[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
SUSTAINABLE HOUSING FINANCE:
PERSPECTIVES ON REFORMING THE FHA
=======================================================================
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
__________
APRIL 10, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-10
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80-876 WASHINGTON : 2013
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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:
April 10, 2013............................................... 1
Appendix:
April 10, 2013............................................... 47
WITNESSES
Wednesday, April 10, 2013
Kelly, Kevin, First Vice Chairman of the Board, National
Association of Home Builders (NAHB)............................ 13
Marzol, Adolfo, Vice Chairman, Essent Guaranty, Inc.............. 8
Rossi, Clifford V., Executive-in-Residence and Tyser Teaching
Fellow, Robert H. Smith School of Business, University of
Maryland....................................................... 16
Stevens, Hon. David H., President and Chief Executive Officer,
Mortgage Bankers Association (MBA)............................. 10
Thomas, Gary, 2013 President, National Association of REALTORS
(NAR).......................................................... 11
Wartell, Sarah Rosen, President, the Urban Institute............. 14
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 48
Kelly, Kevin................................................. 50
Marzol, Adolfo............................................... 59
Rossi, Clifford V............................................ 67
Stevens, Hon. David H........................................ 78
Thomas, Gary................................................. 99
Wartell, Sarah Rosen......................................... 114
SUSTAINABLE HOUSING FINANCE:
PERSPECTIVES ON REFORMING THE FHA
----------
Wednesday, April 10, 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 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, Duffy, Hurt, Stivers; Capuano,
Velazquez, Cleaver, Sherman, Sinema, and Beatty.
Ex officio present: Representatives Bachus and Waters.
Also present: Representatives Carney and Green.
Chairman Neugebauer. Good morning. The Subcommittee on
Housing and Insurance will hold a hearing today entitled,
``Sustainable Housing Finance: Perspectives on Reforming the
FHA.'' This is our fourth hearing on the FHA, a very important
part of our economy and of the housing market.
I will just remind everybody that we will have 10 minutes
of opening statements on either side. And with that, I will
recognize myself for an opening statement.
As I mentioned, this is our fourth hearing on FHA and we
have learned a little bit along the way. One of the things that
we have learned is that FHA was not immune to the housing
crisis and that their mortgage portfolio has been problematic
to the point where we learned that their fund is basically
underwater.
It has a negative equity and the President just released
his budget today which indicates that the American taxpayers
may have to put as much as $943 million, nearly a billion
dollars, into that fund.
And we also heard from people saying that FHA had kind of
moved beyond its initial charge, that it had expanded into
markets and to territories it had not been before.
We also learned that some people felt like FHA was, in many
cases, being used as a vehicle for doing housing policy,
sometimes to the detriment of FHA, and maybe sometimes to the
detriment of the housing market.
What we also learned, as we were looking to bring the
private sector back into play for mortgage housing finance in
this country, is that the pricing that FHA is using on its
mortgage insurance in many cases was very difficult to compete
with, particularly since the American taxpayers are the
ultimate backstop.
We have had a number of witnesses say that FHA reform is
probably needed. There hasn't been a lot of reform to FHA in a
number of years.
And one of the things that I think House Republicans, and I
think this committee, are committed to is having a robust
housing finance market in our country, which is sustainable.
Because we believe that if you have a sustainable, robust
housing finance market in this country, then you will also have
a more sustainable housing market in this country, and that is
very important to the American people.
Some of the people who got mortgages, who shouldn't have
gotten mortgages, could have been victims in this circumstance,
but I think in many cases, the real victims of the housing
crisis were those people who had been making their mortgage
payments, or maybe they paid their house off and were counting
on the equity in their house for retirement or to send kids to
college.
And because of the market conditions and what happened,
those housing values went down and those people were as much of
a victim as those folks who got mortgages which maybe shouldn't
have been made.
So, I think that this is an important hearing today. We
have, I think, additional stakeholders. We have tried to have
as many stakeholders in this process as we can because,
ultimately, the goal here is to begin to look at some
legislative language and policy that we think accomplishes the
goal of making a sustainable housing finance market in this
country.
And we want to make sure that we bring all of the
stakeholders in place because it is important that we get it
right. The ultimate goal here is to get this right.
We look forward to hearing from the witnesses who are here
today. I think we have a great panel and we are certainly
looking forward to them.
And with that, I yield back my time, and recognize my good
friend, Mr. Capuano, the ranking member of the subcommittee,
for his opening statement.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank the members of the panel for being here
today. I particularly want to welcome Mr. Kelly, who grew up in
my neighborhood. We did lose him to a small State named
Delaware or something. It is this little State somewhere along
the Atlantic Ocean, but he is welcome back.
And my understanding is he is still registered to vote in
my district. Don't worry about it, Mr. Kelly, nobody will
change here as long as you vote the right way, of course.
I just want to say that I actually want to thank the
chairman. I think this panel today--I have read pretty much all
of the testimony and I know pretty much where most of your
organizations stand.
I actually think this is going to be the most informative
panel we have had, and the most thoughtful discussion, I am
hoping. I am looking forward to it.
I think that is the end of my opening statement, because
the truth is I want to hear from you. I want to engage in some
discussion.
I think we all agree that we want to make some changes to
the FHA and I think we need to have a discussion about the
specifics and the details of what should change, and what
shouldn't, within those parameters, which maybe today is not
the day for full details, but at least some general parameters.
So I am looking forward to it and, again, I want to thank
the panel for coming. I look forward to your testimony. I yield
back.
Chairman Neugebauer. I thank the gentleman.
And, now, the vice chairman of the subcommittee, Mr.
Luetkemeyer, is recognized for 2 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman, for this
important hearing.
While this conversation may be difficult at times, it is in
the best interest of our country and the American people to
closely examine FHA and to make responsible reforms to this
Nation's housing finance system.
I continue to be troubled by the fact that FHA seems to
have grown well beyond its original mission. Loan limits are
high. The number of insured mortgages has surpassed 7 million
nationwide.
So the question is, can we find ways to reform the system?
During a recent hearing, FHA Administrator Carol Galante made
it clear that she would be supportive of seeing the loan
limits, which now stand at $729,000, decrease.
FHA was created to serve low- to moderate-income borrowers
who were creditworthy. That mission appears to have changed as
FHA's book of business continues to grow.
I firmly believe that we need to advance legislation that
not only returns the mission of FHA to its original purpose of
serving those creditworthy borrowers who need access to the
housing finance system, but also one that shifts risk away from
American taxpayers and allows for more participation in the
private market.
Last week, former FDIC Chairman Sheila Bair had an article
in the Wall Street Journal which said, ``Regulators let big
banks look safer than they are'' and it talked about the
modeling of themselves and how they look at--when they look at
their capital asset ratio.
And it shows that the megabanks, the big banks, kind of
fudge the numbers a little bit whenever they put some of their
more risky assets at less than the actual value and concerns
that we have about them and that part of those investments are
mortgage-backed securities.
So, again, we are playing with fire not only within the
housing system itself, but also with investments in our
financial system as well.
I think it is essential that this committee work to return
FHA to its original mission and to ensure that U.S. taxpayers
are not the ones left footing the bill for these risky
endeavors.
I look forward to hearing ideas from the panel on how to
reform the system into one that is safer and follows the tenets
of its own lending and underwriting.
And, with that, I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And, now, the ranking member of the full Financial Services
Committee, the gentlewoman from California, Ms. Waters, is
recognized for 3 minutes.
Ms. Waters. Thank you very much. I welcome the committee's
continued attention on FHA and I am pleased that we are hearing
from a number of key industry participants today.
Today's hearing is the fourth hearing focused on FHA this
year, and I welcome each of the witnesses to the committee.
Since its inception in 1934, FHA has insured home loans for
more than 37 million American families. For many of these
families, FHA was the only home financing option.
And while FHA has been put under considerable strain during
the housing crisis, it served an important countercyclical role
and ensured the continued availability of mortgage credit.
Now that the housing market has stabilized, FHA's footprint
has been reduced, as we have heard from witnesses during
previous hearings, and I am pleased that FHA has taken a number
of important steps, including multiple premium increases, to
strengthen themselves, which has helped lead to FHA's strongest
books of business on record in 2010 and 2011.
The release today of the President's Fiscal Year 2014
budget will, undoubtedly, return attention to the financial
solvency of the Mutual Mortgage Insurance Fund (MMIF) and
whether HUD may need to borrow funds from the Treasury, a
situation, I might add, that we won't know for sure until the
end of this fiscal year.
There are bipartisan steps that we can take right now that
would help address the solvency issue. I recently introduced,
along with the ranking member of this subcommittee, Michael
Capuano, bipartisan FHA solvency legislation that passed this
committee unanimously last year, and which subsequently passed
the House with over 400 votes, something that does not occur in
this body very often.
So I want to take this opportunity to urge my colleagues on
the other side of the aisle to join us in quickly passing this
legislation and sending it to the Senate.
Among the key reforms contained in that legislation is
indemnification authority, which FHA Commissioner Galante
included in her list of recommendations to this committee in
mid-February.
One other point that is cited in Mr. Thomas' testimony, and
that I believe deserves repeating, is that FHA continues to
have significant resources, sufficient to pay 30 years' worth
of expected claims on its portfolio.
The Fiscal Year 2012 actuarial review showed that the total
capital resources of the Mutual Mortgage Insurance Fund at the
end of Fiscal Year 2012 were estimated to be $30.4 billion.
As Mr. Thomas' testimony further notes, it is also
important to keep in mind that the requirement that FHA hold 30
years' worth of expected claims is 30 times more than what is
required of banks, which are only required by the financial
accounting standards to hold 1 year to reserve.
I want to highlight this fact in particular for those of my
colleagues who believe that FHA should operate more like a
private company and be subject to accounting and other rules
that apply to the private sector.
Once again, I want to welcome the witnesses to today's
hearing, and I look forward to examining more closely the ideas
set forth in their testimony. I yield back the balance of my
time.
Chairman Neugebauer. I thank the gentlewoman.
Now, the gentleman from California, Mr. Royce, is
recognized for 1 minute.
Mr. Royce. Thank you, Mr. Chairman.
The President's budget, which is going to be released later
today, stands as a reminder of the risk posed to the American
taxpayer if the financial solvency of the FHA is not addressed.
And for us here today, it is an opportunity to start to
turn the corner and talk about returning private capital to the
mortgage insurance market.
So my hope is that our witnesses will outline how the FHA
can operate with a clearly defined mission that complements,
instead of competes with, private credit enhancements.
If that can be done, it is going to facilitate a
sustainable housing finance system for the United States. And
the FHA, of course, as we all know, has a key role to play for
first-time and low- to moderate-income borrowers.
But where we can unleash private capital, we should. And it
is in the best interest of the taxpayer and our housing economy
to do so.
I yield back the balance of my time.
Chairman Neugebauer. I thank you.
And I have my interpreter here, the ranking member, and he
has been making sure that I pronounce the next person--Mr.
Carney, is recognized for 1 minute.
Did I say that right?
Mr. Carney. Thank you, Mr. Chairman. I want to thank you
and the ranking member. Don't listen to the ranking member in
pronouncing my last name though; you are not going to get it
right.
