insurance market. But this reflects the fact that
private mortgage insurers all but pulled out of the market
during the housing downturn. According to Moody's Analytics,
the FHA's response to the housing collapse prevented house
prices from falling an additional 25 percent, which would have
resulted in 3 million more jobs lost and a reduction in the
economic output of $500 million.
So I think when we discuss FHA's larger market share, let's
do so with a clear understanding of what precipitated this
increased growth, which is first, the FHA's fulfillment of its
statutorily-defined mission to promote long-term stability in
the U.S. housing market by providing countercyclical support.
Second, despite playing such a critical role in the crisis, the
FHA has already begun taking steps to shore up the MMIF and to
also refocus its efforts towards the primary market for FHA-
insured loans, first-time homeowners, and low- and middle-
income borrowers.
And lastly, by increasing, up front, annual fees, and
making mortgage insurance premium payments due for the life of
the loan, rather than just until the borrower's equity reaches
a certain level, the FHA has actually strengthened the position
of private mortgage insurances. And I certainly look forward to
hearing from our witnesses today and continuing these hearings.
I yield back my time.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from Texas, Mr. Green, is recognized
for 1 minute.
Mr. Green. Thank you, Mr. Chairman, and thank you for
allowing me to be a part of this subcommittee hearing.
I am here to say to FHA, ``Thank God for you.'' I really do
believe that FHA has been of great benefit to this country. It
was formed at a time of crisis in 1934 when loans were hard to
acquire, if you could acquire one at all. They were short-term,
they had balloons. FHA was born out of a crisis with the intent
of responding to a crisis, and that is exactly what it has
done.
It has responded to the ``Great Recession'' by allowing
people to acquire homes who probably could not have acquired
them otherwise, given that so many of these other companies
have gone out of business. If not for FHA, we would be in dire
straits today. I believe that FHA can do some things to improve
its position, and I look forward to tweaking it, and mending
it, but not ending it.
Chairman Neugebauer. I thank the gentleman. And now, we
will recognize our panel. Each of you will be recognized for 5
minutes. Your written statements will be made a part of the
record.
The panel today consists of: Mr. Ken Bjurstrom, principal
and financial consultant from Milliman; Mr. Nat Shapo, a
partner at Katten Muchin Rosenman; Mr. Brian Chappelle, a
partner at Potomac Partners; Mr. Steve Stelmach, senior vice
president and research analyst at FBR Capital Markets &
Company; and Ms. Teresa Bryce Bazemore, president of Radian
Guaranty, Inc.
Thank you for being here today. And with that, Mr.
Bjurstrom, we will recognize you for 5 minutes.
STATEMENT OF KENNETH A. BJURSTROM, PRINCIPAL AND FINANCIAL
CONSULTANT, MILLIMAN
Mr. Bjurstrom. Good morning. Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee, thank you for
the privilege of appearing here today.
My name is Ken Bjurstrom. I am a principal at Milliman,
where my practice focuses on mortgage credit risk analysis for
the mortgage insurance and mortgage banking industry, both for
private and government organizations. In association with
Milliman, I have conducted analyses of the private MI industry
and, at the request of HUD's Inspector General, I have
conducted several reviews of the actuarial report for the FHA's
mutual mortgage insurance fund.
During the early 1980s and again in the early 1990s, as
well as over the last few years, the economy has suffered
declines in home prices or increases in unemployment resulting
in mortgage insurance claims. Subsequent to each of these
periods of economic stress, the MMIF experienced substantial
losses. For endorsement year 1981, roughly 22 out of every 100
FHA borrowers defaulted and lost their home, resulting in a
mortgage insurance claim to the FHA.
For endorsement years 1990 through 2003, relatively good
times, the comparable rate was 8 out of 100 borrowers. And for
the 2007 endorsement year, according to the FHA's MMIF
actuarial report, the rate is estimated at over 30 out of every
100 FHA borrowers. All mortgage insurers are exposed to
considerable risks which, in turn, require them to maintain
basic disciplines, including underwriting, ratemaking, loss
reserving, and also a commitment to high capital levels.
Historically, insurers have generally used the size of the
downpayment or loan-to-value product type in the amount of
coverage in their underwriting and ratemaking approach.
Relatively recently, private MIs have expanded their premium
rate programs to recognize the importance of borrower credit
scores and other factors. In contrast, the FHA currently
utilizes fewer tools available to them to manage their
insurance exposures. Without a more granular approach to
ratemaking, the FHA may be encouraging adverse selection with
respect to obtaining FHA mortgage insurance protection.
State insurance laws require private MIs to adequately
maintain multiple reserves. These reserve requirements require
the MI to account for near-term expected losses, restrict
shorter-term dividends, and measure the company's ability to
write new business. The FHA, in contrast, does not have a
comparable reserving methodology. Private MIs are generally
subject to a maximum risk to capital ratio when combined with
reserve requirements, require it to build reserves and
surpluses during periods of economic growth so that they are in
a position to cover substantial levels of claims during periods
of economic downturn.
The FHA, on the other hand, is not required to hold
equivalent statutory reserve requirements or comparable capital
requirements. FHA's Mutual Mortgage Insurance Fund is required
to have an independent actuarial analysis of its economic net
worth and financial soundness to determine whether it has
maintained a 2 percent ratio of the economic value to its
insurance in force. This ratio requirement, and the economic
valuation from which it is derived, is the only gauge of FHA's
ability to withstand losses.
FHA's economic value calculation has several inherent
weaknesses. The long-term forecast used generates significant
positive economic value for the most recent endorsement years,
as if these economic forecasts were certain. It considers
anticipated future premiums from these books and their future
losses. But these recent books are very large and have the
potential for significant variability over the long-term.
In contrast, private MIs do not take credit for the
economic value reflected in future premiums and terms of their
statutory requirements. If we were to re-look at history and
forecasted FHA claim rates and the economic environments that
caused them, it is clear that the FHA should establish a
capital threshold that reflects a more risk-based probability
of stress losses in the future.
Additionally, the FHA should be allowed to establish loss
reserves and account for estimated loss liabilities prior to
determining its capital ratio or other assessments of its
financial strength. Loss reserves are a critical part of
determining the actuarial health of any insurance fund, and
should be part of the MMIF capital assessment to give Congress
a more accurate view as to the capital adequacy of the FHA's
single-family operations.
Since the early 1980s, when I began working in this
industry, I have witnessed multiple economic downturns which
created tremendous losses for both private MIs and government-
run funds at both the State and Federal levels. It is therefore
important to continue to work diligently to protect the FHA
program. To that end, I recommend that the FHA evaluate and
adopt many of the private MI statutory accounting provisions
described above, better understand and modify their exposures
to support their mission, and retain the necessary capital that
is required to protect the program now and for the next
economic downturn that will most definitely occur.
Thank you for inviting me and for your consideration of my
views. I would be pleased to answer any questions.
[The prepared statement of Mr. Bjurstrom can be found on
page 65 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Shapo, you are recognized for 5 minutes.
STATEMENT OF NAT SHAPO, PARTNER, KATTEN MUCHIN ROSENMAN LLP
Mr. Shapo. Thank you, and good morning, Mr. Chairman,
Ranking Member Capuano, and members of the subcommittee. Thank
you for inviting me. It is a privilege to participate as the
subcommittee performs its important work.
My name is Nat Shapo. I am a partner at Katten Muchin
Rosenman LLP in Chicago. I practice mainly in insurance,
litigation, and regulatory matters. I am also a lecturer at the
University of Chicago law school, where I teach insurance law.
And I was privileged to be the Illinois Insurance Commissioner
from 1999 to 2003.
At the subcommittee's request, I have analyzed the FHA
Mutual Mortgage Insurance Fund from a regulatory perspective.
From what I found, based on GAO audits and other public record,
the fund appears to have been, and to be, operating and
overseeing in a manner that conflicts with basic regulatory
principles.
Insurance is regulated in the United States primarily by
the States per the Congress' direction in the McCarran-Ferguson
Act. The State insurance department is generally divided into
solvency regulation and market practice oversight. The former,
solvency regulation, is usually looked at as the most important
function of insurance regulation, since financial impairment
jeopardizes the carrier's ability to carry through on the heart
of the insurance contract, the promise to pay.
Nearly a century ago, the Supreme Court nicely explained
the key place that solvency regulation has in protecting the
well-being of the common fund that all consumers rely upon.
Insurance companies, the court said, create a fund of assurance
and credit, with companies becoming the depositories of the
money of the insured, possessing great power thereby and are
thereby charged with great responsibility. How necessary their
solvency is, is manifest.
With respect to solvency regulation, requiring
capitalization commensurate with risk is a basic pillar. Thus,
a common requirement in the States, based on a National
Association of Insurance Commissioners model, is a risk to
capital ratio limiting outstanding liability on the insurer's
aggregate policies to 25 times its capital surplus and
contingents in reserve. In other words, the carrier must have
real money, at least 4 percent of its liabilities, on hand.
The 4 percent capital to risk ratio is backed up in the
NAIC model. If it is pierced, the carrier may not write new
business. This protects both current and potential new
consumers by preventing an impairment from becoming a
catastrophe. The FHA fund's risk to capital ratio of 50 to one,
which means capital in the amount of 2 percent of exposure, is
half as stringent as the NAIC model's 4 percent. Certainly, the
weaker standard is relevant.
But my bigger concern is that the standard, at whichever
level, is not enforced, as a regulatory requirement, in
practice. The GAO found that the capital ratio fell from about
7 percent in 2006 to 3 percent in 2008, below 2 percent in
2009. It is not expected to reach 2 percent again until 2017,
meaning it will likely be below its statutorily-mandated level
for 8 years. This extended failure to meet the legal minimum is
exacerbated by the FHA's practice of attempting to write its
way out of trouble.
An impaired insurer is generally not allowed to write new
business absent very stringent additional requirements. But
FHA's exposure has ballooned, according to the GAO. In 2006,
FHA insured approximately 4.5 percent. Today, it insures at its
peak, though in 2009, it insured 32.6 percent. Today, we are
still over a quarter. The results have been predictable, and
exactly what insurance regulation is designed to prevent; the
deepening of the crisis, and a full-blown negative balance
sheet.
GAO explained that in 2012, the capital ratio fell below
zero, to negative 1.44 percent. The fund is expected to be in
negative balance for at least 2 years. A private insurer in
such insolvent condition would be put in liquidation. The
commonly-adopted NAIC hazardous financial condition regulation
establishes a number of other different standards that would be
triggered by an insurer in the fund's condition, which I have
covered in my written testimony.
Adverse findings in audits--we have seen that with the GAO.
An insurer's operating loss in a 12-month period greater than
50 percent of the insurer's remaining surplus. The fund has no
surplus. The insurer growing so rapidly that it lacks adequate
financial capacity. The fund's increased market share by 700
percent, while turning into a balance sheet insolvency. So the
fund would be in violation of those basic standards of the NAIC
hazardous financial condition regulation.
I was asked to provide a regulatory analysis, and the
ultimate policy issues here are well beyond my proverbial pay
grade so I will only briefly comment. Insurance is complicated,
but its basics are straightforward. The Supreme Court explained
that Congress understood the business of insurance to be
underwriting the and spreading of risk. The fund operates apart
from the basic rule. It does not evaluated hazards according to
actuarial principles or correlated premiums-to-risk.