I just thank you for the opportunity to welcome one of my
friends from Delaware, Kevin Kelly, who is here on the panel
today. I have known Kevin for a long long time as an advisor,
as a friend, and as an expert in housing in our State.
As many of you may know, Kevin worked for one of the giants
in housing in our State of Delaware and in our country, Leon
Weiner--who passed away many years ago--a former president of
the National Association of Home Builders, and I think the
building has a bust of him outside of it.
I have learned a lot from Kevin over the years on housing
issues. He used to be the president of the Home Builders
Association of Delaware. There was a time in a former life
where I served as the acting director of public works for the
largest county in our State, and we worked very closely
together.
I want to thank Kevin for all the work that he has done for
our State, and he is now moving up as one of the vice
presidents of the National Association of Home Builders, for
all the work that he is doing and thank him for coming to be
part of this panel today.
And I yield my time back. Thank you.
Chairman Neugebauer. I thank the gentleman.
And I had an opportunity to know Leon Weiner as well. He
was a great American, a giant in the housing industry.
I now recognize the gentleman from California, Mr. Miller,
for 2 minutes.
Mr. Miller. Thank you, Mr. Chairman.
If you look at the design of FHA, they were intended to
play a countercyclical role, and in this downturn, that is
exactly what they did as the private market withdrew, they
moved in.
Now, without a doubt, some of the worst years FHA has on
the books are 2007 to 2009, and that is when they really ramped
up to fill the void made by the private sector.
The problem is that when they entered the market, they were
not prepared for it. Their underwriting standards were not as
they should have been. The premiums were not adequately
adjusted in a timely fashion.
But if you ask, did they do what they were intended to do,
they did. The nice thing about what is happening today is you
are seeing a recovery in the housing market. In my specific
district, I am seeing people getting back to work because of
that recovery.
So, now, we look and say, what did FHA do that really
restructured the way they were going, and in 2010, former FHA
Commissioner Stevens created a risk management office. And, in
doing that, he basically minimized some of the risks that were
coming in the future, but he didn't do it as rapidly as some
wanted him to do, but I want to praise him for what he did.
What we are experiencing now in the recovery, I think you
can say was partly due to the efforts of FHA. Now, I am not
defending them, saying that they did a great job and they did
what they should have done. They did what they should have done
at the right time. They didn't do it in the right fashion.
So how do we look at restructuring what they do in the
future to make sure that their mission is appropriately managed
and the risks they are taking on at a time is appropriate risk?
The latest actuarial review made it clear that FHA was not
fully prepared for the strain that it faced during the
downturn, and I don't think anybody on the panel is going to
say they were prepared for it.
But did they do their job on operational structure? I think
they did because they were designed to be countercyclical, but
they weren't prepared for the measures that they were
implementing and the full risks they were taking on.
But as we return to a robust marketplace, we look for the
private sector to come in and take over the job that the FHA
has done and let's hope that happens in a rapid fashion.
I yield back the balance of my time.
Chairman Neugebauer. I thank the gentleman.
And now, the gentleman from New Jersey, Mr. Garrett, the
chairman of the Capital Markets Subcommittee, is recognized for
2 minutes.
Mr. Garrett. Thank you, Mr. Chairman, for holding this
important hearing.
Reforming FHA must be a top priority of this committee. And
I agree with each and every one of the points you raised: that
we must stabilize FHA; clearly define its mission; reduce
taxpayer exposure; and ensure that it is run well and run like
an efficient insurance company.
But I would add one more point to the priorities. We must
also make sure that the government's scorekeepers provide the
American taxpayer with an accurate picture of the risks that
are assumed.
To do this, the first thing you must realize is that there
is no such thing as a free lunch when it comes to a government
program. The costs are inevitably borne by the taxpayer.
And people are beginning to realize that not only is
government costly, but also that it costs more than they
initially thought. The burden of government rarely comes in
under budget.
So the typical narrative of government programs gone
bankrupt should come as no surprise. However, it defies common
sense that the Mutual Mortgage Insurance Fund, according to
Administration officials, actually makes money for the
government. Only through the alchemy of government accounting
can you transform a mortgage portfolio, figuratively led into
gold, and still remain true to the law.
This free money comes courtesy of the Fair Credit Reporting
Act of 1990 (FCRA). Under FCRA, cooked accounting rules, the
cost of Federal mortgage insurance it determined it's risk on
the basis of its subsidy cost including the risk that the
borrowers default on its mortgages.
The subsidy cost represents, in present value terms, the
amount the loans are expected to earn or lose over their life.
But the rub lies in the fact that FCRA uses the interest rates
on Treasury securities to calculate this cost. This assumption
fails to account for market risk or systemic risk. So unlike
fair value accounting, which apparently incorporates a premium
for market risk, FCRA fails to reflect the true cost of FHA-
backed mortgage insurance.
Unfortunately, the Administration has strongly resisted the
move to fair value accounting, instead clinging to this
dangerous fiction of FCRA and this alchemy.
So to bring a ray of sunshine to Federal budgeting, you
must require the Administration to account for Federal loan
programs on a fair value basis.
I do hope the Administration will finally wake up to the
unfortunate economic reality we are in, and much like FHA, free
lunches do end up costing a lot more than you expect.
And with that, I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the gentlewoman from Ohio, Ms. Beatty, is
recognized for 1 minute.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member.
I join my colleagues today as we continue the examination
of the Federal Housing Administration, specifically looking to
the future as we anticipate the necessary reforms for improving
FHA's long-term financial position, for refocusing the agency
on its mission to increase mortgage assurance for first-time
buyers and low- to moderate-income households.
I think looking at the past history of the great benefits
that FHA provided to the housing market and the economy as a
whole, during the past several years, it has been, in my
opinion, undeniable that the FHA has been an integral part of
the housing recovery and the market as a whole.
And we could not, in my opinion, function without its
presence. So I look forward to hearing your testimony and how
you can be helpful to assure that we don't lose sight of the
original mission of FHA.
Thank you, Mr. Chairman, and I yield back.
Chairman Neugebauer. I thank the gentlewoman.
I ask unanimous consent that all members of the Financial
Services Committee who are not members of the subcommittee and
who have joined us today will be entitled to participate in the
hearing.
Without objection, it is so ordered.
Now, it is my pleasure to introduce our panel today: Mr.
Adolfo Marzol, vice chairman of Essent Guaranty, Inc; the
Honorable David H. Stevens, president and chief executive
officer of the Mortgage Bankers Association; Mr. Gary Thomas,
2013 president of the National Association of REALTORS; Mr.
Kevin Kelly, first vice chairman of the board of the National
Association of Home Builders; Ms. Sarah Rosen Wartell,
president of the Urban Institute; and Mr. Clifford Rossi,
executive-in-residence and Tyser teaching fellow at the Robert
H. Smith School of Business, University of Maryland.
I thank the witnesses for being here, and with that, Mr.
Marzol, you are recognized for 5 minutes.
STATEMENT OF ADOLFO MARZOL, VICE CHAIRMAN, ESSENT GUARANTY,
INC.
Mr. Marzol. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for the opportunity
to testify today on, ``Sustainable Housing Finance:
Perspectives on Reforming the FHA.''
My name is Adolfo Marzol, and I am vice chairman of Essent
Guaranty, a private MI company. Just a little background on
myself, my parents came to the United States as Cuban refugees
in 1961. They bought their home with an FHA loan. My mother
actually still lives in that home today.
I bought my first home with a 5-percent-down mortgage from
Fannie Mae, fortunately, with private mortgage insurance. And I
do think my family's story mirrors so many, where access to
housing finance has made a tremendous difference in our lives.
Essent was formed in 2008 in the depths of the crisis. We
are dedicated to prudently continuing to provide access to
mortgage credit. We are guided by the fundamental belief that
truly private capital will take credit risk without explicit or
implicit guarantees is something that would be needed and
valued in our housing finance system.
We believe private MI, backed by strong capital and a
reliable payment of valid claims, offers the market a product
that effectively mitigates risk. It can be accessed by lenders
of all size. It integrates smoothly into the functioning of the
mortgage market, including TBA securitization.
And we think if government provides backstops in the
market, private MI provides an effective alternative between
either all taxpayer credit risk or no taxpayer credit risk.
We are pleased that our business approach has been
validated by the market. Since we actually began writing
insurance in 2010, we have grown to be about 10 percent of the
new private mortgage insurance being written.
Our entry has been part of a broader renewal of a resilient
industry which, importantly, is demonstrated through the
ability of both new entrants and legacy companies to raise
capital of over $10 billion since 2008, and nearly $2 billion
just this year.
Investor interest in providing capital to the U.S. MI
industry appears to be quite strong, which should enable
companies like Essent to do more.
FHA helped our Nation through the crisis by expanding its
role when private markets were distressed, and despite
differing views regarding the eventual balance between the
private and public roles in the market, we think there is
widespread agreement that the role of private capital should be
expanded from its present state, and taxpayer risk can be
reduced.
The balance towards private has definitely been improving.
We think it can continue to improve without loss of access for
ready borrowers by steady, incremental use of private MI.
We support a future role for FHA, but transitioning to a
more focused mission of providing access to homeownership for
creditworthy borrowers who are not adequately served with
private MI.
And, today, we really come with four key recommendations:
Number one would be to address the long-term solvency of FHA on
a foundation of provisions similar to those that were adopted
by the House last Congress in H.R. 4264, the FHA Emergency
Fiscal Solvency Act of 2012, including additional authorities
HUD has requested to address solvency, and we believe should
also include setting prudential limits on seller concessions, a
policy change HUD has proposed, but not implemented.
Number two, we believe solvency should be addressed while
moving toward a mission-focused footprint for FHA, simply
because taking non-mission risks to address solvency needlessly
increases taxpayer risk and creates incentives to serve
borrowers that can be privately insured.
Number three, we would like to urge beginning to explore a
different relationship between private MI and FHA not as
competitors, but as partners that make sure the market is
covered. As partners, private insurance should play as large a
role as possible, and FHA should be a complement that expands
access where needed.
And one approach to build a partnership is credit risk-
sharing with private MI by FHA. Risk-sharing approaches should
be tested through pilots, as FHFA has directed be done at the
GSEs, targeting risk-sharing transactions on $60 billion in GSE
mortgages to contract taxpayer risk this year.
And, finally, we would ask for support for appropriate
recognition of the value of private MI when regulators
establish the final Dodd-Frank mandated risk retention rules
and continued recognition of MI in Basel III capital rules for
banks.
Appropriate recognition for the risk-mitigating benefits of
MI will avoid needless business going to FHA when private MI
works well.
Thank you for this opportunity to share our views, and I
welcome your questions.
[The prepared statement of Mr. Marzol can be found on page
59 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
And, now, Mr. Stevens, you are recognized for 5 minutes.
Thank you for being here.
STATEMENT OF THE HONORABLE DAVID H. STEVENS, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, MORTGAGE BANKERS ASSOCIATION (MBA)
Mr. Stevens. Thank you. Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee, thank you for the
opportunity to offer MBA's perspectives on FHA reform.
The MBA represents the entire real estate finance industry,
but given the circumstances facing FHA in the single-family
market, my oral statement will focus on that sector. My written
testimony includes our views on FHA's critical role in multi-
family rental housing as well.
FHA has never played such an important role in the housing
market. Today, it is the dominant source of mortgage finance
for borrowers with low downpayments and those without high
incomes or inherited wealth.
Many of these are first-time homebuyers, young families
looking to put down roots in a community, and they are a
segment that must be served if we are going to grow our economy
and sustain the housing recovery.
Since the onset of the housing crisis, when FHA's books
suffered like everyone else's, the agency has taken a number of
steps to address losses in its single-family portfolio: raising
mortgage insurance premiums; increasing downpayment
requirements for certain borrowers; eliminating the approval of
loan correspondence; raising lender net worth requirements;
reexamining reverse mortgage policies; and establishing the
Office of Risk Management.
By making these changes, FHA has moved swiftly to protect
taxpayers and the fund. The credit profile and performance of
the 2010 to 2012 portfolios demonstrates the effects of these
changes.
For example, the average FHA credit score for 2011 was 696,
up from a historical average closer to 650. More importantly,
these books are projected to contribute significantly to the
economic value of the fund over the next several years.
Looking ahead, we believe further programmatic changes at
FHA must balance three priorities: restoring financial
solvency; preserving FHA's critical housing mission; and
maintaining the agency's countercyclical role.
We continue to work with our members to develop additional
policy changes regarding FHA's future and we will certainly
share those recommendations with this panel as they get
completed.
There are a number of steps this subcommittee could take to
further strengthen FHA and promote the return of private
capital. Loan limits could be lowered from the levels that were
necessary at the height of the housing crisis.
Downpayment requirements could be adjusted to mitigate for
other risk factors like low credit scores. Risk-sharing is
another idea that if done prudently, could potentially meet all
the objectives I have just listed.
Similarly, risk-based underwriting could further reduce
FHA's credit risk by targeting areas of risk-layering. However,
the consequences to FHA's traditional borrowers on each of the
above suggestions could be significant if FHA employs overly
stringent controls.
Finding the right balance is absolutely critical. Many
lenders in recent years have tightened their standards beyond
FHA's minimums. FHA may need to lock in some of these overlays
as appropriate. This would protect FHA from any erosion in
standards as market conditions evolve.
Also, in recent years, FHA has increased its oversight and
enforcement of agency-approved lenders. To be clear, as FHA
Commissioner, I initiated tighter controls and enforcement
procedures that shut down irresponsible FHA lenders. When
warranted, this was certainly the right thing to do for the
fund.
The key is finding the proper tolerances and communicating
them clearly to market participants. When lenders are forced to
operate their businesses to near perfect standards, they will
operate well inside of those published standards.
Right now, credit is far tighter than anyone has
experienced in decades. There may be families with good credit
willing to put down substantial downpayments who are being
frozen out of the market because the risks of making any
mistake are simply too great and the rules of the road are
unclear and often contradictory.
When lenders don't know whether FHA will demand
indemnification or cancel the government guarantee on top of
the potential they may face substantial financial penalties
because the goal posts have been moved, they will, quite
naturally, only lend to people with perfect credit and limit
financing options for FHA's targeted population.
Mr. Chairman, we need to strive to clear up the uncertainty
in our real estate finance system. We need a system where
homeownership is a doorway to opportunity and borrowers can
once again feel safe, confident, and secure in their loans, but
also a system that thrives in an environment that encourages a
competitive, responsible marketplace so business can grow.
That includes not just FHA, but also examining the future
of the entire housing finance system. Ultimately, all
stakeholders want the same thing: a fully functioning market
that relies most heavily on private capital with a limited,
appropriate role for Federal programs.
A stable, sustainable FHA program must be part of that
system. Thank you for the time.
[The prepared statement of Mr. Stevens can be found on page
78 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Thomas, you are recognized for 5 minutes.
STATEMENT OF GARY THOMAS, 2013 PRESIDENT, NATIONAL ASSOCIATION
OF REALTORS (NAR)
Mr. Thomas. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for this opportunity
to testify on behalf of the 1 million members of the National
Association of REALTORS who practice in all areas of
residential and commercial real estate.
My name is Gary Thomas. I am a second generation real
estate professional from Villa Park, California. I have been in
the business for more than 35 years and have served the
industry in numerous roles. I currently serve as the 2013
president of the National Association of REALTORS.
Throughout the course of my real estate career, I have
witnessed the vital role that the Federal Housing
Administration plays in providing access to affordable
homeownership.
Over the past 5 years, FHA's role has been more critical
than ever as it sustained housing markets nationwide during the
worst economic crisis of our lifetime.
NAR recognizes the challenges that FHA is facing today and
the concern about risk to the taxpayers. FHA has taken a number
of significant steps to immediately replace their reserves,
including raising premiums 5 times in the last 2 years,
increasing risk management controls, and raising downpayments.
We believe these changes are substantial and will continue
to improve FHA's financial condition. However, there are
additional reforms that we believe will further enhance FHA and
protect the availability of mortgage credit to millions of
American families.
Today, FHA is constrained in its response to economic
conditions and its own financing standing. We support
legislation to provide FHA with flexibility to change program
requirements when necessary to protect the fund. These include
greater flexibility on setting premiums, changing loan
policies, and other programmatic changes.
As a tool in its risk management arsenal, FHA should
continue improving its oversight of lenders. We support
legislation that provides FHA the authority to seek
indemnification from direct endorsement lenders, and the
ability to quickly terminate a lender's ability to originate
FHA-insured loans.
There are a number of other proposals that have been
suggested, which NAR believes are worthy of discussion. These
include lowering the guarantee, and creating a risk-sharing
model with private mortgage insurance companies. NAR does not
currently have a policy on these proposals, but is actively
reviewing them.
We would benefit from additional information about the
proposals and their impact on the FHA, consumers, and the
housing markets. To summarize, the National Association of
REALTORS supports reforms that strengthen the FHA fund. And we
look forward to the return of a vital, robust private market.
NAR remains concerned about changes that would cause
disruption to the housing market. Now is not the time to lose
sight of FHA's mission for the sake of encouraging greater
private equity, which will return on its own when extenuating
factors, such as regulatory uncertainty around issues like QM,
QRM, and Basel III are resolved.
We applaud FHA for continuing to serve the needs of
hardworking American families who wish to purchase a home. And
we stand in support of its mission, its purpose, and its
performance, particularly in the times of a national housing
crisis.
On behalf of the National Association of REALTORS, thank
you for the opportunity to share our thoughts on how we can
work together to ensure that FHA maintains its critical role
for American homeowners. And I look forward to taking any of
your questions at the appropriate time.
[The prepared statement of Mr. Thomas can be found on page
99 of the appendix.]
Chairman Neugebauer. I thank the gentleman. And now, Mr.
Kelly, you are recognized for 5 minutes.
STATEMENT OF KEVIN KELLY, FIRST VICE CHAIRMAN OF THE BOARD,
NATIONAL ASSOCIATION OF HOME BUILDERS (NAHB)
Mr. Kelly. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee. I appreciate the
opportunity to testify here before you today. I also wish to
thank my Congressman, Congressman Carney, for being here today,
and thank him for his service to this Congress and to our
State.
I am a homebuilder and developer from Wilmington, Delaware,
and serve as first vice chairman of the National Association of
Home Builders. NAHB supports efforts to improve FHA. We
understand that this is not a simple undertaking, and change to
FHA programs cannot be separated from the larger discussion of
reforming the complex housing finance system, including future
reforms to Fannie Mae and Freddie Mac.
While the recent FHA actuarial report is troubling, and
deserving of congressional oversight and action, NAHB urges
Congress to proceed carefully. Although there is no question
that the housing finance system needs to be reformed, the
contributions that FHA has made during this economic downturn
underscore the need for a government backstop to both the
primary and secondary mortgage markets.
As we have learned, private institutions have been unable
or unwilling to meet the housing capital needs of homebuyers.
Without government support for home purchasing and refinancing,
the Nation's mortgage markets will grind to a halt in times of
economic stress and uncertainty, throwing the economy into
recession.
FHA has become the primary source of mortgage credit for
first-time homebuyers, minorities, and those of limited
downpayment capabilities, as other sources of mortgage credit
have disappeared. The program has been essential for the
Nation's economic recovery. FHA's share of the market jumped
from 3 percent during the housing boom to a high of 30 percent
early during the housing crisis.
Nearly 80 percent of FHA's purchase loans have been for
first-time homebuyers. This dramatic shift is evidence that FHA
is performing its mission of providing a Federal backstop to
ensure that every creditworthy American has access to stable
mortgage products.
NAHB believes that the private market should be the primary
source of mortgage financing, but that market is currently
extremely limited. While such conditions prevail, it is
appropriate for FHA and other federally-backed programs to play
a larger-than-usual role to keep our economy afloat.
FHA also plays an important role in financing of multi-
family rental housing, especially now during the economic
crisis. Such financing is particularly valuable in small
markets where Fannie Mae, Freddie Mac, and other market
participants are less active.
FHA is now in danger of exhausting its multi-family
commitment authority before the end of the fiscal year. It is
vital for Congress to provide an additional $5 billion in
commitment authority to prevent the programs from shutting down
this summer.
With Fannie Mae and Freddie Mac directed to reduce their
respective multi-family businesses by 10 percent over the next
year, we face a severe reduction in multi-family financing for
reasons unrelated to market conditions. NAHB believes the
Congress should look at FHA and its policies in an effort to
ensure the program is on sound financial footing.
While we have cautioned against the piecemeal approach to
address housing finance reform, we have supported individual
reforms aimed at providing the FHA with immediate tools to
better manage risk and to protect the insurance fund. FHA must
be modernized so the agency can operate more efficiently and
effectively.
It has been constrained both by Congress and HUD, which has
impeded the agency's ability to operate in a manner that
evolves with the developments in the private market. FHA must
be freed from bureaucratic restraints to develop a results-
oriented culture. NAHB believes that this can be accomplished
by restructuring FHA as an independent government entity within
HUD.
In addition, a number of other changes to the single-family
programs have been proposed recently, including risk-based
pricing, risk sharing, and reduction in the FHA loan guarantee.
These proposals merit exploration.
NAHB believes that any modification should be analyzed in
the context of other changes that have occurred or may occur
both within FHA and in the broader housing finance market. NAHB
stands ready to work with you to achieve reforms that will
provide much-needed stability for the Nation's housing sector,
while ensuring FHA's future role as a source of mortgage
financing, particularly in difficult financial times. Thank
you, Mr. Chairman.
[The prepared statement of Mr. Kelly can be found on page
50 of the appendix.]
Chairman Neugebauer. Thank you, Mr. Kelly. Ms. Wartell, you
are recognized for 5 minutes.
STATEMENT OF SARAH ROSEN WARTELL, PRESIDENT, THE URBAN
INSTITUTE
Ms. Wartell. Chairman Neugebauer, Ranking Member Capuano,
and members of the subcommittee, thank you for the opportunity
to testify about FHA.
I am focused today on steps that Congress can take now to
improve FHA's financial health by strengthening its ability to
manage risk and mitigate loss. You can help the agency to
better protect taxpayers with additional loss mitigation
measures.
Some of these measures won broad bipartisan support from
this Chamber just last year. I urge you to enact these now
rather than let more time pass while costs that could be
avoided continue to mount.