The capital in this common fund does not support its
exposure. Government intervention in the distribution of risk
never ends well, and does not ultimately protect consumers that
it is meant to. We have seen that in the New Jersey auto market
and other places with heavy government intervention. By doing
so, FEIA makes obtaining business and attracting capital, the
core functions of any business, more difficult for carriers,
distorts the entire market as a whole, and deepens the spirals
already in place both at the FHA and among private carriers.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Shapo can be found on page
88 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And now, Mr. Chappelle, you are recognized for 5 minutes.
STATEMENT OF BRIAN CHAPPELLE, PARTNER, POTOMAC PARTNERS LLC
Mr. Chappelle. Thank you, Mr. Chairman, Ranking Member
Capuano, and members of the subcommittee. I am Brian Chappelle
with Potomac Partners.
I believe that a strong and viable private mortgage
insurance industry is an integral part of the mortgage market.
I also believe that the MIs' challenges today have little to do
with FHA. The MIs benefited from FHA's support of the mortgage
market at the height of the crisis in 2008. By helping to
stabilize home prices, FHA reduced MI losses. However, as the
FHA audit shows, FHA will incur significant losses on loans
made during that period.
The good news is that loans made since then have
strengthened the fund. FHA has taken numerous steps to shore up
its reserves. Its rate increases are also pushing more business
back to the MIs. FHA has raised its premium 5 times, with
another coming next month. Even an MI said, in its annual
earnings filing just last week, ``We believe that the FHA's
current premium pricing has allowed us to be more competitive
with the FHA than in the recent past for loans with high FICO
credit scores.''
And that was before the FHA's upcoming increase. For all
the attention given FHA's mortgage limits, the data shows that
FHA activity is concentrated in lower-priced homes. FHA's
median loan amount was $147,000 in 2011. Seventy-one percent of
FHA loans insured in 2012 were below $200,000; $200,000 is
below the base loan limit in effect prior to the Economic
Stimulus Act of 2008. Over 80 percent of FHA loans insured last
year were also below the pre-stimulus limit when high-cost
areas were included.
FHA did more loans under $50,000 than over $500,000. FHA
did twice as many loans under $100,000 as they did over
$300,000. Concerning borrower income, the FHA median was
$56,000 in 2011. FHA's median was only 12 percent above the
U.S. median family income that year. That is lower than FHA's
borrower profile in 1971, 40 years ago, when the FHA median was
22 percent higher than the U.S. median.
There are three ways that FHA achieves the balance between
its mission, its responsibility to the taxpayer, while also
minimizing overlap with the private sector. First, FHA's
premium structure reduces overlap. Unlike many types of
insurance, FHA charges all borrowers the same premium
regardless of credit characteristics, thereby helping the
private insurers to compete for better-quality loans.
Second, FHA uses reasonable mortgage limits to minimize
overlap. As the above data showed, high-balance loans are a
very small part of FHA's business, or the MIs problem. However,
some high-balance loans can help FHA cushion taxpayer risk
because every audit I can remember has said higher-balance
loans perform better.
Third, FHA provides 100 percent insurance coverage. A 1997
GAO audit concluded, ``Reducing coverage would increase
borrower costs and reduce borrower eligibility.'' In addition,
lenders are now taking the unprecedented step of adding their
own underwriting requirements on top of FHA's. Reducing
coverage would exacerbate this current problem.
There is a more immediate problem facing the mortgage
market today, however. As Federal Reserve Governor Duke noted
in a speech last Friday, purchase mortgages hit their lowest
level since the early 1990s. That is 22 percent fewer purchases
than in 2008 at the height of the crisis. Younger home buyers
are being particularly hard hit by tight credit. According to
Governor Duke, from late 2009 to 2011, the number of first-time
home buyers under 40 was half of what it was in the early
2000s.
She added that since 2007, there has been a fall of about
90 percent for borrowers with credit scores between 620 and
680. At the same time, about 30 percent of all purchase
transactions in 2012 had home buyers paying cash. They did not
need or want a mortgage. For the first time I also can
remember, all cash sales are now the number one source for home
purchases in our country, ahead of FHA, Fannie Mae or Freddie
Mac.
In other words, the private sector has returned to the
housing market, just not to the mortgage market. I am worried
that we may well be moving backwards towards the housing market
where homeownership is limited to those who are wealthy or have
wealthy parents, and a dwindling few whose credit is stellar
enough to qualify for a mortgage. I believe that we must first
solve this challenge before worrying about carving up a
depressed purchase mortgage market.
The fundamental problem with the current market today is
not that FHA is doing too many purchase loans, but that,
combined, FHA, the private mortgage insurers, and the GSEs are
not backing enough of them.
Thank you very much, and I look forward to answering any
questions you may have.
[The prepared statement of Mr. Chappelle can be found on
page 76 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Stelmach, you are recognized for 5 minutes.
STATEMENT OF STEPHEN STELMACH, SENIOR VICE PRESIDENT AND
RESEARCH ANALYST, FBR CAPITAL MARKETS & CO.
Mr. Stelmach. Good morning. My name is Steve Stelmach. I am
senior vice president at FBR Capital Markets, an investment
banking firm headquartered in Arlington, Virginia. I would like
to thank Chairman Neugebauer and Ranking Member Capuano for my
invitation today.
Among the issues that the subcommittee asked to be
addressed today is the impact of the FHA's policies and
practices on investments in private mortgage insurance. This is
a topic for which I can offer a unique perspective. In my role
at FBR Capital Markets, I have 10 years of experience in
advising our clients on the merits and risks of investing in
particular industries and companies
My particular area of focus is U.S. housing, mortgage
finance, and, relevant to the subcommittee, mortgage insurance.
FBR's clients are pension funds, endowments, mutual funds, and
asset managers in the United States and in Europe.
Collectively, these clients match assets in the trillions of
dollars. Having participated in countless conversations with
these institutional investors over many years, I can attest
that the actions of the FHA have a direct influence on investor
decisions to allocate or not allocate capital to the private
mortgage insurance industry.
Today, I would like to address three main topics on which
investors tend to focus: first, how the FHA has historically
crowded out private capital; second, how recent changes at the
FHA has actually encouraged new capital into the market; and
third, how FHA policy changes can have the impact of expanding
mortgage availability.
First, on the issue of crowding out private capital, the
FHA has a fixed insurance premium structure, which means the
borrowers are all charged the same insurance premium. Until
recently, that premium was at or below rates charged by private
mortgage insurers. This premium, combined with the downpayment
requirements, are less than those required by private mortgage
insurance, higher FHA seller concessions, lower perceived
repurchase risks for defaulted loans, and higher gain on sale
margins pushed lenders and borrowers into the FHA product.
With capacity constraints within the mortgage origination
channels, uncertainty of our future liabilities, the
creditworthiness of the average FHA borrower is much higher
than historical levels. Currently, the average credit score of
an FHA-insured loan hovers around 700. This is safely in prime
credit territory, and well above the average FICO score for
many low- and moderate-income households that the FHA has
traditionally served.
When the FHA premium was capped at 55 basis points, FHA
charged a lower insurance premium for this prime quality
borrower than premiums charged by the private mortgage
insurers, making it exceedingly difficult for the private
mortgage insurers to compete for that business. Turning to the
issue of private industry, or private capital returns in the
mortgage insurance industry, we see investor interest as very
strong.
Following the passage of the FHA Reform Act of 2010, the
FHA was given the authority to raise annual premiums to 155
basis points, or 1.55 percent. Following a series of premium
increases, the current FHA premium is 1.35 percent.
Additionally, the FHA has taken further steps to shore up its
finances, making FHA loans less attractive to higher credit
quality borrowers, expanding the market share from private
mortgage insurers.
Since the FHA began to institute premium increases in 2012,
FBR has helped to raise $550 million in capital for a new
mortgage insurance company, and recently participated in
raising a billion in capital for an existing mortgage insurance
company. In total, the mortgage insurance industry has
attracted nearly $3 billion in new capital in the last 12
months. Notably, investors chose to invest this capital only
after FHA instituted premium increases.
Despite the sums raised in the past 12 months, it is a far
cry from the roughly $20 billion of capital that the private
industry enjoyed just a few years ago. While much of the
decline in industry capital is a result of extraordinary claims
that the industry has paid in recent years, investors have been
hesitant to provide capital to the industry, given persistent
regulatory uncertainty, including GSE reform, FHA reform,
Qualified Mortgage definitions under Dodd-Frank, and Qualified
Residential Mortgage definitions under Dodd-Frank.
We believe that as the market receives greater clarity on
these issues, this clarity can facilitate even greater
investment in private mortgage insurance. As a public policy,
it could be seen as self-defeating for the FHA to allocate
precious dollars for borrowers who would otherwise qualify for
private mortgage insurance, while other borrowers struggle to
get financing. As a means of expanding mortgage availability to
those less-served segments of our country, the FHA has a
critical role to play.
And this dynamic leads to my final point. Higher premiums
and other actions taken by the FHA can actually increase
mortgage availability, up to a point. Now, this may sound
inconsistent with policymakers' objectives but, in fact, we
expect FHA premium increases to widen mortgage availability to
less-served segments of our community. As premium increases
take hold at the FHA, the FHA will price itself out of the
prime credit market that I mentioned earlier.
Private mortgage insurers are willing to serve this market.
And if the government backs away, investors are more willing to
invest in this private industry. In fact, we have started to
see this play out. Importantly, however, now that the FHA
capacity is not being allocated to this higher credit quality
borrower, the FHA's precious resources can be directed to
qualified but less creditworthy households. Under this
scenario, we see the FHA fulfilling a very important policy
objective of providing mortgage credit to underserved
borrowers, while private capital becomes increasingly available
to meet growing mortgage market demand.
Again, I thank the committee for inviting me today. I am
happy to answer any questions that you may have.
[The prepared statement of Mr. Stelmach can be found on
page 99 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And finally, Ms. Bazemore, you are recognized for 5
minutes.
STATEMENT OF TERESA BRYCE BAZEMORE, PRESIDENT, RADIAN GUARANTY,
INC.
Ms. Bazemore. Thank you. Good morning. I am Teresa Bryce
Bazemore, president of Radian Guaranty, a leading private
mortgage insurance company. For decades, FHA and private MI
have worked together in housing finance to ensure that low- and
moderate-income families could purchase homes, often their
first homes, with low downpayments.
In fact, my first loan was an FHA loan for a condo, and so
I have personally benefited from receiving both FHA and
privately insured mortgage loans. FHA has been, and remains, a
valuable part of the housing finance system. However, in the
past few years FHA has dominated the mortgage insurance market
due to housing policies and practices that provide competitive
advantages to FHA, while crowding out private capital.
By way of background, the private mortgage insurance, or
MI, industry is the private sector alternative to loans insured
by FHA. Private mortgage insurers help qualified, low-
downpayment borrowers obtain an affordable and sustainable
mortgage. When a borrower places less than 20 percent down, the
lender is required to obtain private MI in order for that loan
to be eligible for subsequent sale to Fannie Mae or Freddie
Mac.
Even during the recent challenging times, the MI industry
raised over $8 billion in new capital, paid approximately $34
billion to the GSEs in claims resulting from foreclosure
losses, and has reserved another $16 billion for this purpose.