At the same time, I hope you will hold off on decisions
about FHA's mission until the design of the larger housing
finance system is clear. Some measures under discussion would
limit access to FHA in ways that could impair its ability to
provide countercyclical support to the economy, and help
creditworthy borrowers.
Once we have a plan to wind down the GSEs, and bring more
private capital to housing finance, while preserving liquidity
and long-term financing, FHA's place in the market will be
clear. Unfortunately, Congress is, at a bare minimum, many,
many months away from enacting legislation to reform the
broader system. And in the meantime, costs that FHA could avoid
today continue to amount.
It appears no deep differences prevent you from protecting
taxpayers now in taking these modest steps. One caveat: I do
believe that the time is right now to bring down the FHA loan
limits gradually, recognizing that the different market
conditions exist in high-cost areas.
Fortunately, FHA's market share is falling on its own, and
private mortgage insurance is serving more of the market, as it
should. Although the credit quality of FHA-insured loans is
high right now, the majority are in terms the private insurers
and the GSEs will not yet accept.
As the GSEs and MI credit standards ease, FHA's market
share will continue to shrink, even while its capital position
strengthens, just as it has in the past, after each period
where FHA fills a gap in the market.
So I urge you to take up now the provisions of the
legislation passed overwhelmingly by this Chamber last year,
with some modest changes I detail in my written testimony.
Please also consider four additional management proposals that
could help FHA to control costs.
First, you can provide the Secretary with what I call
``emergency risk mitigation powers,'' so that he may suspend
issuing insurance upon terms that are risky to the taxpayers,
if he makes a finding that continuation under those terms
exposes the taxpayers to elevated risk of loss, and fails to
serve the public interest.
The emergency authority would be time-limited, rulemaking
would follow, and Congress could, at any time, vote to
disapprove the use of those emergency powers.
Second, you can direct the HUD Secretary to continuously
improve its early-warning risk indicators. To my mind, the
Administration's proposal regarding specific changes to the
compare ratio is too timid. You can empower the Secretary to
use any early-warning indicator that evidence suggests is
predictive of loss, provided it is lawful and
nondiscriminatory.
It shocks the conscience that FHA officials must continue
to accept loans for insurance pending administrative
procedures, when they know the taxpayers are being exposed to
unnecessary risk from a particular lender. Of course, lenders
must have a mechanism to challenge these determinations. But
taxpayers, not program participants, should get the benefit of
the doubt.
Third, you can authorize FHA to pilot new insurance
policies to test their costs, including carefully designed
risk-sharing, consistent with principles I detail in my
testimony, and understand better those costs and benefits
before implementation.
Finally, provide FHA with the flexibility to use insurance
premiums to pay for systems, contractors, and even employees
with special skills at compensation akin to the bank
regulators, to strengthen its capacity to mitigate risk. It
will be some time still before broader housing finance reform
legislation is enacted.
The system that results will determine the role that FHA
must play long into the future. In the meantime, I hope that
Congress will tackle what is possible, non-controversial, and
urgently needed, improvements to FHA's ability to manage risk
and reduce losses. A practical bill will be a helpful
prerequisite to broader housing finance system reform. I thank
you.
[The prepared statement of Ms. Wartell can be found on page
114 of the appendix.]
Chairman Neugebauer. Thank you. Mr. Rossi, you are
recognized for 5 minutes.
STATEMENT OF CLIFFORD V. ROSSI, EXECUTIVE-IN-RESIDENCE AND
TYSER TEACHING FELLOW, ROBERT H. SMITH SCHOOL OF BUSINESS,
UNIVERSITY OF MARYLAND
Mr. Rossi. Chairman Neugebauer, Ranking Member Capuano, and
members of the subcommittee, thank you for the opportunity to
testify on how to reform the Federal Housing Administration.
I am currently an executive-in-residence and Tyser teaching
fellow at the Robert H. Smith School of Business at the
University of Maryland. Prior to my role at the University of
Maryland, I spent more than 20 years at major financial
institutions, managing or leading risk management functions.
My testimony today focuses on the effectiveness of FHA
structure, its policies, risk assessment, and operational
capabilities to ensure the long-term financial sustainability
of its programs. In addition, I highlight several
recommendations that would secure the financial viability of
FHA, while also clarifying and sustaining its role in the
housing finance system.
Unquestionably, FHA has served a critical role in our
Nation's housing market by providing affordable credit to about
40 million first-time homebuyers, and other borrowers with
limited resources who would otherwise have difficulty in
obtaining access to credit through more traditional private
sector sources.
The recent financial crisis and its aftermath underscore
the importance of FHA's countercyclical role in providing much-
needed liquidity and credit to mortgage markets reeling from
the withdrawal of private capital during this period.
At the same time, FHA in its capacity as public steward of
the $1 trillion-plus Mutual Mortgage Insurance Fund, has
responsibility for maintaining the financial sustainability and
integrity of that fund, which according to recent actuary
analyses, has lately experienced considerable stress.
The current state of the fund can be directly attributed to
a lack of clarity in the scope of its programs; mission
conflict between maintaining actuarial soundness of the fund
and advancing homeownership opportunities to prospective
borrowers; a lack of resources to effectively identify,
measure, and manage risk consistent with an insurance fund of
the scale and complexity of the fund; and a lack of systematic
and proactive countercyclical policy mechanisms to guide the
agency as economic circumstances change.
The question for policymakers is what changes should be
made to FHA to provide the agency with the best opportunity to
fulfill its crucial mission in housing, while also protecting
the taxpayer? Ensuring the long-term viability of the fund,
while clarifying FHA's mission, can be achieved by implementing
a number of reforms aimed at addressing the contributing
factors to the current challenges facing FHA.
These reforms include the following: clarifying the role of
FHA vis-a-vis other market participants by requiring the FHA to
adopt an area median income target to determine program
eligibility, and to phase out the use of area-based loan
limits.
In conjunction with establishing income-based eligibility
requirements, FHA should strengthen its requirements to ensure
all eligible borrowers have the best chance of staying in their
homes, restructuring the FHA to provide the agency with the
flexibility and tools to manage its risk.
An optimal structure for an agency the size of FHA would be
to establish it within a new Federal corporation overseen by a
commission comprised of the heads of the various Federal
agencies with housing and mortgage responsibilities, and
chaired by the HUD Secretary.
This entity would bear some resemblance structurally, in my
opinion, to the Federal Deposit Insurance Corporation. Such a
structural arrangement would yield a number of benefits for FHA
specifically, and for housing markets generally.
A set of countercyclical policies and practices should be
developed. Taking a cue from the Federal Reserve's targeting of
key macroeconomic factors in developing its monetary policy, a
set of policy targets for housing and mortgage markets would
provide FHA with clear direction on when to expand and contract
its business.
Such policy targets as local home--market home price
trends, market credit spreads on mortgage securities, and other
pertinent housing and mortgage metrics could provide FHA with
direct feedback on the health of these markets. Permit FHA to
enter into risk-sharing arrangements with suitable
counterparties consistent with other market participants. And
finally, provide greater pricing flexibility to the FHA,
including the ability to initiate risk-based pricing of
mortgage insurance premiums reflective of the inherent risk of
a loan.
Without question, FHA is an essential part of the housing
finance system. While maligned for the current financial
challenges of the fund, it is important to keep in mind that
the FHA has served this country well for nearly 80 years.
However, like many institutions, FHA has not kept pace with
important structural changes in the market. The advent of
securitization, and other sophisticated capital markets' risk-
transfer mechanisms, have left the FHA at a competitive
disadvantage vis-a-vis other market participants.
The lack of a clearly defined mission for FHA, along with
potential conflict between its social and financial missions,
are contributing factors to the current state of the fund. The
agency requires a number of major reforms in order to put it on
a secure financial footing that would ensure its important
legacy for borrowers for the next 80 years. Thank you very
much.
[The prepared statement of Mr. Rossi can be found on page
67 of the appendix.]
Chairman Neugebauer. I thank the gentleman, and I thank our
panel. We will now go to Member questions. Each Member will be
recognized for 5 minutes in order of seniority. With that, the
Chair recognizes himself for 5 minutes.
Before I get into some questions, I want to just have a
little poll here with the panel. How many people on the panel
agree that the core mission of FHA is as a mortgage insurer,
that is the core business? Would you raise your hands, please?
And if the core mission is that it is a mortgage insurance
company or entity, should it be run on an actuarially sound
basis? Does everybody agree with that?
I think the question then--and I appreciate the testimony--
is I think every one of you mentioned the fact that FHA should
engage in risk-sharing as one of the ways to get the taxpayers
off the hook. Is there unanimity on that? Ms. Wartell?
Ms. Wartell. If I may just clarify, I think that
appropriate pilots for parts of FHA's business are a reasonable
way to proceed, but to mandate FHA risk-sharing across the
portfolio would not be something I would support.
Chairman Neugebauer. I think some people mentioned a pilot
program, or something like that. But one of the parts of the
risk-sharing piece that has been brought up is that there has
been discussion about reducing the guarantee on FHA from 100
percent to some percentage more in line with what the private
market insures.
Is there anybody who disagrees with that concept? Mr.
Stevens?
Mr. Stevens. I think that is the right way of approaching a
pilot like this, Mr. Chairman. The thing I would emphasize is
that we have to separate the guarantee against the mortgage-
backed security versus the insurance guarantee that private
capital has to make up at the loan level up front.
And in the event of catastrophic loss, the way it works for
VA, or even Freddie Mac or Fannie Mae, is in the event the
institution ultimately fails, the guarantee still exists on the
mortgage-backed security, which keeps capital flowing into the
market.
Chairman Neugebauer. Ms. Wartell, did you want to comment
on that?
Ms. Wartell. I just want to note that if we were to use a
structure like that, Ginnie Mae would then continue to have a
significant amount of counterparty risk. And so, it is very
important that we--and that would be very different than for
the VA portfolio, which serves a very discrete set of
borrowers, with a different set of incentives.
So proceeding with real caution, as opposed to funding,
would be very important for FHA to--
Chairman Neugebauer. I am reminded, though, that Ginnie Mae
actually does that for VA loans, and they are not 100 percent
guaranteed.
Mr. Stevens. You are absolutely correct. And I think for
the most part, we all agree that a pilot is worthy of testing.
I think the point that Sarah is making is that there are a
fewer number of counterparties in the VA program. And FHA is
widely distributed amongst a couple thousand institutions that
participate in that program.
And so therefore, the ability to manage the counterparty
risk for that large number of lenders which participate in FHA
will clearly add some cost to Ginnie Mae, which would have to
be offset in some measure, either higher Ginnie Mae guarantee
fees, or some way for them to build resources, because we also
know that they are fairly underresourced as well.
Chairman Neugebauer. Mr. Marzol?
Mr. Marzol. Mr. Chairman, what I wanted to offer is I think
the spirit of the suggestion of the limited guarantee is a
worthy one, because it is an alignment of interests between
private sector and public when there is risk-taking. I just
wanted to point out that the approach to risk-sharing we
suggest in our testimony is a fairly well-established one.