This is $50 billion taxpayers do not have to pay. We are able
to pay claims at these levels in part because of the rigorous
countercyclical reserve requirements and loan loss reserve
requirements imposed by State insurance commissioners.
A requirement to reserve half of every premium for 10 years
ensures that significant capital reserves are accumulated
during good times, and then drawn upon to absorb the losses
during downturns. While private MI and FHA are similar in that
they enable borrowers to buy a home with less than a 20 percent
downpayment, there are some significant differences that
Congress should consider.
First, private MI places private capital at risk in a
first-loss position after the borrower's equity. FHA relies on
Federal funding, so that taxpayers currently are on the hook
for over $1 trillion in mortgages.
Second, private MI covers 25 to 35 percent of the loan
amount, whereas FHA insures 100 percent of the loan amount,
meaning the lender lacks any meaningful risk of loss.
Third, private MI companies adjust premiums depending on
the underlying loan characteristics. FHA premiums, on the other
hand, do not reflect the true overall risk of the loans that
FHA insures. Fourth, loans insured by FHA and guaranteed by
Ginnie Mae are priced more favorably in the market than
conventional loans guaranteed by Fannie and Freddie and insured
by private MI.
Keeping these differences in mind, I would like to offer
five recommendations.
First, authorize risk-sharing between FHA and private
mortgage insurers. The private mortgage insurer will conduct an
independent underwriting, and take a first-loss position ahead
of the taxpayer.
Second, alter FHA borrower eligibility standards to refocus
FHA on serving lower- and moderate-income borrowers who need
their help, as proposed in the Administration's February 2011
White Paper on housing finance reform.
Third, consider reducing FHA's guarantee below its current
100 percent level, much like the VA mortgage program. A lower
level of insurance coverage results in better underwriting and
loan performance, which reduces both the probability of default
and the severity of loss.
Fourth, authorize FHA to adjust its premiums to levels that
reflect the true risk of the loans that it insures.
And fifth, avoid government actions that unintentionally
steer borrowers to FHA, such as GSE guarantee fees and loan
level price adjustments that are not actuarially based.
The result is to make privately insured loans purchased by
the GSEs more expensive than FHA-insured loans, thereby
steering borrowers to FHA loans. Finally, I would like to say
that unless the QRM and Basel III rules recognize private MI as
a risk mitigant, low- downpayment borrowers will find it much
harder to obtain a mortgage.
Thank you, and I will be glad to answer any questions.
[The prepared statement of Ms. Bazemore can be found on
page 46 of the appendix.]
Chairman Neugebauer. I thank the gentlewoman. And now, each
Member will be recognized for 5 minutes for questions.
I will begin by recognizing myself for the first question.
Mr. Shapo, according to the NAIC Model Act, and I am going to
read from that, ``In the event that any mortgage insurer has an
outstanding total liability exceeding 25 times its capital,
surplus and contingency reserve, it shall cease operating until
it can build sufficient reserves.'' Why do you believe that
State regulators put that in place?
Mr. Shapo. It is part of the risk. The risk to capital
ratio is a pillar of the system. There are minimum capital
requirements in the low seven figures, but for a larger
company, that is not the most important requirement. The most
important requirement, as the company grows and as its exposure
changes, the capital has to change and increase as the risk
increases. So the baseline requirement is risk to capital.
The requirements in different lines of insurance all follow
that, in one form or fashion, the risk to capital ratio. And so
that is the baseline requirement. And then the most important
remedy, the most important follow-up to that is that if you
don't meet that ratio, you can't continue to write business. It
is essential that a company that is not able to support its
level of exposure with real money in hand cannot continue to
write more business and, potentially, increase and take
basically an impairment and turn it into an--
Chairman Neugebauer. So to if I am following you here then,
if FHA were an insurance company in Illinois, where you were a
former insurance commissioner, and they had a negative net
worth and they were writing 52 percent of the business, would
they be allowed to continue to do that?
Mr. Shapo. No. The basic purpose of the regulation is to
keep, is to try to cabin the risk. You need to cabin the risk
because you need to protect the current policyholders, you
want--you need to--
Chairman Neugebauer. My time is limited. I intended for
that to be a yes-or-no question.
Mr. Shapo. I am sorry.
Chairman Neugebauer. So would they be allowed to continue
to operate in Illinois if they had a negative net worth and
they were increasing the amount of business that they were
getting?
Mr. Shapo. No, the purpose would be to avoid the negative
net worth. And so the answer is they would not be allowed to
continue.
Chairman Neugebauer. So I want to get consensus here
because I think an important piece of this hearing is to
establish what FHA is. And so, Mr. Bjurstrom, is FHA a mortgage
insurance entity?
Mr. Bjurstrom. I believe it is, yes.
Chairman Neugebauer. Yes. And so is it being run, and is
the oversight consistent with other mortgage insurance
companies in this country?
Mr. Bjurstrom. I think over the last 20 years, there have
been several attempts to perform actuarial credibility as well
as capital modeling. But due to the single-premium-fits-all
type of structure, and the lack of actual reserving for losses,
there is a lot of confusion with respect to how much the
capital ratio or even just the capital account has in order to
pay losses.
So if you look over the last 20 years, they have lowered
their premiums. I think they began about 380 basis points about
20 years ago. They reduced them down, thinking that they had
enough money after the last crisis. But we went into this next
crisis in such a manner where now they are increasing premiums
again. And it is that kind of fluctuation and lack of temporal
diversification that creates a lot of confusion. Therefore, the
standards aren't set and regulated enough in order for them to
maintain a high enough water level to meet their expected claim
liabilities.
Chairman Neugebauer. And my final question--and I have
asked this a couple of times in previous hearings. One of the
concerns I have is, almost that FHA manages their fund based on
cash flow. In other words, as long as they have enough cash
flow coming in to cover the losses for this year, they kind of
think they deem themselves sufficiently capitalized. And if you
run business on that model, then you are not ready for the big
hit down the road.
But the question I would have today is, I wonder what the
numbers would look like. The fund is now underwater to the tune
of about, I think, 1.7 percent or something like that. If they
didn't have the current levels of business of the market that
they have, if they had a more traditional level, would that
number--you have done a lot of analysis--be much lower? In
other words, their capital would be actually more negative if
they didn't have the cash flow day after day from the fact that
they are dominating the market?
Mr. Bjurstrom. Yes, they operate on a cash basis, and they
have operated in that manner until they actually--until they
were held to hold a--to perform the capital ratio test. But the
capital ratio test is just a number of financial strength. They
still operate on a cash basis. So at the end of the day, there
are roughly 750,000-plus serious delinquent borrowers right
now. So that if they were to have to reserve immediately for
those losses, and pull that cash into a reserve and then
recalculate their capital ratio, you are correct that capital
ratio, or financial ability to serve future borrowers, is much
less.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member, Mr. Capuano, is recognized for
5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. And again, I thank
the witnesses for your testimony. Thank you for being here
today.
Mr. Bjurstrom, do you think the FHA should be shut down
because it is bankrupt?
Mr. Bjurstrom. I do not.
Mr. Capuano. Mr. Shapo, do you think the FHA should be shut
down?
Mr. Shapo. No, sir.
Mr. Capuano. Mr. Chappelle?
Mr. Chappelle. No, sir.
Mr. Capuano. Mr. Stelmach?
Mr. Stelmach. No, sir.
Mr. Capuano. Ms. Bazemore?
Ms. Bazemore. No.
Mr. Capuano. Good. We agree. Thanks for coming.
[laughter].
But we all agree that the FHA has some current issues. We
all agree with that, no doubt, no debate. Mr. Bjurstrom, as I
understand it, the FHA now has approximately $30 billion, give
or take, in reserves. Do you believe that they will exceed
those reserves in this year? Do you think they will dip beyond
that, into taxpayer funds, to meet their requirements this
coming fiscal year?
Mr. Bjurstrom. I think it will be close.
Mr. Capuano. Do you think they are going to need taxpayer
funds this year?
Mr. Bjurstrom. No.
Mr. Capuano. Mr. Shapo, do you think they are going to need
taxpayer funds this year?
Mr. Shapo. Not to my knowledge.
Mr. Capuano. Mr. Chappelle?
Mr. Chappelle. No, sir.
Mr. Capuano. Mr. Stelmach?
Mr. Stelmach. Not to my knowledge.
Mr. Capuano. Ms. Bazemore?
Ms. Bazemore. I don't have a basis to make that assumption.
Mr. Capuano. Fair enough. So of those of you who have an
opinion agree they are not going to have to access taxpayer
funds. Yet the law requires them to access that because the
law, in my opinion, is stupid. Mr. Bjurstrom, do you think that
law should continue? Do you think we should keep a stupid law,
or do you think we should change a stupid law?
Mr. Bjurstrom. I don't have enough of a legal background to
answer that question. I think that the--
Mr. Capuano. You learned from Ms. Bazemore, didn't you?
Mr. Bjurstrom. No, I think at the end of the day, the fund
is the way--the accounting of the FHA is such that it relies on
this water balance between the number of claims that they have
to pay--
Mr. Capuano. No, I understand. They--I apologize, but my
time is short.
Mr. Bjurstrom. Sure.
Mr. Capuano. I am not going to go through this because I
think I just made the point that none of us think they are
going to have to dip into taxpayer funds this year. I can't
imagine that anyone would defend a stupid law, and therefore we
should change a stupid law. And therefore, I invite my
colleagues again to sign on to H.R. 1028, which will stop and
prevent a stupid law from occurring and therefore exposing
taxpayers to paying for something they don't have to pay for.
But we will see who actually signs on to that. I guess--
what we are talking today is--I guess Ms. Bazemore, you have
been in this business for awhile, correct?
Ms. Bazemore. Yes.
Mr. Capuano. Okay. Are all of the companies that were in
business in 2007, all the PMI companies, still in business
today and writing insurance today?
Ms. Bazemore. No. There were eight companies prior to the
crisis, and three of them are no longer writing business. They
are managing the portfolios that--
Mr. Capuano. So 3 out of 8 is what, 40 percent?
Ms. Bazemore. Five. So five are left. And three new
entrants have come into the market.
Mr. Capuano. So approximately 40 percent of the companies
have disappeared because of the crisis, and yet I am supposed
to say when 40 percent of the companies have disappeared those
losses have been probably been shifted over to government
responsibility. And I understand that, I am not blaming them.
Everybody lost money in 2008, a lot of people made bad
assumptions and bad bets. But at least 40 percent of the PMI
industry somehow made those same bets.
And yet, I am supposed to say everything was fine, we
should just ignore that? The States can take care of it?
Ms. Bazemore. Actually--
Mr. Capuano. I think it speaks for itself, when you lose 40
percent of the companies doing the business, that there is an
inherent problem that everybody has to share. I have no doubt
that your business model has shifted today from what it was in
2007 and 2008.
Ms. Bazemore. I would just point that the loss reserves
that were being discussed earlier, each of the companies that
are--even though they are no longer allowed to write business,
they had significant loss reserves to pay claims. So--okay.
Mr. Capuano. I understand that. And so is the FHA,
obviously. So therefore, I understand that part of the reserve
has worked. But they are out of business, so there is some
problem. I guess I am trying to make the point that private
insurance is a good thing. And I think that there is certainly
a role for it, and I actually agree that it is upside-down now.
But I am looking at a chart that indicates in 2002, private
insurance had 70 percent of the market and the FHA had 30
percent. Is that the right number? And in 2007, private
insurance had 82 percent of the market and FHA had 18 percent.
The question is, what is the right balance? And I guess we will
find out as the market goes on. Today--in the last 2 years,
private insurance had actually increased its share of the
market by 2\1/2\ times. In 2008, did the FHA crowd you out?
Ms. Bazemore. I would say that the FHA actually didn't take
actions to crowd us out. I think there were other government
policies, such as the GSE increases in their fees, their LLPAs
as well as--
Mr. Capuano. You do agree that we had to do something in
2008 and 2009?
Ms. Bazemore. Those two things happened in the 2008-2009
timeframe, and we saw a precipitous decline.
Mr. Capuano. Bingo.
Ms. Bazemore. And we have done a number of things as
private MIs to get that business back.
Mr. Capuano. And I think that is fine. So has the FHA, and
right now we are still in the process of trying to find that
right balance, which I agree with. That is where I agree with
the whole premise of these hearings, that we have to find the
right balance, exactly where it is. But there is no given that
somehow the FHA or government involvement in certain aspects of
the market is a good thing. The question is, where is the line,
let's fine tune it a little bit.
And by the way, before my time runs out, I just need to
make the same point I always make, that when you talk about
$200,000 limits, you are basically taking about a third of the
country and saying we are not going to do any loans in your
district. Because in Massachusetts last year, they had 83,000
FHA loans. Texas had 815,000. That is 9.7 times more FHA loans
than Massachusetts did.
And if you limited it to $200,000, because the market in
Massachusetts is so much more expensive, it would have been 24
times more loans. Because Texas is a relatively modest-priced
State, and Massachusetts is not. And we are not alone.
California, New York, Philadelphia. To understand the market,
you have to understand there are regional differences in both
real estate prices and wages. And I know you know that, but I
say that because my time is running out.
Chairman Neugebauer. I thank the gentleman. And that is one
reason a lot of people are moving to Texas.
[laughter].
Mr. Capuano. Mr. Chairman, then why haven't our real estate
prices gone down?
Chairman Neugebauer. I now recognize the vice chairman of
the subcommittee, Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. The gentleman
next to me from California is wanting all of those folks to
come out to California, as well, so--thank you all for being
here this morning. And to follow up a little bit on the ranking
member's line of questioning there with regards to the size of
the loans, the other day when we had the FHA individual in here
talking about their model of how they were doing things, over
the last couple of years they indicated that they have actually
expanded the larger part of their--or the portfolio part of
their business to making larger loans.
And they did it, they said, to--obviously, because of the
increasing amount of premium they can get to shore up their
bottom line. It would be counter to what I have heard this
morning from, I think, two or three of you with regard to the
data here that you are quoting this morning indicates that FHA
actually has not been making larger loans in increasing
numbers.
Can you give me some information? Mr. Chappelle, I know you
were--you had a lot of information in your testimony.
Mr. Chappelle. Thank you, Congressman. The Congress gave
FHA the authority, in 2008, to expand its mortgage limits to
help ensure there was liquidity in the entire mortgage market.
Because private businesses made the decision, the smart
decision, to pull back. But Congress wanted to make sure that
there was money available so that the market would not collapse
as far--worse than it actually did. And so, they gave the
authority to the FHA to raise their limits.
FHA raised the limits. But the point is, they have done
very few loans over $400,000; only 9 percent of their business
is over $400,000.
Mr. Luetkemeyer. Is it increasing, though? That was the
point they made the other day.
Mr. Chappelle. No, it is going the other way.
Mr. Luetkemeyer. That they are increasing those numbers,
and they are looking at the last couple of years of loans they
have made. And they keep coming back and saying their portfolio
has improved, our past dues are less, our loss ratios are less,
and are pointing to that portion of their business as improving
their overall picture.
Mr. Chappelle. But the key issue is, structurally, in the
FHA program, FHA charges every borrower the same premium. By
charging every borrower the same premium, which some of my
colleagues here aren't too crazy about--but by charging
everybody the same premium, that means people with lower risk
are paying more. It has been a fundamental part of every audit
that I can remember that higher-balance loans perform better
than lower-balance loans.
So by definition, if you are charging those borrowers
here--if your premium is here on those borrowers, they are
overpaying their premium. Consequently, they will go to the
private MI because it is a better deal, unless they have no
other choice. So the--
Mr. Luetkemeyer. My comeback to that would be--I am not
trying to argue with you here, but I--it is--I am getting some
different information from those other folks who testified
earlier. And having been in the financial services industry for
35 years, I can tell you that, yes, the bigger loans, they may
make more money on. But you also have more exposure to loss
because there is a bigger loan there.
And if you don't have better criteria on those larger
loans, and you don't do a better job of underwriting those
loans, your exposure is greater. On the front end, you may make
a few more dollars, but on the back end, your exposure is huge
because it is a larger loan. If it goes south, you have a
bigger problem. So I am not sure that they are actually solving
the problem; I think they are probably taking on more risk in
the long term, if that is the case.
But if you are saying they are not doing that, why, I
appreciate your testimony this morning. From the standpoint
of--Ms. Bazemore, you had some interesting comments here with
regard to a number of suggestions on how to price risk and how
FHA could improve their book of business. Could you go back
over those? I thought some of those were pretty salient. And I
guess my initial question would be, as you go through them, has
FHA thought about doing some of these things?
Are you talking with them, do they have an ombudsman
program, for instance, that you would be able to communicate
with them on to be able to have some interaction and then have
them take up some of these suggestions?
Ms. Bazemore. I would say that clearly they have made some
changes in terms of increasing their pricing. I think part of
it is just to understand what their risk is and making sure the
pricing is commensurate with the risk that they are taking on.
But with respect to risk-sharing, I think the concept there--
which is something that we have had some engaged conversation
about--is with the idea of being able to bring some of what we
have built in the private mortgage insurance industry to bear
in a way that would be really a partnership.
And we have built a lot in terms of risk analytics, we have
built a lot in terms of our ability to analyze portfolios, even
on a weekly basis, what is being submitted. And to communicate
back with the lenders who are originating those loans to help
them understand what is going on.
Mr. Luetkemeyer. Thank you. My time is about ready to run
out. I want to make one quick point. There are certain tenets
of sound lending that are inescapable regardless of whether it
is a large loan or a small loan. And if you get away from those
sound tenets of lending, you are going to lose. It seems to me
that we have continually done that with some of our GSEs. We
continually--we know what we need to be doing, and yet we fall
away from that. And then when--as soon as we do, we wind up in
trouble.
Mr. Chairman, I yield back. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentlewoman from New York, Ms. Velazquez, is
recognized for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Bjurstrom,
following the housing bubble-burst, three of the eight largest
private mortgage insurance companies went out of business.
Those that survived suffered significant losses. Could you
please explain the reasons why many of the major private
mortgage insurers suffered such losses during that economic
recession?
Mr. Bjurstrom. I would be happy to. I think during that
period of time there were a lot of new types of products that
were brought to the market. And from an actuarial pricing
standpoint, there was not a lot of information to judge the way
they price their products. And therefore--
Ms. Velazquez. It didn't have anything to do with the fact
that your industry relaxed the standards?
Mr. Bjurstrom. Yes.
Ms. Velazquez. Borrower standard and underwriting
requirements, pressure by the lenders?
Mr. Bjurstrom. That is correct.
Ms. Velazquez. Okay. So why were some of these companies
not able to pay these claims without going bankrupt?
Mr. Bjurstrom. Actually, they have been put into
receivership and they have been under the department of
insurance of their State of domicile. They are restricted from
writing new business, but they are still paying claims and
setting up reserves for those losses.
Ms. Velazquez. But still, can you explain to me why they
were not able to pay the claims without going bankrupt?
Mr. Bjurstrom. Without going bankrupt?
Ms. Velazquez. Yes.
Mr. Bjurstrom. I think Mr. Shapo had indicated that they
reached their statutory risk to capital.
Ms. Velazquez. Okay. Mr. Chappelle, Fannie Mae noted in its
most recent report to the SEC that many of its private mortgage
insurance counterparties were struggling to meet their current
State regulatory capital reserve requirements. Based on your
experience as a former insurance commissioner, would you be
concerned about this company's current financial conditions?
What about their obligations to fulfill future claims? Why or
why not?
Mr. Shapo. Why what? I am sorry, ma'am.
Ms. Velazquez. Why, or why not?
Mr. Shapo. No. The purpose of the regulation is to keep the
companies from going bankrupt. They are not bankrupt. The
purpose of the regulation is to make sure that the risk to
capital ratios are in line.
Ms. Velazquez. Would you please comment on the Fannie Mae
recent report to the SEC?
Mr. Shapo. I think I am commenting on it. What the States
are doing is, they are preventing the companies from expanding
their potential exposure at a time when their financial
condition cannot support it. The whole purpose of that is to
keep the companies from actually going bankrupt. They are not
bankrupt. That is the purpose of requiring a minimum ratio.
What has happened in some cases is the companies have been put
in runoff, prevented from continuing to write new business.
They are put in runoff for the whole purpose of protecting
the common fund and protecting the ability to pay clients.
Ms. Velazquez. Mr. Chappelle, recent reports from Fannie
Mae on the Bank for International Settlements indicate that
private mortgage insurers are still in a wait position and are
susceptible to significant risk. If private mortgage insurers
were to obtain a larger share of the market as they claim they
want, would they be in a good position to weather another
economic downturn? Why or why not?
Mr. Chappelle. That is a good question, Congresswoman. And
it is an uncertain thing. None of the MIs have the rating that
Fannie and Freddie required before the housing crisis, which
was a AA rating. The good news is that the ratings are
improving. But they are still well below an A rating, and that
is a problem.
Ms. Velazquez. Thank you. Could you, Mr. Chappelle, discuss
the importance of FHA's countercyclical role during periods of
economic recession, when private mortgage insurers are absent
from the market? How bad could the downturn have been if FHA
was not present to keep the housing finance market afloat?
Mr. Chappelle. Sure. I worked at FHA from 1975 to 1986, so
I saw what happened in the oil patch States in 1982 to 1986.
When we were at FHA, we continued to stay in those markets
after the private sector made the right business decision to
pull back. I remember a statistic that we had from back then,
that 19 percent of FHA's business came from the 6 oil patch
States, but 50 percent of their claims came from those 6
States.
Now, it would have been easy for FHA at the time to pull
out of those six States. But if they had done that, it would
have been devastating for Texas, Oklahoma, Colorado, Louisiana,
Alaska, and another State. And so the value that played there
is--what they are doing now is the same thing--at the national
level, what it did in 2007 and 2008.
Ms. Velazquez. And can we talk about FHA solvency? Do you
think that the agency has taken steps that will address its
underlying solvency issue?
Mr. Chappelle. Absolutely, Congresswoman. Their MIP for the
period from the 1930s to the 1980s was roughly 3.5 percent,
what they were collecting. They are now collecting 9 points
today; 9 percent is their premium, effectively. That is going
to allow them to shore up the fund immediately and build
reserves so that hopefully, they will be above the 20 percent
capital ratio much sooner than the actuary audit anticipated.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Miller [presiding]. Thank you.