We are risk-sharing partners today with the taxpayers when
we put our first-loss insurance on loans that go into GSE
securitizations. And so our proposal would be to at least try
to take that approach, which is fairly well-established, and
see if it can have merit, and can be utilized for some of the
borrowers who are ending up in FHA. So, I just wanted to offer
that thought.
Chairman Neugebauer. And then, I want to go in one other
direction here. One of the proposals is that we make FHA a
separate entity, and possibly decouple it from HUD. Because if
it is, as the panel said, an insurance entity, then it might be
better served being an independent agency, building up its
reserves, and pricing to build up the reserves.
But also, I think one of the witnesses--maybe it was you,
Ms. Wartell--said that they needed some investment and
technology, and to upgrade that. Right now, they are dependent
on the normal budgetary process to be able to get the resources
they need, maybe to have the state-of-the-art underwriting.
Would anybody disagree that this committee shouldn't
consider looking at partitioning that entity from HUD? Mr.
Marzol?
Mr. Marzol. It is not that I disagree with that suggestion.
But what is important from our perspective--because you are
right, FHA is a mortgage insurer. But I think we should be
clear as to whether it is a government-owned mortgage insurer
whose role is to compete broadly in the marketplace, and try to
serve everyone it can, or is it a government program that is
supposed to help expand access where the private sector can't,
and then within that framework, should be run appropriately as
a mortgage insurer.
I just think that is, from our perspective, an important
clarification.
Chairman Neugebauer. Mr. Kelly?
Mr. Kelly. Thank you. NAHB would support an independent
agency housed within the Department of Housing and Urban
Development for the reasons I stated in my testimony.
It is an organization that needs to be modernized. It needs
to be freed from the bureaucratic constraints that currently
hamstring the organization and its effectiveness. So we would
support its independence, but it should be housed within the
Department of Housing and Urban Development.
Chairman Neugebauer. I see my time has expired. I now
recognize the ranking member, Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman, and again, I want to
thank the panelists. So far, the testimony and the discussion
has been exactly what I had hoped for, the least ideological
discussion I think I have ever heard on this committee on an
important issue.
But that doesn't mean we don't have differences. It just
means we are having an adult conversation, which is nice for a
change. So thank you for that.
I guess the only thing--I think I agree pretty much with a
lot of generalities that I have heard. Again, details are
details. But Mr. Stevens, I just want to clarify one thing that
you did say.
You said you want to see the limits lowered. And I don't
have a problem with that. But I want to be clear about it. I
want you to clarify--would you agree that there are regional
differences in real estate costs, and therefore, the limit
should be adjusted from one region to another?
Mr. Stevens. Yes. Thank you, Congressman, for asking a
follow-up on that question.
We clearly think loan limits are worthy of consideration.
It is not that easy. We all know that it is really not a matter
of risk when it comes to FHA. First and foremost, the higher
loan limits are actually additive in terms of negative subsidy
to the budget, in terms of how it is calculated. And it is also
a very small percentage of the portfolio.
The other key point is obviously, the $729,000 is only in
higher-cost markets. So it is just a handful of select markets
around the country that are important--
Mr. Capuano. I haven't had one of them.
Mr. Stevens. --to those markets. And the thing we really
believe is important in the event loan limits are not extended,
because as you know, they automatically roll back, is we need
to test and find out who is going to support those markets in
the absence of those loan limits falling back.
Mr. Capuano. I want to follow up on an important point,
because I presume you are all relatively familiar with the
congressional process, and how long we take to do anything. It
is actually a good process.
I know it is frustrating to a lot of people, but it works
well, because we don't take things like FHA and throw them out
one day, and bring them in the next day. That is what it is
meant to do. But because of that--and I agree with you--a lot
of concerns were thrown out.
Even the risk-sharing. I like the concept. But I will be
honest with you, I am a little concerned about it. I would like
to see it tested in certain pilot areas to see where it should
go, exactly how it should work. Conceptually, it sounds fine.
Ideologically, okay, let's try it.
But I would be very hesitant, probably, about just doing
it. Because we are getting into something, and we don't know
where it is going to go. So for me, I would love to see some
general pilot programs to try to specify and see exactly how
all these new ideas work before we mess around with something
that has worked so well for so long.
That being the case, it is going to take us time. And in
order for me--I come from the approach that says, ``Look, let's
do what we can while we can. And then on the things we are not
sure of, let's take some time.''
Again, I think that the FHA discussion is slowly moving
away from the ideological debate and into something more
realistic that we can eventually work out. But in the meantime,
I think it is a mistake to sit here and do nothing. Because I
am watching FHA kind of slowly fade away.
The multi-housing stuff, the reverse mortgage stuff, is a
real problem that we are doing nothing about because we want to
do the whole thing or nothing. I feel just the opposite. I
would like to get some pilot programs going in the meantime,
and in the meantime, do what we can.
We had a bill last year, that I am assuming you are all
familiar with, which got 402 votes on the Floor of the House.
Would any of you oppose the concept of taking that bill and
passing it? Again, I fully admit it is not the bill I want, but
it is something we have already agreed to.
Pass that bill, and in the meantime, work on the other
things that we want to try. Maybe get some pilot programs
going, and move on other issues. Do any of you think that we
should do nothing until we can do everything? Or do you think
that we should do what we can do as quickly as we can to fix
it?
I guess I would ask you, Mr. Marzol, and then just go right
down the panel.
Mr. Marzol. We are for making as much practical progress as
can be made. And as I said in my oral testimony, we certainly
thought the bill that passed last year, plus the additional--
some additional authorities at HUD has requested a specific
mention on the seller concessions. Those would certainly be
progress. And if more can be done, more can be done. But we are
all for progress.
Chairman Neugebauer. Mr. Stevens?
Mr. Stevens. The most recent version of the bill is very
similar to the one that was introduced when I was FHA
Commissioner, which also passed, I think, by 404 votes as well.
There were some minor changes to it. And we would like the
opportunity to be able to work with you on a couple of
concerns.
I could address them now if you would like. They are
technical in nature. But we do agree generally that there is
opportunity to put an FHA reform proposal through in the
context as you stated.
Chairman Neugebauer. Mr. Thomas?
Mr. Thomas. Yes. We are in full support of the bill that
you and Congresswoman Waters have proposed. It is very similar
to the one last year that we supported, and we support yours as
well.
Mr. Kelly. Congressman, NAHB supported that piece of
legislation last year. We think it gives--it is a platform to
revisit the subject this year. But again, we would urge that
FHA reform be donned in the broader context of overall reform
to the housing finance system, including GSE reform.
Mr. Capuano. Mr. Kelly, just to clarify, and again, I agree
with what you say. Getting back to the reality of Congress, you
realize that broader discussion may take a long time to
finalize. And a very clear question, do you think we should not
do anything until we get the whole thing done? Because that is
really the question we have.
Mr. Kelly. As I say, the legislation--as opposed to doing
nothing, something is better than nothing. But again, a
preference would be to try and work on all of the moving parts
at the same time, to develop a comprehensive reform to the
mortgage finance system.
Ms. Wartell. Congressman, if there are ways in which this
body can protect the taxpayers from additional losses that are
agreed to today, I think it would be very difficult to justify
failing to act on those now while additional costs are
incurred.
So, I fully agree. There are changes that could be made.
They are technical in nature. They can be quickly worked out.
You should do what you can do now.
Chairman Neugebauer. Mr. Rossi?
Mr. Rossi. I embrace pragmatic change that can happen
quickly, but at the same time, I am a big believer that we have
absolutely no national housing policy. And for that reason
alone, I think that we have an excellent opportunity to finally
step back and make the changes that we need to make to make
both the secondary market or what we see in the conventional
conforming side, as well as on the fully guaranteed side, the
right steps going forward.
So, in my opinion, quick legislation isn't always
necessarily good legislation. And so, I would at least caution
the subcommittee to really kind of take a closer look at those
things.
Chairman Neugebauer. I thank the gentlemen. And now the
gentleman from Missouri, Mr. Luetkemeyer, is recognized for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Just to kind of
follow up on Mr. Capuano's question, you all were talking about
different changes. Are there things that the Administration
could do right now? I know it takes a long time for Congress to
get anything done. It is like watching paint dry on a wall
here, what we do.
Mr. Stevens, you are an interesting gentleman to have on
the panel today, having been in the Administration before and
FHA. Are there things that the Administration could do now
through Executive Order, through some administrative rule, that
could impact this, and make a big difference?
Mr. Stevens. There are some things. As you know, they have
already done a lot that only came from the help of Congress
when the ability to raise mortgage insurance premiums was
initiated in this body, and ultimately went through the Senate.
So that has been very helpful to the 2010, 2011, and 2012
portfolios, which are all, by all expectations--CBO, OMB, and
otherwise--expected to be very profitable.
There are measures that could be done. As an example, today
FHA is being further protected beyond their own guidelines by
lender criteria that is more conservative than what FHA allows
for. And I think one of the things that should be considered,
particularly as competition increases in the market, is will
lenders in the broader lending community erode the credit of
FHA by using the broadest scope of the FHA underwriting
guidelines? Or should FHA take some measure to try to at least
lock in and protect some of the credit that is being originated
today?
An easy example is that FHA's minimum FICO credit score
requirement is 580. Most lenders don't do FHA loans at 580.
They do them somewhere in the low 600s, due to performance
concerns.
That gap should be looked at closely by FHA policy experts,
and it should be determined whether those should be locked in
at some level to avoid the risk of potential erosion downstream
as the market becomes more competitive. So there are some
things that can be done by mortgagee letter that don't require
Congress.
Mr. Luetkemeyer. Ms. Wartell, in your response to Mr.
Capuano, you made a comment, too, that there are some things
that can be done. Are there things you are aware of, or
suggestions you could make, that the Administration or FHA
itself could do right now that would be impactful?
Ms. Wartell. There are a couple of measures that FHA is
pursuing right now, but that require rulemaking for them to
complete, and in some cases, because program participants have
objected, there has even been litigation about that.
So one of the reasons why I think some of the provisions in
this legislation would be helpful is it would clarify FHA's
authority to take those actions through mortgagee letter. And I
would be happy to specify those. I don't have them off the top
of my head.
But I do think that giving FHA more flexibility to act
sometimes without regulatory procedure speeds up their ability
to protect the taxpayers.
Mr. Luetkemeyer. Thank you. Mr. Stevens, I know that in
your position with the Mortgage Bankers Association, you see a
lot of the housing market activity. Do you see from the actions
being taken by the government regulators, or the government
agencies here, that they are forcing the private market away
from this by the fees or their criteria that they are using?
And if so, are there ways that we can draw--bring it back
in so the private market can come back in and be effective?
Mr. Stevens. Thank you for that question. I think it was
actually referred to in Gary Thomas's testimony as well, is
that the extraordinary uncertainty in the lending community,
through a morass of regulation coming from multiple bodies, not
that regulation is wrong, because we need good regulations in
the marketplace, but it is the inconsistency, the overlap, the
lack of coordination in housing policy in Washington that is
really causing much of the lending industry and private capital
trepidation to re-engage in the system.
If you are private equity today, you don't know where QRM
is going to end up. So why would you extend credit into the
marketplace, knowing the risks associated with that? There are
rules coming out from multiple regulators, and there is no
coordination point at all within Washington.