Mr. Chappelle, you made a good point. Mr. Luetkemeyer made
a statement, and he was correct, that when the larger loans do
default, it is a large amount of money. But if you look at the
reality, only 1.6 percent of FHA loans were made above
$500,000; only 3.5 percent were made above $400,000; and only 9
percent were made above that range.
Mr. Chappelle. Correct.
Mr. Miller. But if you look at the default rate, above
$400,000 the default rate was about 33 percent lower.
Mr. Chappelle. Correct.
Mr. Miller. As you go up, they even went down. So the FHA
was right to a point. The loans they made that were the safest
and best-performing are in the higher-cost areas, but they are
not making that many of them.
Mr. Chappelle. Exactly.
Mr. Miller. Because of the cost.
Mr. Bjurstrom, you made a statement that their rates were
much higher 20 years ago than today, but CDs were 6 and 7
percent 20 years ago, and they are less than 1 percent today.
So everything has come down dramatically in that time.
But I am kind of curious how you perceive FHA's performance
compared to the private sector in four ways: first, adequate
internal controls and technology systems in place--how do they
currently compare to the private sector; second, appropriate
accounting standards; third, real-time risk management; and
fourth, their capital ratios. Can you address those?
Mr. Bjurstrom. Yes. I think there is really--I can address
it with two points. One is, is in any insurance company with
respect to enterprise risk management, having a lot of change
in any given year or over a very short period of time is never
good. A few years ago, the FHA had a very low share of the
market. And then as they came in, in the latter part of 2008
and 2009, they went from 400,000 policies to over a million
policies.
That puts a lot of stress on an organization. So at the end
of the day, working through that additional business puts a lot
of stress--
Mr. Miller. But that doesn't address the questions. Are
their internal controls and technology systems, compared to the
private sector, adequate? Are their appropriate accounting
standards compared to the private sector, adequate? Real-time
management? Are they responding in an adequate timeframe in
their capital ratios?
Mr. Bjurstrom. Yes, I think their accounting needs to be
changed to recognize the more certainty--certain liabilities
that one can--
Mr. Miller. So we need to provide better assets for them to
make sure they can do their job.
Mr. Bjurstrom. That is correct.
Mr. Miller. Okay.
Mr. Bjurstrom. That is correct.
Mr. Miller. And how about their appropriate accounting
standards and real-time management? Are they responding
adequately today to the market changes? They weren't a year or
2 ago, but are they today? Have they upgraded their standards
on risk management?
Mr. Bjurstrom. I believe they are working on it, to achieve
a certain level of standards. But according to the GAO, I think
there are a lot of improvements to be made.
Mr. Miller. Okay. For everybody on the panel, do you think
FHA operational technology and the cutting tools it needs are
available to them today to minimize taxpayer risk? Ms.
Bazemore?
Ms. Bazemore. I believe they need additional tools.
Mr. Miller. Okay.
Mr. Stelmach. I don't have the ability to judge the FHA's
internal--
Mr. Miller. I couldn't hear you.
Mr. Stelmach. I don't have the ability to judge FHA's
operations.
Mr. Miller. Okay. Mr. Chappelle?
Mr. Chappelle. They can always improve, but they are doing
it at an acceptable level right now, I believe.
Mr. Miller. Okay. Mr. Shapo?
Mr. Shapo. I don't have the factual basis to be able to
have a full answer to the question. But clearly, they are not--
they do not have the same kind of enterprise risk management
practices and self-assessment tools that regulated carriers do.
Mr. Miller. Okay.
Mr. Bjurstrom. I agree with Mr. Shapo's point that the
regulation is such a--in such a manner that those--that
transparency is not there.
Mr. Miller. Okay. Yes, sir--
Mr. Chappelle. The legislation that this committee passed
last year would go a long way to helping along that issue,
though, also.
Mr. Miller. Okay.
Ms. Bazemore, you commented on the lack of involvement of
the private sector. And what I am seeing out there from people
wanting loans is, the private sector is just not moving back in
adequately. And the only option out there, in many cases, is
FHA. That is the reality I see builders are going through when
they are building homes and selling them.
And you say FHA premiums are harming the private sector
return to the marketplace. They have increased them 5 times. So
is it the premium problem, or is it the QM, QRM and Basel? All
the private sector issues that we are trying to deal with, and
we have made more difficult, are those keeping the private
sector out more than just more the cost differential?
Ms. Bazemore. I think the first thing I would say is, you
have to think of the private sector as sort of two parts. So
when you think of private MI, we are really part of the GSEs.
And so we insure GSEs, essentially bring private capital to
that. That has always been there, we have never left the
market. However, I think there was a perception with lenders in
terms of going to FHA because that is where the decision is
made about whether to use FHA or to use private mortgage
insurance.
And so, for instance, over the last year we have trained
15,000 loan officers on the fact that many times it is better
for the borrower to have a mortgage-insured loan than--
Mr. Miller. No borrower with common sense would use FHA
over private sector mortgage insurance, because of cost alone,
if it were available. So, if you look at the cost differential
between the two, it is huge. So if you are going to get an FHA
loan, your fees and costs are much greater than if you went to
a PMI in a private sector. So there has to be more keeping the
private sector out than we are addressing.
Ms. Bazemore. You have to really look at the FHA and Ginnie
Mae execution together, and that is the real comparison with MI
and the GSEs. And it is still more favorable to have FHA and
GSE, with a Ginnie Mae guarantee in terms of the loan in the
marketplace.
Mr. Miller. My time has expired. I would like to go into
that more.
But, Mr. Cleaver, you are recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. This is one of the
committees, I think, where there is an attempt to avoid having
fact-free debates. So I would like to know whether any of you
disagree with the report from Inside Mortgage Finance which
says the private mortgage insurance--insurers were able to
write $175 billion in 2012. Does everyone agree with that?
Ms. Bazemore. Yes.
Mr. Cleaver. So how do you juxtapose that with the subject
of this hearing? FHA is crowding out the PMIs? Yes, Ms.
Bazemore?
Ms. Bazemore. Congressman Cleaver, I think that a lot of
the crowding out took place in sort of the 2009--late 2008-2009
timeframe. And since then, there have been efforts, I think,
both by the FHA--because even Secretary Donovan stated that he
felt they had too large of a share of the market. So FHA has
taken steps, through premium increases. The private industry,
private MI, we have also taken a number of steps to try to
increase the share.
And I think that it is slowly working, and that is what you
are seeing in Inside Mortgage Finance, that sort of has
continued. The difficulty is that things like increased GSE
fees, can have the effect of changing that. And so other
benefits, when you see what is happening with QRM or Basel
III--where FHA may get benefits--all of those things could
actually reverse the benefits that we have been seeing. And
that is one of the points of my testimony.
Mr. Cleaver. Mr. Chappelle?
Mr. Chappelle. Yes, I agree with your point, Congressman.
The problems from the MI industry are not FHA-related. As Ms.
Bazemore pointed out, it was QRM, it was loan level price
adjustments from the GSEs. But also equally important, when you
pull out of a market in 2008 and 2009, the mortgage business is
a relationship business. If you pull out, you just can't flick
a switch and come back in. It is going to take time.
And as Ms. Bazemore said, they are training loan officers
about the benefits of private mortgage insurance. But I know a
lot of lenders, going back to the oil patch days in the 1980s,
who still have trouble doing business with MIs because they
felt they had policies rescinded without having the coverage of
insurance. So there are a lot of other factors that have
nothing to do with FHA.
And, hopefully, the LLPAs are a critical--the GSE LLPAs are
a critical part of that. And I know we agree that needs to be
looked at. But it is far more of these other issues than it is
the FHA issue.
Mr. Cleaver. Yes, and if you listen to all of you, each of
you has, at times, made statements that would suggest that you
all agree that FHA is not the problem. But--and Ms. Bazemore,
to go back to what you said, in 2007, the housing market
collapsed. It collapsed. And so, these private companies did
what they do at a time when things go bad. They pulled back.
They stopped lending. Do you agree?
Ms. Bazemore. I don't think we stopped lending. I think, in
fact, we changed our underwriting guidelines because we saw so
many borrowers were being put into homes that they couldn't
afford and we thought the loans should be affordable and
sustainable. So many of the changes are in alignment with Dodd-
Frank and QM.
Mr. Cleaver. Yes. We probably have a slight disagreement.
Because I think they stopped lending, and we actually had
committee hearings where we dealt with that with banks. They
stopped. And it is true that some of the exotic products had
created problems, and that was pushed aside as it never should
have been brought to the surface.
But, there was some robust and reckless lending. Does
anybody disagree with that? Okay. And so those companies--you
can--I don't know how you want to--if you are going to say they
came--that they had more intelligent lending. But the fact is,
the percentage of the mortgage insurance written fell back,
right?
Ms. Bazemore. Yes.
Mr. Cleaver. So that, in and of itself, I think, would
suggest the need to maintain FHA. I think we need to tweak a
lot of things, including Dodd-Frank. But I don't think we can
attribute everything bad to FHA. I am out of time.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman, Mr. Westmoreland, is recognized for
5 minutes.
Mr. Westmoreland. Thank you, Mr. Chairman.
Mr. Chappelle, I was noticing in your resume, or biography,
that when you were with FHA you actually maybe had the
responsibility for the development of the adjustable rate
mortgage program. Is that true?
Mr. Chappelle. Yes, I worked on the implementation of it.
Yes.
Mr. Westmoreland. Okay. Originally, did FHA make that
buyer, as part of the loan guarantee, qualify for the
adjustable rate, or what the rate could eventually go to?
Mr. Chappelle. We surely didn't use what it could
eventually go to, Congressman. It was 30 years ago, so I am
going to have to--I would have to go back and read the
mortgagee letter.
Mr. Westmoreland. Okay. I was just thinking that you might
remember it because it was a pretty important part, and you
were there.
Mr. Chappelle. The only thing I would say is adjustable
rate mortgages are probably 1 percent of FHA's business today,
a very small portion of it.
Mr. Westmoreland. Okay. But if you were making somebody
qualify for what the rate could have been versus what the
adjustment rate was, that would have been a smarter move, don't
you think?
Mr. Chappelle. Absolutely.
Mr. Westmoreland. Mr. Bjurstrom, you evidently counsel, I
guess, businesses on how to compete against FHA. What are some
of your recommendations that you give them to be able to
compete, and what level can these private industries--do they
play on the same level, the same guidelines, as what FHA does?
Mr. Bjurstrom. I think the MI companies try to price their
products so that they achieve the amount of loss-paying ability
and capital accretiveness that is necessary to remain a viable
company. I think it is difficult to compete with one price that
the FHA has with their--because it creates a sort of adverse
selection between the products and programs that are being
targeted for a capital accretive and solvent--on a solvent
basis versus an all-in.
And from time to time it works out, but with one price for
all borrowers over all times the underlying mix of the
underwriting characteristics of the borrowers changes. So in
some years, when the economy is good, you may have additional
premium because losses are low. But in times that it is bad,
you have more losses, and therefore you are going to need more
premium to cover those.
So to basically--the way I advise my clients is just to
make sure that they understand the risks and exposures
associated with originating a borrower, and then price it
effectively.
Mr. Westmoreland. So, basically, are you saying that FHA
may have some different guidelines as far as the quality of the
credit?