We have advocated strongly that this Administration could
identify an individual or body to coordinate all of these
policy efforts, and clearly articulate the sort of end-state,
and try to move in a coordinated fashion so that the confusion
can subside, and private capital can find a pathway to re-enter
the market.
Mr. Luetkemeyer. Yes, sir? Mr. Marzol?
Mr. Marzol. I wanted to make a comment. If uncertainty had
paralyzed us, Essent wouldn't be here today, because it took
getting started in 2008 to be able to be in the market in 2013.
And I would like to just, for ourselves, we think we have
the capacity to do more. We think capital is interested in
doing more through private mortgage insurance. I would like to
give you the sense that if there is opportunity, we think at
least our company, and broadly, our industry, is positioned to
do more, while other private capital sources are trying to get
their feet under them and resolve their uncertainties.
Mr. Luetkemeyer. I think my time is up. I certainly
appreciate everybody being here this morning. It is a great
discussion. Thank you. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. Thank you. And now, the ranking member
of the full Financial Services Committee, Ms. Waters, is
recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I would like
to get a little clarification discussion from Mr. Thomas about
the requirement that FHA has sufficient reserves to pay
predicted claims over 30-year period.
The recent report released by FHA's independent actuary
states that FHA's single-family insurance fund has an economic
value of a negative, what, $16.3 billion? But FHA's current
cash reserves total about $30.4 billion. Notwithstanding this
fact, FHA's independent actuary estimates that it does not
currently have sufficient reserves to pay predictive claims
over a 30-year period.
Can you discuss FHA's requirement to hold reserves to cover
claims over a 30-year period? How does that compare to the
Financial Accounting Standards Board's requirement for the
reserves that need to be held by private financial
institutions? And are you aware of any other Federal loan
program that has such stringent accounting requirements?
I am speculating that this is I guess, some protection with
the 30-year loan. But most people refinance about every 5 years
or so. So what is this? And is it time for us to start looking
at a repeal of this, and do something that makes good sense?
Mr. Thomas. If you look at it compared with the private
side, it is completely wrong. So I would agree with you, that
we do need to take a look at it.
We also need to take a look at the fact that the
Administration, in the budget that they are proposing, is
asking to take a certain amount of money to put in, if in fact
it is needed. It is not needed yet. And so why in the world are
we even putting that in there when it is not needed?
Also, the fund is performing extremely well, and should
be--I don't think they are even going to need it, from
everything that we have researched, by the time we get to the
end of the fiscal year.
So, I agree with you. I don't think that we need to have
that type of a requirement on the government side that isn't
required on the private side.
Ms. Waters. I know that sometimes when we begin to look at
repealing certain things have replaced in law that people are
very skeptical. They must have done it for a good reason.
However, they don't take into consideration everything that
has happened since the law was first instituted. And I think it
is time to take a look at this.
And so since I am talking to you about it, I am going to
come back and talk to you again about the possibility of a
review of this that would help to rearrange our reserve
requirements in ways that will not in any way put FHA at risk,
but rather, relieve them of a requirement that makes it appear
that somehow they are insolvent, or they are in trouble.
And I just think that we should be a little bit more
forward-looking than this, and not be held to this law, that
perhaps does not--is not relevant at this point in time, as we
look at what happens to the 30-year mortgage, for example.
Again, I said that I think people refinance, or sell, or do
something every 5 years. That is an amount of time that I
remembered. I don't know if that is still about the right
amount of time.
Mr. Thomas. A little longer now. But that--
Ms. Waters. Seven years or what?
Mr. Thomas. Yes.
Ms. Waters. About seven--so I do think that it is worth
review. Thank you very much. Mr. Chairman, I yield back the
balance of my time.
Chairman Neugebauer. I thank the gentlewoman. And I now
recognize Mr. Miller, from California for 5 minutes.
Mr. Miller. Thank you, Mr. Chairman. One thing Congress
excels at is looking back. We really do a good job there. But
if you look at the current market, and the uncertainty of QRM,
Basel III, where the secondary market is going, we have created
tremendous uncertainty in the marketplace right now.
There has been debate that FHA is crowding the private
sector. I think the private sector is just afraid to crowd back
in. They are just not coming in.
And there has been some debate that FHA should work more
like a private business. But Mr. Stevens, had that occurred
when the downturn existed, and had FHA worked more like a
private business, and slowed our exit to the marketplace during
the downturn, what would have been the result on the housing
market and the economy?
Mr. Stevens. It would have been devastating. And,
Congressman, as you know, we worked closely during that period
of time. There was nobody providing low-downpayment financing
in the marketplace.
And quite frankly, even HMDA data for last year clearly
shows that for first-time homebuyers and other demographics
with low downpayments, there is no source of access to the
housing finance system. As the market recovers, and its rules
create greater certainty, Adolfo's point aside, I think there
is clearly not the interest in private capital to engage in a
way that reflects sort of a normal lending environment as we
have seen over past decades.
Mr. Miller. Even last year, you could look at the
marketplace. And when you were applying for loans, FHA was one
of the few out there, because the private sector just wasn't
filling that void.
Mr. Stevens. Yes. If you look at--just take for example,
Fannie Mae's recent quarterly statement release, if you look at
the average loan-to-value of their purchase transactions, or
excluding HARP, which is in their financial statement--HARP is
refinanced activity--it is in the high 60 percent range.
So there is very little financing still coming into the
market outside of FHA, VA, or USDA in the low-downpayment
sector. And I think that will come in with confidence around a
variety of things you suggested.
Mr. Miller. You are starting to see the private sector come
back a little bit. But when you became FHA Commissioner, you
took a number of steps to improve the risk management
capability of the FHA. And can you help us understand how far
behind the FHA was with risk management when you became
Commissioner?
Mr. Stevens. Thank you for that question. As you well know,
there was no risk management role at all at HUD when I came
into the FHA job. It didn't exist.
So we actually had to come to this body. We had to get an
approval to get it created as an office. We had to get
appropriations to create the office.
And that is one of those flexibility impediments that
really makes it difficult for FHA to respond quickly in times
of crisis. Because we had to go through a variety of steps,
which took months, in fact almost a full year to get the Office
of Risk Management established and funded so that we could
create it, and to have an insurance company of any size, let
alone the size of FHA, to not have an independent risk
management oversight function was deplorable. And that could
not have happened without the support of Congress.
Mr. Miller. Nobody expected the collapse to be as rapid as
it was, or as significant when it did occur. That was part of
the problem. And if FHA had appropriate capabilities during
this crisis, do you think the losses would have been much
smaller than they were?
Mr. Stevens. Yes. The budget is going to be released here
any second. And I think as we look at the numbers, the two
provisions that I think people are going to look at most
closely is first, that the seller-funded downpayment assistance
program, which actually FHA tried to stop and was sued to
continue the program, will have cost the FHA over $13 billion
cumulatively against what is likely to be less than a billion-
dollar net loss.
And second, the reverse mortgage program also was very
costly. And that was a program that they had difficulty making
changes to. If you could avoid those kinds of, what I call sort
of ``inability to respond to risk management issues,'' as Sarah
Wartell discussed earlier, and FHA could respond to those,
there would have been a way to avoid actually any need for a
draw whatsoever, had those two programs been addressed
appropriately up front with their own authority.
Mr. Miller. They played a good countercyclical role. Could
they have played that part if they were much smaller than they
are today?
Mr. Stevens. No. We have come through a recession that had
34 percent home price declines from peak to trough. We had a 9
percent national unemployment rate, the worst recession since
the Great Depression, the worst housing recession in anybody's
history here in this room.
And FHA became sole-source provider for housing finance.
Now, granted, it is well beyond what we would describe as their
mission. But in the absence of FHA playing that role, I am not
sure where the financing would have come from in this country.
Mr. Miller. Dr. Rossi, you gave examples of what private
companies can do, but FHA cannot. Can you give us some examples
of that?
Mr. Rossi. The one example that comes to mind as we think
about the risk management--and I would applaud Dave Stevens'
efforts to revitalize, or actually establish a risk management
office--but I will tell you that if FHA, in my opinion, was
overseen by the Office of the Comptroller of the Currency or
the Federal Reserve, their Board would be under consent
decrees, or for still, some of the problems that exist today
for the size and complexity of the fund that they had.
There is no question in my mind that they need to--for the
size of that fund, they definitely need to reinvigorate their
practices around risk management. That is in my mind job number
one for them to establish themselves in that critical role of
being there for--
Mr. Miller. I want to applaud Mr. Stevens for his movement
on risk management, on what you said.
Mr. Rossi. Yes, oh, absolutely. In fact, that, as a first
mover on that, that was absolutely critical.
Mr. Miller. Yes. Thank you. I yield back the balance of my
time.
Chairman Neugebauer. I thank the gentleman. The gentlelady
from New York, Ms. Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Stevens, could
you please explain to us, or discuss the difference between the
steps taken by FHA to improve its solvency versus some of the
proposals today, as increased FICO score, downpayments, and
mortgage insurance premiums?
Mr. Stevens. Let's start with the fundamental point that is
going to come out in the budget, which I understand was just
released. It shows that FHA will need a draw of just under a
billion dollars.
That is solely the result of the 2006 through the first
part of 2009 books of business. The 2010, 2011, and 2012 books
by OMB, CBO, and the independent actuary for all those shows
their books being very profitable, and well-managed.
And I think the result, what has made those books
profitable, made them less risky to the taxpayer, is the
authority that was given to them, quite frankly, to raise
premium, and some overlays that were put in around putting a
minimum FICO score in place that would require a much larger
downpayment beyond that.
And I would say fundamentally, FHA's risk profile is a far
different picture today, in terms of new loans being generated,
than the kind of risk that was put on those books during those
peak years.
Ms. Velazquez. So can you tell me what specific reform, if
any, you believe that is necessary today?
Mr. Stevens. I think they need greater flexibility, to
Sarah's point around emergency powers, which by the way, I
don't think is in the last bill that was presented. And that
needs to be added.
I do think there needs to be some additional capabilities
for FHA to require indemnification of lenders that clearly
violate the program. I think we have to be careful in some of
that indemnification language, because it could also cause
additional tightening. And there is a provision in there we
need to talk about. But those are components.
I think the third area is we need to think about risk-based
underwriting. So rather than attach provisions that would put
hard-line vigor downpayments, for example, in the portfolio,
which would be a wealth barrier to access, you can accomplish a
similar outcome by putting better underwriting characteristics
with lower downpayments, and first-time homebuyers, that might
cap, for example, the debt-to-income ratio to a lower level, so
that you can ensure sustainability for low-downpayment
borrowers, while not excluding access to homeownership.
Ms. Velazquez. Thank you, Mr. Stevens. Mr. Thomas and Mr.
Kelly, what do you think will be the unintended consequences of
implementing better work requirements than those that are in
place today? Could they potentially harm the single-family
mortgage market for first-time, lower-income or minority
homebuyers, particularly those in high-cost areas like New York
City?
Mr. Thomas. I am from California, so I understand that,
too. Yes, it could. And so, I agree with Mr. Stevens. That is
what you need to take a look at, not just coming up with a
minimum downpayment, or anything like that.
It needs to be looked at actuarially, as to that borrower
and their ability to repay. It should not be just a hard line.