Mr. Bjurstrom. Yes.
Mr. Westmoreland. Okay. Now, let me ask you this. And we
agree--at least I agree coming from a building background, real
estate background--that we need FHA. And FHA was started with
great intentions as far as first-time home buyers, and low- to
moderate-income. Do any of you on the panel see that FHA has
gotten out of that original intent and gotten into some places
where maybe the private sector, private mortgage insurance, has
more expertise in that area of lending than what FHA was really
created to do?
Ms. Bazemore?
Ms. Bazemore. I would just say that I think that while it
is continuing to serve some of its historical mission, I think
just because of some of these policies we have talked about, it
has broadened out further than that. And a significant amount
of loans that they are doing fall within what the private
sector could be doing. And the capacity is there, certainly, to
do it.
A comment came up earlier, just in the last 2 weeks, that
two of our companies have raised $1.8 billion in capital. So
the capacity is actually growing, and I think the model is
working as it was intended to.
Mr. Westmoreland. Mr. Chappelle?
Mr. Chappelle. Congressman, it is important to remember
that the loans that the FHA is getting, these higher credit
score borrower loans, are helping the solvency of the fund. But
they charge a premium structure that discourages those
borrowers from coming into the program unless they have no
other option. So they are not--those borrowers are not getting
a good deal because FHA charges that borrower the same price
they charge the borrower with credit deficiencies.
So if they are coming in, they are coming in because they
have no other option, because it wouldn't be the right business
decision. But by the fact they are coming in, they are helping
to strengthen the portfolio and the solvency of the fund.
Mr. Westmoreland. I am out of time. I will yield back. But
I can appreciate that fact that they wouldn't be coming to FHA
if they could go somewhere else. But to me, that is also a
telltale sign of the quality of some of the loans that actually
may be coming through.
So with that, I yield back.
Chairman Neugebauer. I thank the gentleman. Mr. Sherman is
recognized for 5 minutes.
Mr. Sherman. Ms. Bazemore, I was interested in your
testimony on Basel III. I agree with you that obviously
mortgage insurance is a risk mitigant. What can the
Administration and/or this committee do to make sure that in
calculating bank capital, the obvious risk mitigant effect of
insurance, mortgage insurance, is taken into account?
Ms. Bazemore. I think the easiest thing to do would be to
stay with what has been the current practice through Basel I of
recognizing private mortgage insurance as a risk mitigant
rather than the proposal that would not give any weight to it,
but would give full weight to government loans.
Mr. Sherman. I would hope that this committee would join
with you and others in the industry in making sure those who
are crafting Basel III get that issue right. We all agree that
we want private sector capital to be part of mortgage
insurance. And I understand the private mortgage industry has
recently attracted new capital. How much have you attracted?
Ms. Bazemore. Our company, about 2 weeks ago, raised a net
$689 million. One of the other legacy mortgage insurer--
insurance companies, in fact, just released today that they had
netted, I think, about $1.1 billion. So just for those two
companies, there was significant capital that came into the
market.
Mr. Sherman. Now, are there changes that can be made in the
FHA to increase the role of the private sector and to attract
more capital into mortgage insurance?
Ms. Bazemore. I think the focus really is on moving FHA to
more of its historical mission, understanding that may have
changed over the last few years. And it is moving back, but
looking at practices that really make sure that when private
mortgage insurance is in the best interest of the borrower, it
is being used. And that there aren't other sorts of decisions
that are made, or policies that are put in place, that it would
encourage otherwise.
Mr. Sherman. Now--and I don't know which person to address
this to, so I will kind of see who seems interested in
answering it--I understand that under the proposed QRM rule,
loans insured by FHA are automatically exempted from the risk
retention requirements, while loans insured by private
insurance are not necessarily exempted.
Is this because meeting FHA standards somehow means that it
is a wonderful, pristine loan? Or that the value of FHA
insurance is so--that value means it is a Qualifying Mortgage,
and why wouldn't we also exempt from the risk retention private
mortgage insurance?
Always the same hands. I am used to that.
Ms. Bazemore. I think, first of all, the reason why FHA is
given full credit is because it is fully backed, 100 percent
explicitly, by the Federal Government, and so the banking
regulators are essentially looking at that. I think that with
respect to--there has been a huge coalition that has come
together of industry, trade groups, and consumer groups that
are very concerned about the QRM rule, because we believe that
it could actually reduce the availability of low-downpayment
loans.
And so, there has been a lot of focus on the fact that low-
downpayment loans with MI should also be included in the QRM
rule.
Mr. Sherman. So the reason for the exemption is not that
FHA has standards that are so good that if you meet those
standards it must be a Qualifying Mortgage. It is simply that
if the lender has that insurance, they are pretty well-insured
from loss. Mr. Stelmach, I see you nodding.
Mr. Stelmach. I simply agree with Ms. Bazemore, that there
is a 100 percent government guarantee on GMA securities, which
are ultimately the destination for FHA loans. Those loans trade
more--are more profitable to make than those in the mortgage
origination market. And it makes more sense, perhaps, from a
QRM definition. But it also will introduce distortions in
market share between FHA and private capital, which may
exacerbate the current situation.
Mr. Sherman. My time has expired.
Chairman Neugebauer. Yes. Thanks to the gentleman.
And now the gentleman, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
holding this hearing.
My first question is for Ms. Bazemore. Do you believe that
FHA underprices the risk that they insure? Because we talked
about how they have gained a lot of market share from private
mortgage insurance. PMI premiums have gone up because of the
risk experience, but FHA hasn't gone up as much. Do you believe
they under-price their risk?
Ms. Bazemore. Without doing a true actuarial review, it is
hard for me to say at this point whether or not they are--
Mr. Stivers. Let me ask it another way. Does private
mortgage insurance charge an actuarially sound premium?
Ms. Bazemore. Yes, we believe we do.
Mr. Stivers. Does FHA underprice PMI?
Ms. Bazemore. I think, based on the comparison, we would
think that it is somewhat underpriced because of the risk
profile of the loans that they are insuring.
Mr. Stivers. I won't ask you take the next logical step,
but everybody can do that for themselves. If PMI is actuarially
priced soundly, and FHA underprices PMI, everybody else can do
the rest of the equation for themselves.
One of the loss reserve accounts that are used by private
mortgage insurance companies is the contingency reserve, where
50 percent of each premium collected from each given year's
book of business is required to be held in reserve for a period
of about 10 years to pay claims that might arise out of a
specific book of business in the event of some kind of severe
problem like we experienced over the last few years.
Which means private mortgage insurance can't earn all their
premiums through short-term distortions in the marketplace of
low default rates. Do you know if FHA follows that same
reserving procedure?
Ms. Bazemore. That might be a better question for--
Mr. Stivers. Does anybody on the panel know if FHA uses
that same procedure?
Mr. Bjurstrom. They currently do not use that standard.
Mr. Stivers. And if FHA doesn't have a contingency reserve,
should it have one? I will go ahead and--we can go straight
down the panel. Does everybody think that would be a good idea?
Mr. Bjurstrom. I think it would be a good idea.
Mr. Shapo. It would be a sound way to manage risk in a way
that they are not doing now.
Mr. Chappelle. FHA does have $38 billion in reserve.
Mr. Stivers. And what did they have last year?
Mr. Chappelle. Thirty-three billion dollars, $32 billion.
It has gone up.
Mr. Stivers. Okay. Still going down there.
Mr. Stelmach. Yes, I believe that would be a sound
practice, absolutely.
Mr. Stivers. Thank you. The other thing that Ms. Bazemore
talked about that I think is an interesting idea is to have
partnerships with FHA and private mortgage insurance companies.
Does anybody else on the panel--she was the only one who really
spoke in depth about that. Somebody else mentioned it a little
bit.
Mr. Bjurstrom. I have some--actually, there are examples of
private-pubic partnerships now. A number of State housing
finance agencies have mortgage insurance funds in which they
actually reinsure 75 to 90 percent of the risk to the private
MIs.
Mr. Stivers. And do you think that is a good idea?
Mr. Bjurstrom. I do think--
Mr. Stivers. I guess I want to go straight down the line
again and see if everybody thinks that is a good idea. Because
it sounds like a great idea to me.
Mr. Shapo. In theory, it sounds like a great idea. I am not
as familiar with the proposals as Ms. Bazemore and Mr.
Bjurstrom.
Mr. Stivers. Sure.
Mr. Chappelle. I agree, Congressman. The Congress did give
that legislation back in 1992, and the MI industry and FHA were
both interested in doing it. But there are factors. The
economic factors of pricing, counterparty risk, sharing of the
risk, and never--nothing ever came of it back then.
Mr. Stelmach. I would agree that is a good idea. But we
also need a balance between public policy and expanding
homeownership with private capital. And that sounds a lot like
some of the issues we had when the GSEs were in existence with
trying to balance those same issues. So yes, a good idea, but
balance.
Mr. Stivers. Thanks. I think there are some ideas that we
can pursue to have a more sound policy that charges actuarially
sound rates, and still encourages homeownership. But when you
encourage homeownership in a way that somebody can't sustain
it, that is not really encouraging responsible homeownership.
So I think charging rates that are inappropriate or low isn't
fair to FHA or their long-term mission and their viability.
So I think there are some simple reforms that we can enact,
common sense reforms, that I think would make the program
better. I really appreciate all of you coming today. I
appreciate your thoughtful testimony and ideas.
Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentlewoman from Ohio, Mrs. Beatty, is
recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
Mr. Shapo, I believe you stated in your testimony that the
FHA has expanded its business in a time when it is--I think it
was impaired, insolvent and undercapitalized. With that said,
what do you make of the fact that since its peak in 2009, FHA's
market share has been steadily declining while the private
mortgage insurance share has been increasing at roughly the
same pace?
Mr. Shapo. I think that the more important question is what
would--the way I look at it is, what would happen--what would
the ratios be now if it were not for the distortions to the
market. The fact that FHA has reserves doesn't mean that it is
not impaired and it doesn't mean that it is not in a negative
position.
The fact that the FHA--that the loss history is improving
doesn't mean that it should have continued to write more
policies after it went under its minimum ratio and after it
went into a negative balance. By doing those things, by
expanding beyond its position before, it has distorted the
marketplace. And so the question would be, would the private
companies have been able to take a larger market share if they
had been able to get some more of that good business that FHA
was able to get after the worst of the financial crisis.
So I think that--my answer is, is that even though the
private carriers have more market share, they do not
necessarily have any market share that they could have gotten
in the market share that could have properly supported their
risk if there hadn't been distortions in the market.
Mrs. Beatty. Mr. Shapo, with that said, maybe a better
question, or response, would be if I put it this way. If you
take, for example, the credit ratings, which I am sure we will
all agree plays a key factor--so if you look at the world out
here of the market share, and I have a credit rating that is on
the high end. And if I then look at what the percentage cost
for that loan would be, if I have a high rating and I am
getting it for 4.3 percent, why would I then go to FHA, which
is going to be a higher rating if my credit rating is a good
rate?
So then those who would be in that same market share, with
the higher--why would they go to FHA? You would, in fact, get
those folks because most of us would understand a lower
percentage, which you would get in the private market versus
FHA. So I don't get that FHA would be hurting the private
market, or insurers, because I am not going to pay 1.5 percent
higher when I know I can come over here.