That would harm the fund, and it would harm the ability of
people to get into the--
Ms. Velazquez. So how do we strike that balance?
Mr. Thomas. You are going to have to give them the
flexibility to make the adjustments without having to come back
to Congress to get those things implemented. They can do it if
you give them the ability to do it.
Ms. Velazquez. Yes, Mr. Kelly?
Mr. Kelly. The National Association of Home Builders
surveys its members on a fairly regular basis. In our recent
surveys, when we asked, ``What are the greatest impediments to
builders selling homes?'', they are telling us--and this has
changed over the last couple of years--that it is buyers'
access to an availability of credit.
So I think FHA has played a vitally important role in
supporting the housing market during this downturn, and this
Nation's economy. I think we have to move very carefully in
looking at the types of adjustments that were talked about by
the other speakers.
I am a builder and developer who, on the for-sale side,
build to first-time homebuyers, often in lower-income, urban
areas. And quite frankly, we periodically examine and go back
in those developments.
The last 120 homes or so that I have sold in two
developments in urban areas in Wilmington, Delaware, none of
the buyers had more than a 3 percent downpayment. And out of
the 120 over the last, I think it was 4 years, last time we
checked, which was about a year ago, there was one default. All
those buyers had to go through very extensive housing
counseling. They all had FHA insurance.
But again, I suggest that we have to do it carefully, and
very thoughtfully.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Neugebauer. I now recognize Mr. Bachus, the
chairman emeritus of the full Financial Services Committee, for
5 minutes.
Mr. Bachus. Thank you. Looking at this various data about
the HECM program, the home equity mortgage conversion, and the
reverse mortgage program, it seems like that is
disproportionately affecting the FHA insurance fund.
I know there have been premium increases. But I would ask
the panel, Mr. Kelly, Mr. Stevens, maybe any of you who would
like to respond, are you aware of any changes to minimize FHA
losses other than maybe increasing premiums? And does the
industry have any--is there any consensus between, say, the
agency and the industry on how to minimize these losses?
Mr. Stevens. Congressman, as we all know, the reverse
program is a very unique program for seniors which extends to a
senior citizen all the principal balance, interest accrues over
time, and they make no payments. The only way the program
works, quite frankly, is if home prices are appreciating over
time, or if you keep the draw low enough so that it can
compensate for flat home prices.
The program, up until this point, did not allow for that.
It was a full-draw, 30-year fixed-rate program that allowed too
much of a draw up front to the senior. And when home prices
didn't appreciate, it put the fund underwater, and that is what
has caused this disproportionate outcome.
I actually think Commissioner Galante has made the right
move in her most recent announcement that they are going to
curtail the fixed-rate, full-draw HECM, in replacement for what
they call the ``HECM Saver Program,'' which is actuarially
sound, at least the last time I looked at the actuarial review
of that program. It reduces the draw amount.
Raising premiums really doesn't help at this point, because
if the home doesn't appreciate, and you can't pay it back, you
are not going to get the premium anyway. So we need to have a
program which accommodates for a flatter home price market,
while maintaining a program that still provides seniors access
to some sort of ability to draw down their equity.
And I think that HECM Saver, and eliminating the full-draw
HECM is the way to get there.
Mr. Bachus. Mr. Kelly, do you want to make any comments? I
know that home prices have started to appreciate again. That
may take some pressure off. But we can't assume that will
continue.
Mr. Kelly. I would just reiterate that some of the things
that have been done on the overall fund, not necessarily the
HECM fund, I will be honest with you, I am not that familiar
with it; haven't utilized it.
But some of the things that FHA has put in place in the
last couple of years--higher mortgage insurance premiums,
tighter underwriting standards, recently the requirement that
the MIP continues to be paid by homeowners when their loan
drops below 78 percent, and the debt-to-income ratios that are
currently being mandated for buyers with scores under 680--I
believe are all very prudent measures that, again, will stand
the fund in good stead over the long--
Mr. Bachus. Mr. Thomas, I should be asking you, I am sure,
that first question. But what are your thoughts about
minimizing the loss and HECM program?
Mr. Thomas. Those are the two areas that have caused the
fund the greatest hazard. And I would agree that the most
recent changes are going to do very well for the fund. And so,
we support those.
Mr. Bachus. That is reducing the draw, basically, I think,
may be a sure way to say that. And should FHA be in the
business of insuring reverse mortgages, given their current
financial situation? Would anyone like to answer that?
Mr. Stevens. It is a delicate subject, as you know better
than anyone. The ability for seniors to particularly have
access to equity in their homes is something that is important.
And I do think you can do it in a sound manner.
I think FHA was limited in terms of what they could have
done in the past. I think the latest move, we will prove--
although it will limit the amount seniors can draw, it still
gives access to the program.
I think eliminating it in its entirety is a question about
public policy and support for the elderly, who own real estate,
and have fewer other means to have income.
Mr. Bachus. It is a social mission. And I think you have to
decide as a matter of policy whether that--and I think if it
undermines the fund, the answer has to be no, if the changes
work. Would anyone else care to make a comment? Also, what you
would advise us to do. Mr. Rossi?
Mr. Rossi. Yes, thank you for asking that question.
Actually, if I put myself back in the day when I was heading
risk for several large institutions, one of the things that our
regulators would tell us is, ``Make sure you have your risk
infrastructure in place ahead of any growth.''
And that goes to programs like the HECM program. In my
opinion, you need to go back and do the basic blocking and
tackling of understanding the risk that you are taking on. And
while I think that program is very important, you really have
to go back and ask yourself, ``Do we have the wherewithal to be
able to take those risks on at this time?''
Ms. Wartell. Congressman, I think the important thing to
emphasize is what Dave Stevens said earlier, that if at the
time officials at FHA in the Bush Administration, or in the
Obama Administration concluded they should change the rules of
certain programs, either the seller-funded downpayments, or the
HECM program, if they had been able to swiftly implement the
changes they wanted, the FHA fund would be positive today.
And so I think it really--I agree with Cliff about risk
mitigation tools for FHA. But I also think we need to create
the ability for them to protect the taxpayer by being able to
act more swiftly. So the HECM program is a perfect example of
the kind of flexibility that is required.
Mr. Bachus. And if any of you have recommendations on how
we can be of assistance or supply statutory language, we would
welcome that.
Ms. Wartell. Absolutely.
Chairman Neugebauer. I thank the gentleman. Now the
gentleman from Missouri is recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. And I am pleased we
are having this hearing. I think we need to deal with the
issues that have been raised here with FHA.
Ms. Wartell, do you believe that the FHA is already
independent of anything that may come out of this committee,
moving in the right direction?
Ms. Wartell. I am sorry. Absolutely. FHA, as I mentioned in
my testimony, market share has already fallen as it should. And
history has shown us in prior circumstances where they played a
similar countercyclical role, they took a hit to the health of
the fund.
In both cases, their share fell, and their solvency was
restored. And there is this ability to essentially share risk
intertemporally that is built into the mechanism of FHA and it
is working again.
Mr. Cleaver. The reason I asked you, is because I thought
you were suggesting what I already--except I am wondering if
the other panelists agree that the FHA, independent of anything
we are doing, is moving in the right direction? Does anybody
believes the opposite is true? I am not particularly thrilled
about some of the things they are doing, but I think they are
trying to correct the problem internally. I am not really sure
about the cancellation of the mortgage insurance premiums when
they hit 78 percent. I think that is going to send people to
the GSEs. Does anybody disagree with that?
Mr. Stevens. Congressman, I think the difference is that we
have to consider, as we look at taxpayer protection, that while
FHA used to cancel the premium at 78 percent loan-to-value
(LTD), they still guaranteed the risk to the bondholders,
regardless of loan-to-value.
For Freddie Mac and Fannie Mae, they cancel mortgage
insurance if you can get an appraisal, or it amortizes down.
But then, you have no more mortgage insurance on the
transaction whatsoever. And if the loan goes into default,
there is nothing there to back it up. So it is hard to
guarantee the risk without collecting a premium for it.
The second thing--and this is more for the Builders and the
REALTORS--I am not sure if consumers realize when they are
buying a home that 15 years from now, they are not going to
have to make that mortgage insurance premium, if it gets
canceled when they get to 78 percent loan-to-value.
And if they don't, then perhaps protecting the taxpayer
should be the first priority. It doesn't change your
qualification ability. And it probably is not a decision at the
point of sale. Although, again, I think that is a better
question for Mr. Thomas or Mr. Kelly.
Mr. Cleaver. Mr. Thomas, would you please address that?
Mr. Thomas. Sure. Congressman, to my knowledge, that never
comes up in the discussion when you are sitting with a
potential homebuyer, as to the fact that they might be able to
cancel the FHA premium at some future date.
Mr. Cleaver. But would you agree that they probably don't
even know anything about that?
Mr. Thomas. Absolutely.
Mr. Cleaver. So they can't bring up what they don't know.
Mr. Thomas. That is my point. The REALTOR doesn't explain
it to them, nor does the mortgage person explain it either.
Mr. Cleaver. Mr. Kelly?
Mr. Kelly. I would agree with Mr. Thomas. They don't
recognize that is an eventuality. I don't think it is a factor
in the decision-making process.
Mr. Cleaver. Let's continue in my line of thinking about
FHA moving in the right direction. Rising home prices, it is
believed, are also going to very likely reduce the $16.3
trillion problem that we thought we would have for the first
time in 79 years of FHA. So--
Mr. Stevens. The budget that was just released is a re-
evaluation. Although I haven't read it, I think we will find in
the budget that what changed it from billions of dollars of
expected loss to the current budget, which looks at it being
less than a billion dollars, I think the home price changes are
obviously a key driver there.
And that also lowers what we call ``severity costs'' to
FHA, because when a home goes into default and it sells in a
rising home price market, that loss per foreclosure also ends
up being less. I think both of those variables will likely be
significant in what ultimately ended up being a much smaller
loss than what was expected several months ago.
Chairman Neugebauer. So my final question is, if the entire
panel believes and even with the actual report from November
which said we were going to have a problem, that FHA is moving
in the right direction. Is there any concern that tinkering
with the FHA now that it is moving in the right direction,
might create problems that don't even exist today?
Mr. Rossi. I would just venture to say that we may be more
lucky than anything else at this point that home prices are
rising, and so the fund is down to maybe $1 billion or so, as
opposed to getting any place, the right changes that they need
to be made so that the sustainability of the fund is there for
any kind of housing price market that we come up against. So
that is my perspective on it.
Ms. Wartell. But Congressman, I think that there are two
sets of changes. There are changes that will give FHA the
ability to better manage its risk, which are the kinds of
changes that I think you find every single member of this panel
strongly supports.
And then I think there are another set of changes which
could have the effect of limiting access to FHA and whether
those limits are appropriate or not is very hard to know,
because we don't know what the policy framework for the rest of
the housing market is going to look like when all of these
changes come to there. So I think it is really important to act
as quickly as you can on the things where there is consensus
and make sure that we are doing the rest of those reforms in
the context of broader reform.
Chairman Neugebauer. Good point.
Thank you. And I thank the gentleman. Just a point of
clarification in the budget's number for the President. This is
actually an increase of what was in the President's budget from
last year. It doesn't actually make any representation of what
the actuarial numbers are at this particular point in time.