It tends to be into FHA's mission, which I am glad we agree
on and we have heard in the other hearings, what their mission
is core to. So those folks who fall to the left of the higher
end are paying that flat rate because they are not going to be
engaged with the private insurers.
Mr. Shapo. My take on it would be that because of the--FHA
has brought artificial factors into the starting--during the
crisis. And then if it does so, it is going to be in a position
to take those better risks because it has become a larger
player. Therefore, keeping the private companies away from
getting those better risks when the market got better probably
affected their ability to attract capital.
They have attracted capital. But the question is, could
they have attracted more capital? The mortgage insurance
market, like all insurance markets but in particular the
mortgage insurance market, is subject to pretty substantial
fluctuations. And so the question is, would the degree of the
comeback been higher if there hadn't been as much distortion to
the market between the government--
Mrs. Beatty. I guess for me, it is not the distortion. And
rest assured that I am comfortable in saying FHA does not set
the credit scoring. So based on those folks going in on--the
credit scoring is not established by FHA. They would not go to
FHA when they can get a better rate.
Mr. Shapo. But FHA's market position, I think, has
distorted the market and restricted the ability of the private
carriers to take in--to get the better risks, and then to
attract more capital.
Mrs. Beatty. I think we just have a difference of opinion.
Thank you.
Chairman Neugebauer. I thank the gentlewoman.
Now the gentleman from California, Mr. Royce, is recognized
for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman. Mr. Chairman, I think
we have had a very good round of hearings on the future of FHA.
It is not my goal to do away with FHA, but I do think we have
to force the FHA to deal with its fiscal woes. We have to stop
attempting to grow out of that situation with the approach that
they are on now, and figure out a way to allow the private
market to regain market share.
And when you think it through, I think that is the best
scenario that we have for the taxpayers, but also for future
homeowners if we can do that. I think we have already pretty
clearly established that current policies at the FHA have led
to the crowding out of the private market. So the concern here
is, in the future, going forward, are there policies that are
going to further aggravate that situation. And specifically,
the proposed Qualified Residential Mortgage rule and the
proposed Basel III capital rules provide special dispensation
to FHA loans.
The former gives a safe harbor from the risk retention
requirements for FHA loans, and the latter allows a zero-risk
weight to loans insured by FHA. So the net result is that
government policies, I presume here, are going to steer
borrowers to the FHA and further crowd out the private market,
which certainly was not the congressional intent. What will be
the impact, is the question here, on the mortgage insurance
marketplace if these rules are finalized in their current form?
And I would ask Mr. Bjurstrom and Ms. Bazemore for opinions
on that.
Mr. Bjurstrom. I think the execution gets incredibly more
expensive, and therefore the alternative FHA programs will
dominate the market.
Ms. Bazemore. I would agree with that. I think that the
concern is that the cost will become significantly higher, and
so FHA would again be favored in the marketplace.
Mr. Royce. Would anyone else like to weigh in on that
scenario, or do you agree with that assumption, or--
Mr. Chappelle. I agree, Congressman. And I think it is
important for private MI loans to receive the same general--be
in the same general category as FHA or Fannie-Freddie loans
are. Because we need more loans being made in the country, and
we don't need anything that is going to restrict or leave out
loans. So I would heartily endorse it.
Mr. Stelmach. I would endorse that, as well. If you think
about a $9 trillion mortgage market in the United States, there
is only one industry right now, private industry, that provides
some sort of credit enhancement with only $6 billion of capital
to support that. So in a $9 trillion market with only $6
billion of private capital, I think there is ample room on a
regulatory basis, on a Basel III basis, to expand that private
capital.
Mr. Royce. Mr. Shapo, you say in your testimony you have
seen many times, in the insurance marketplace, when government
programs like residential risk pools put in place to try to
help hard markets have ballooned in market share and only
ultimately distorted the market and destroyed any chance the
market had of pulling out of a crisis. And you cite the New
Jersey automobile insurance markets as an example there.
That appears a good reference point for what we see now
with the FHA, with market share rising I think it is about 56
percent or over that. And private insurers pressed to leave the
market. As you say, this is just one of many examples of
government intervention in the marketplace. Can you describe,
then, the impact that this has on competition as a result of
these interventions? Could you explain the result to consumers,
and what other examples are out there that you might want to
give us?
Mr. Shapo. Thank you, Representative. Yes, the common
thread in all these is substantial government intervention.
Sometimes taking different forms, but substantial government
intervention to try to enhance availability and/or
affordability of insurance products. And my point is that an
insurance market is like any other market. Insurance has many
complexities, but the basic ways that the market works are not
complex.
I quoted the Supreme Court, which quoted a House report, in
McCarran-Ferguson: ``The theory of insurance is the
distribution of risk according to hazard, experience and the
laws of averages.'' It is pretty straightforward stuff. And to
the extent that the outcomes are not pleasing to policymakers,
and that they try to affect those outcomes, that will affect
the ways the market works.
Subsidies will develop, risk will be mispriced, capital
formation--
Mr. Royce. Capital formation will be impacted negatively.
Mr. Shapo. I'm sorry?
Mr. Royce. Capital formation is impacted negatively.
Mr. Shapo. That becomes the most important factor, is that
capital formation is negatively impacted. Money does not flow
to the marketplace. And what happens is, you tend to get a
double spiral. You get a spiral in the government-encouraged
pool because it is not properly pricing risk. So it tends to
balloon out of--and we have an extreme example here, where you
have a negative cash balance and a negative capital position
with the FHA program.
Mr. Royce. It can lead to insolvency, yes.
Mr. Shapo. And it impairs the private market, too, because
no capital comes in and they can't properly compete.
Mr. Royce. Thank you. Thank you, Mr. Chairman.
Chairman Neugebauer. Now, the gentleman from New Jersey,
Mr. Garrett.
Mr. Garrett. I thank the chairman. I just have a couple of
questions.
Mr. Bjurstrom, can you talk to me about accounting? GAAP
accounting?
Mr. Bjurstrom. I am not an accountant, but I will do my
best.
Mr. Garrett. Is there any reason why the FHA could not be
using GAAP accounting?
Mr. Bjurstrom. I don't--I believe they can account for it
any way that you direct them to.
Mr. Garrett. Okay. Is there any reason why other agencies
or entities should not be using GAAP accounting, on the Federal
level?
Mr. Bjurstrom. I am not familiar with the ability of other
entities to do that.
Mr. Garrett. All right. But as far as the FHA?
Mr. Bjurstrom. No, I believe that you have the ability to
tell them specifically how to account.
Mr. Garrett. Okay. So when you talked about the GSEs
previously, you talked about them having stakeholders, which
would be the investors in it, right? Now when you talk about
the FHA, we don't have investors in the FHA in the typical
sense of the word. But you do have shareholders, you might say,
if you described the American taxpayer in the FHA.
And I guess this is open to the panel, as the taxpayer
being the shareholder of the FHA, should we not be looking to
them to factor in market risk, FHA, when they make their--when
they do their accounting? I will start at the end, and anybody
else who wants to comment on it.
Mr. Bjurstrom. Pricing is the art of factoring in all
risks. And if you look at the exposures and the mission and the
purpose, and then after you have figured that out and then you
then back into pricing. And along with that pricing is a
component for volatility, which would include a lot of the
market risk which this industry has a lot of market risk
volatility.
Mr. Garrett. Right. And--so anybody else? Wouldn't that be
more transparent if it was a private corporation? You would be
requiring transparency to the investor. Here, the stakeholder
is the taxpayer. So wouldn't that be good for the stakeholder,
the taxpayer, to have that information, that transparency? Does
anybody disagree with that? You disagree with that.
Mr. Bjurstrom. I like the transparency question just
because of the fact that instead of it just being a single
entity like the FHA pricing its own insurance, I think that is
where they need to start. But I also like the benchmarking
against others that are pricing for the same risk.
Mr. Garrett. Right.
Mr. Bjurstrom. As well as the opportunity to do reinsurance
or risk share. Because then you get many multiple points of
validation that you agree with others that your price is
commensurate with the risk, not just individually promoting
price changes individually.
Mr. Garrett. I understand. Mr. Chappelle, do you disagree
with the idea of transparency?
Mr. Chappelle. I don't disagree with the idea of
transparency, but I do have trouble--FHA is a government
program. If you are going to compare it to the private sector,
it is impossible to come up with a legitimate comparison. You
are going to have to make estimates as part of that process.
There was already a say to evaluate FHA's soundness through the
1990 Budget Act.
And if you want to move the goal posts and change how they
do it, you could do it. But it is a government program. I think
we all recognize that, and it is hard to apply to a government
program what the private sector has. They don't have the profit
motive. They can't withdraw from markets. They can't do the
things the private sector--
Mr. Garrett. Right. So you take that out. But as--your
initial testimony was that you can factor in the market risk.
So that would be one aspect that GAAP accounting would be
providing to the public, the taxpayer, to understand better
what their actual financial posture is. Notwithstanding that
they don't make a profit, and notwithstanding that they are
backstopped, correct?
Mr. Chappelle. It wasn't my testimony that said that.
Mr. Garrett. No, I am just saying would that--is that not
true?
Mr. Bjurstrom. I think, at a minimum, doing the analysis in
order to create the right policy and the right information
concerning that policy is most appropriate.
Mr. Garrett. In my minute that I have left here, the role
of FHA, what it should be, what it was designed for. The
President has talked famously about how we should be raising
taxes on the proverbial rich. And they define the rich as those
people making over $200,000, $250,000. If that is the rich,
then should the FHA be put back to its original foundational
format to say that it is not there to help the rich, it is to
help out first-time homeowners and lower- and middle-income
people making under $250,000?
Does anybody disagree with that assessment? You do?
Mr. Chappelle. Congressman, it is an insurance program.
Mr. Garrett. Right.
Mr. Chappelle. And like everybody has said on this panel,
it has to spread risk. There is a cornerstone of the FHA
program that higher-balance loans perform better than lower-
balance loans. So if we are going to protect the taxpayer, you
need some of those borrowers. But the news is, FHA charges a
premium structure that if someone who is ``rich'' wants to use
the program, I would welcome it. Because they would be
overpaying their insurance.
Mr. Garrett. That is--okay, just to know, then, that we
will establish one program that is for the rich, then, yes.
That is fair.
I yield back, I guess. It is the Chair's prerogative.
Chairman Neugebauer. I thank the gentleman.
I want to follow up here because a couple of points have
been made. This hearing is really about a number of things, but
one of them is that--and Mr. Chappelle just made this point--
this is an insurance program. But it is an insurance program
that is not being run like an insurance program, in that when
you look at the industry standards that governments have
basically established for people in this kind of business,
model legislation, models of how much leverage is--should be--
is reasonable, and reserves that should be there to protect
people.
So I think the question is, is why would there be any
argument that if we are going to have an insurance program, and
the shareholders are American taxpayers, why wouldn't we run it
like an insurance company and have it adhere to the same
standards that other insurance companies have to adhere to? Mr.
Bjurstrom?
Mr. Bjurstrom. I agree. If you need to run it like an
insurance program and price it appropriately, reserve for it
appropriately, and capitalize it appropriately, then you would
have a better idea of what your future expected outlook looks
like. And that is really the--from a financial, accounting and
modeling and actuarial standpoint, that is all we are really
suggesting and trying to achieve.
Chairman Neugebauer. I think the other issue is--and I
support what the gentleman from New Jersey said about using
GAAP accounting or what I call ``accrual accounting'' to be
able to establish what is the value of the portfolio and what
is the potential risk of the portfolio so that you can price
it.
The other piece of the pricing currently is the fact that
FHA doesn't factor in their operating costs into setting their
price because we appropriate money for that. So at the very
least, it would appear to me that if you are going--that entity
should be at least, if it is not going to pay a dividend, if it
doesn't have shareholders, it is going to operate as a
nonprofit, it ought to at least, then, have to factor in the
cost of operation.
Because it is not so much that we are trying to steer
business to the private mortgage insurance companies, but what
we are trying to do is find a balance in the marketplace of the
total housing finance picture. And while we may be pushing some
more business to the PMI companies, the private companies,
today, unfortunately, about 90 percent of the mortgages in this
country are still being backed by the American taxpayers.
And so it is the policy that we are driving, that we
continue to, I think, put inhibition--or inhibit the ability of
the private sector to be into the marketplace today. Because
this has been brought out, the risk retention issues. But it is
not so much the pricing differentiation of the premium law.
That is a piece of it. But it is the fact that, overall, a FHA
loan today is a lower-cost loan overall because of the fact
that it is backed by the Federal Government.
And so when--and Ms. Bazemore brought this point up--you
put the fact that you have Ginnie and FHA together, then the
borrowing cost in the capital markets is much less. And so, it
pushes it automatically. It doesn't--really, almost to a point
where the differentiation in premium maybe is negated by the
fact that the overall lower borrowing cost is compensating for
any premium differentiation in the marketplace.
And so, I think one of the things that I would hope, as we
are moving forward, is that we have two responsibilities here.
One is to make sure that a program that we have oversight over
as a government is being run appropriately. And that if we take
a look at something that has been in place for a number of
years without--not a lot of changes, and understanding that the
world has changed. Back when FHA was originally put in place,
there wasn't a lot of securitization going on.
Most of the loan sales were individual sales. Now we have
securitization, so should we take a look at how we--how that
impacts the way we run these businesses? But more importantly,
I think, for many of us is trying to get back--and I think Mr.
Capuano made a great point earlier--what is the right formula.
What is the role of--what is the marketplace for FHA? And then
what is the marketplace for the private market to be in there?
We have to fix all of the pieces. But we can only fix them
one at a time. And so as we move forward, I hope that we can
have a meaningful dialogue about how we look at the FHA piece.
I think there is some room here to shore it up, and I think
there is room here to make sure that we don't--that there are
not some market distortions there that are driving people to
FHA other than the mortgage premium, or mortgage insurance
premium, that FHA is charging.
And I think that is really, hopefully--we heard some very
good testimony today, and I look forward to probably having
some ongoing dialogue with some of the market participants
here. Because the ultimate goal here is for all us to do the
right thing. And I am concerned right now that we are running
FHA kind of on an ad hoc basis. And if it had a little better
structure that overall it would be a more sustainable program.
We wouldn't need to have hearings about why you have a
negative net worth. Those are not the kind of oversight
hearings that we need to be having. We need to be having
oversight hearings where things are getting better. And
unfortunately, we have been told that things are getting
better, but the results have not proven that fact. And then the
other point is the fact that since we are not using Generally
Accepted Accounting Practices, we really don't know if this
entity is actuarially, how sound it is or isn't.
So with that, I am going to yield to my colleague, Mr.
Capuano, for any remarks that he may have.
Mr. Capuano. Thank you, Mr. Chairman. And again, I agree
with you. I think that the whole idea of this is try to figure
out exactly what we want the FHA to do. But I do caution people
that no government program should be run as a private program.
We don't have the profit motive. And if you want to look at the
model, look at the model of private insurance, private
mortgages before the FHA.
There were no middle-class mortgages, period, end of issue.
Only rich people or people who inherited a house could afford
to buy a home. And the FHA allowed people to get into the
middle class by buying a home. So there is a balance. And I
agree, our job is to try to find that balance. Ms. Bazemore, if
I told you that in 2 years you could increase your share of the
current business by 2\1/2\ times, do you think that would be a
good deal?
Ms. Bazemore. Yes. But it would also depend on where I
started.
Mr. Capuano. No, and I don't blame you. Of course, if you
told me you were going to increase my salary 2\1/2\ times, I
would say okay, I am in, sign me up. It's not happening, I
know. PMI has increased its share of the mortgage businesses by
2\1/2\ times in the last 2 years. And yet I keep hearing from
some people that it is absolutely proven, without question,
without a doubt that the FHA is squeezing private enterprise
out.
I find that hard to believe when you are increasing your
mortgage here. You are going back to what appears to be a more
normal time. We are not there yet. And I agree with that, there
needs to be more done. And my fear is that if we don't get this
right, if we allow the FHA to continue going where it is going,
which I don't like some of the things they have done. I
understand them in the short term, but in the long term we will
be doing, effectively, what we shouldn't be doing, which is
making mortgages so expensive or mortgage insurance so
expensive, again, there will be no middle-class people.
I guess I just want to reemphasize that as we rebalance
this, as we look at it, the basic question is, how much is
enough? And maybe I am wrong, but I don't think that the
private mortgage industry would be well-served if we drive the
middle class out. You have done a good job over the years
finding a niche in balance with the FHA. Now, again, that
niche, that whole system, was messed up in 2008 for everybody,
and we need to re-find that balances.
But prior to that, I didn't hear any complaints. No one was
complaining then. And so the question is, do we or do we want
to have any government involvement in allowing the middle class
to continue being able to afford a mortgage. And for me, that
is where we are trying to go. I have no philosophical viewpoint
here, except that I know--and again, I never qualified for an
FHA loan because I do come from a high-cost area and because I
have been fortunate in my life.
Fine. But I know one thing. If there were no GSEs and there
was no FHA across the country, my mortgage rates would be
through the roof and I never would have bought a home. Because
I own, currently--the home that I bought in 1980 is a two-
family home. Why did I buy a two-family home? I needed the rent
to pay the mortgage. And I had to fight with the bank to accept
that.
So without that, I wouldn't be in the middle class, and my
children would not have had a college education because I, like
many Americans, remortgaged my house to pay for their college
education. And for me, I thank God there was a system in place
that allowed me the opportunity to buy a home. And I need to
make sure that is the case for the next generation. Which, by
the way, as a point of fact, is not there in many parts of this
country today.
People 30, 40 years old cannot afford to buy a home. They
can't get the downpayments together because the house prices
are too high, and they can't afford the monthly mortgage.
Especially if you add that on top of the student loans they are
paying. That is not good for them. It is also not good for
America, and it is not good for your businesses. So with your
help, we will find that way to balance it.
But I need to make sure that some philosophical viewpoint
of some greater good doesn't get in the way of actually finding
a way to rebalance this system in a manner that keeps it going
for the next generation. I know that your testimonies I heard
today all fit in that category, and I thank you for that. And I
look forward to working with you all as we move forward.
Thank you.
Chairman Neugebauer. The gentleman from Texas, Mr. Green,
is recognized for 5 minutes.
Mr. Green. Thank you very much. And I neglected to thank
the ranking member earlier for allowing me to be a part of the
hearing. I did thank the chairman, so I now thank the ranking
member. And after hearing the ranking member's statement, I
think we probably are at the offertory and closing hymn.
Because like him, I, too, thank God for FHA.
But I will ask a few questions, if I may, to bring a little
bit of clarity to your testimony. Because I suspect that some
things are the case, but sometimes when you finish testifying,
persons who are viewing this at home are not sure. So perhaps
we can bring a bit of clarity. Is it true that each of you
would keep FHA? Simply put, is there anyone who wants to end
FHA, have no FHA at all?
If so, would you kindly raise your hand if you want to end
FHA? All right, let the record reflect that we have no hands in
the air. And as a result, we can conclude that no one wants to
end FHA. Now, let me go further and ask is there anyone who
believes that FHA as it has functioned traditionally is somehow
adverse to the market that has developed through the years,
that has seen some difficult times as of late. But is FHA's
traditional role one that we all believe is important and we
should maintain.
And if so, if you do not agree, would you kindly raise your
hand? If you don't think its traditional role is one that we
should maintain. And for our benefit, Mr. Chappelle, I am going
to ask you to give us your summary, quickly, of what FHA's
traditional role has been and how that role still benefits us,
even in these difficult times.
Mr. Chappelle. Sure, Congressman. FHA has helped low-,
moderate- and middle-income families to be able to buy their
home. Predominantly first-time home buyers; 75 to 80 percent of
their loans go to first-time home buyers. Predominantly lower-
income home buyers, as I noted in my testimony. Their median
income was $56,000 in 2011. So FHA's role is to help--it is
really the insurer of last resort for creditworthy home buyers.
But to be able to do that, they do need to spread that risk
a little bit because they have to--they can't just have the
highest-risk pool. They have to spread the risk. But they do
have structural protections, I believe, which ensure they do
not encroach too far into the private sector. And that would be
the fundamental point I would make.
Mr. Green. And do you think that tweaking the 100 percent
rule--that is what I am calling the rule that allows FHA to
insure the home for 100 percent--
Mr. Chappelle. --of the value?
Mr. Green. Of the value, yes. Do you think that can be
tweaked such that it provides FHA with a greater amount or
lesser amount of risk?
Mr. Chappelle. I think it would be a major mistake for the
program. That 100 percent insurance is one of the core,
structural parts of the program. Because what is happening
today in the marketplace is that lenders, even with 100 percent
insurance, are adding their own underwriting requirements on
top of FHA's. They are called ``credit overlays.'' Because--and
I know some of the panelists said there are only perceived
risks in the FHA program.
I can assure everybody, lenders feel there is real risk in
the FHA program. That is why they put these overlays in place.
And if you go and lower that insurance from 100 percent, that
is just going to ratchet up that risk factor for the lender,
which will exclude the people that you would like to see, and
we would all like to be--see to be part of the FHA program. So
I think that would be a serious, serious problem for the
program to lower that insurance.
Mr. Green. And the final question on this--in this area.
What do you think that FHA can do to better serve the public?
Mr. Chappelle. Congressman?
Mr. Green. Yes. Mr. Chappelle?
Mr. Chappelle. I think the mortgage limits were raised in
response to the problems in the marketplace in 2007 and 2008.
I, and I am sure most other people who would like to see the
FHA program continue to prosper recognize those limits should
not stay there forever. And once the mortgage market recovers--
because the purchase market is still in a depressed state. But
once the purchase market recovers, those limits should come
down to more reasonable levels.
And I think at the appropriate time, that would be the
correct thing to do.
Mr. Green. I thank all of the witnesses, and I will just
have my parting comment. I have many constituents who have
benefited from FHA. And it is the bridge that has brought a
good many people over to the promised land, if you will, of
homeownership. And I think that there may be some things that
we can do to tweak it, but FHA should not be frowned upon for
the good job that it has done.
And to a certain extent, we are condemning it for being
successful. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman. I would like to
thank each of our witnesses again for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, 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 these witnesses and to place their 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.
And without objection, the hearing is adjourned.
[Whereupon, at 12:17 p.m., the hearing was adjourned.]
A P P E N D I X
March 13, 2013
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