So I think sometimes, we have to make sure we are talking
about the same numbers. I now recognize Mr. Garrett, from New
Jersey, for 5 minutes.
Mr. Garrett. I thank the chairman, and I thank the panel
again. First of all, let's start this way. Is there anyone on
the panel who thinks we should not be as transparent as we can
with the American taxpayer as far as the risk that FHA
potentially poses to them? Good.
So we know that collectively, when we are talking about
investors in the private sector, we want to make sure that we
protect the investors by having appropriate accounting
standards for them, so they know what they are investing in. Is
there any reason, does anyone suggest that we should not then
have appropriate accounting standards for FHA, have them
account for their books like any traditional insurance company
would?
Ms. Wartell. Congressman, I think the question is, what is
appropriate for the taxpayer, and I think the rules that are
embedded in the Federal Credit Reform Act are designed to
accurately account for the cost taxpayer actually could bear.
And I think there is a concern that former CBO Director Bob
Reischauer, the Center on Budget Policy Priorities, and many
others have mentioned about potential changes to the Credit
Reform Act in ways that could essentially inflate the cost that
the taxpayers might incur from potential risks in a way that
could be inconsistent with actual costs to the government.
Mr. Garrett. So would you say that the initial subsidy
estimates that FHA has given over the years have been accurate
and transparent to the taxpayer and accurately reflect the
risks to the taxpayer?
Ms. Wartell. I think that the taxpayer generally has all
sorts of contingent liabilities, costs from the Social Security
fund and from Medicare and many other different--
Mr. Garrett. But let's just focus here on FHA for a moment.
We can fix those on another day. Are they accurate as far as
what they have been doing at FHA, in protecting that in a
transparent and accurate manner over the years?
Ms. Wartell. I think FHA has generally been as good at
predicting loss to a mortgage insurance fund as the private
sector, actually probably better, but I take your point that it
is very hard to know how housing prices and economy and
unemployment will vary.
Mr. Garrett. So, let's take a look at that. Does anybody
disagree that they have been fairly accurate? Mr. Marzol?
Mr. Marzol. Mr. Congressman, the comment I would make on
the issue of mortgage credit risk, particularly with low-
downpayment borrowers, is that the future outcomes depend a lot
on what happens to the economy, home prices, and jobs.
So there is uncertainty about those future outcomes. If the
economy and jobs are good, the mortgages should perform fairly
well. One of the tools that we use, and I am not an expert in
GAAP or government accounting, but as a businessman, a tool
that we use a lot is stress-testing our portfolio.
It is not just assuming that times are going to be good,
but it is asking ourselves, what will it look like if times are
bad, including if they looked like the Great Recession that
was--
Mr. Garrett. And does FHA do that now?
Mr. Marzol. Not, there are in the actuarial report, there
are downsides--
Mr. Garrett. Right.
Mr. Marzol. --scenarios provided, and that is something
that is just--people we try to look out a lot.
Mr. Garrett. So that is one thing that they are not doing
as well as you would suggest, as you are doing. The other area
is not incorporating a premium for market risk. And before I go
to you, Mr. Stevens, let me just throw up some numbers to put
this in perspective, so we can show the chart.
If you really squint at that chart, this is from CBO, it is
from 1992 to 2011. Just to poke off some years, this is the
initial subsidy estimate recorded as provided in the budget
appendices from the CBO, in the first chart. And the next chart
shows latest re-estimates as provided in Fiscal Year 2013
credits supplement.
What do these charts show? To Ms. Wartell's comment, yes,
they show that FHA was predicting, and each year from 1992 to
2011, but basically, it is a negative number, which means the
effect on the budget is that they would be ahead of the game,
right? By $852 million, in 1992, to 6 billion, 738 million
dollars in 2011. How close were they to their predictions in
all there? Well, let's see.
They were wrong in every single year. That is not a great
track record. They were off by $205 million in 1992. In 2011,
they were off by 3 billion, 376 million dollars. On a scoring
level of one out of 100, zero isn't that great, is it? So I
would not say the level of accuracy is great. And yes, the
private sector may not be that good at this, but if the private
sector had a zero accuracy level, they would be out of
business.
But when the Federal Government has a zero accuracy level,
the American taxpayers are the ones who foot the bills. So I
would hope that we could agree, as was said at the beginning,
that we all want more transparency and one of them would be to
go into CBO with success.
Or others have suggested doing corporate premium for market
risk and also we go into fair value accounting, which perhaps
along with what Mr. Marzol has also suggested, give us a more,
true reflection of what this is affecting and the cost to the
American taxpayer. With that, I see my time is up now.
Chairman Neugebauer. I thank the gentleman. And now the
gentlelady from Arizona, Ms. Sinema, is recognized for 5
minutes.
Ms. Sinema. Thank you, Mr. Chairman. Actually, I don't have
any questions. And that might make me the most popular member
of the subcommittee today, actually.
[laughter].
Thank you.
Chairman Neugebauer. With that, we will recognize Mrs.
Beatty for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
Member. First, let me thank all of the panelists who joined us
today as we look at your perspectives on how to reform FHA. We
have obviously had a number of these meetings, and we have had
our Director from FHA come in and provide us highlights.
In listening and reviewing your materials, I think many of
you, and especially as I look at the document from you, Mr.
Kelly, let me thank you for the third paragraph on page 2,
where you give us the 80-year history and what FHA has gone
through from the Great Depression.
And in that last line, you talk about it being a testament
to its ability to meet the mission in these difficult economic
times, that we weren't there 4 years ago, when we were really
in the height of it.
So my question to you or any one or two of the other
panelists, is I take a more laser focus on the mission of FHA,
to serve those low- and moderate-income homeowners, often
first-time homeowners, and then for fun, let's just throw in
what happens when we look at a 620 credit score, or lower,
because that is the population in my district, when I look at
having the richest and the poorest.
For you, the question is, let's focus on those who are on
the lower end. In looking at, and listening to the testimony,
what I would like to hear is, what one specific thing, assuming
we are all in favor in keeping it to its mission, and only
tweaking it, what is the one thing that you could give me, that
you would support or suggest to us, that we do for those low-
income folks who aren't going to have another opportunity?
And certainly, we know that the housing market spurs the
economy and I don't think anyone here, and I don't want to
speak for you, would be against saying that this low- and
moderate-income, first-time homeowner, who has had some life
crises, as many of us might have had, should still deserve to
have that opportunity to be insured for a home. What is it that
you would do from your perspective?
Mr. Kelly. I would tell you from my own experience, as I
shared with the committee earlier, our company has built and
developed a lot of first-time entry-level housing. We have used
the FHA programs, often in conjunction with State and local
programs.
What I have viewed again, and this is anecdotal more than
scientific, my own experience is the fact that in every
instance where we have done these programs, there has been a
mandatory housing counseling component to that. I think you are
also going to find that probably, fairly universal, with State
housing finance agencies, and their first-time homebuyer
programs across the country.
And I think if you look at the rates of foreclosures in
those programs with State housing finance agencies, their
portfolios are performing very well. I think it is very
important that those who are unaccustomed to the obligations
and responsibilities of buying a home and maintaining that
home, understand what the total cost and real cost are for it,
so they can prepare.
Unfortunately, when they don't get that counseling, many
only think about the fact that they have to pay a mortgage.
They have no idea that mortgage payments are going to include
taxes and insurance escrows, and they don't think about the
cost of heating and cooling and maintaining the property.
Mrs. Beatty. Thank you.
Mr. Kelly. The one thing I would say to your quote, what I
think is at the root of your question is that recessions are
hardest on those with the least means. And so if you are in a
State that is dependent on manufacturing, for example, Ohio and
Michigan, they got particularly gutted by the automobile
industry. You find yourself unemployed, and you don't have a
lot of wealth in the bank to survive that period of
unemployment.
Your credit score is going to be hurt harder than those who
have large amounts of inherited wealth, or relatives who help
you out through those times. We do need to find a way to ensure
that we have responsible access for consumers who don't have
those kinds of resources available to them, to get the
advantages of homeownership, which is good for society, good
for the community, and good for the economy.
I think there are solutions that provide access. And one
suggestion is to consider ensuring that they have a debt-to-
income ratio that allows for enough residual income after their
fixed costs to cover their liabilities, not necessarily allow
50 percent back into that income ratio, which could be
unsustainable for a person who has other marginal means for
paying their monthly obligation, lowering that debt-to-income
ratio to a more reasonable level, while not excluding them
entirely from the opportunity for homeownership. It is a
balance of sustainability and access that is critical to the
market.
Mr. Thomas. I would follow up too, Congresswoman, that we
want to make sure that FHA remains available and affordable to
all classes. We don't want to see the increase in cost or
downpayments that will disenfranchise these borrowers. If it
was raised to 5 percent down, that would disenfranchise 300,000
borrowers a year.
Chairman Neugebauer. I thank the gentlewoman, and now the
gentleman from Mr. Ohio, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you, Mr. Chairman, and I want to thank
the witnesses for being here today. I also want to thank the
chairman for calling this very important hearing on how we can
shore up FHA because to my fellow Ohio Congresswoman, FHA does
have an important mission, and we want to make sure they are
there to perform that mission.
But I have heard some things that you have pretty much all
agreed on today. Number one, and I will call it a consensus,
there seems to be some mission conflict, and there seems to be
a discussion about when it is appropriate to deal with that.
FHA has to do a better job of allocating resources to risk
management. They need to at least look at risk-sharing.
They need to do something with risk-based pricing and they
need to do something with their risk exposure and decide what
level they feel comfortable insuring, and I think all these
things together can move us forward, and so I am going to ask
some questions on each one of those things in turn, with regard
to mission conflict, and my predecessor just talked a lot about
how important FHA is to low-income folks.
But I saw a recent study from the George Washington
University School of Business which showed that 30 percent of
FHA loans were going to families making more than 115 percent
of the average median income, and I guess something looks like
it is missing to me, and I will ask this question to Mr.
Stevens, but why does FHA not have an income limit?
There is a limit on the home price, there is a limit on
lots of things but if it is really a mission geared toward low-
and moderate-income buyers, why don't we look at some type of
cap on how much folks can make and be eligible?
Mr. Stevens. Congressman, I think virtually every
economist--and I am not one--would agree and have advised over
time that income is a better measure for an FHA program. The
challenge is if we want a market that functions, income is one
of the most disputed measures when it comes to backing up
representations and warrantees.
So if you put a minimum income, a maximum income level for
a particular community, and an underwriter and a lender is
underwriting, a self-employed borrower who has a part-time job
as well, and there is a dispute ultimately upon default, as to
what income level was used, that can become a problem.
And I would just tell you anecdotally, I ran a large
financial institution, and I brought 20 underwriters into a
room. I handed them each a thick pair of tax returns, a set of
tax returns. I had them all underwrite the same return
separately, and then put their number on the white board in
front of the room. And I had about 12 different numbers out of
that group of underwriters.
And that is the risk we ultimately create for the lending
community to advance capital. I think loan limits have become a
proxy for that.
Mr. Stivers. Can I ask you, so you are the head of the
Mortgage Bankers Association, do your members use income in
their underwriting?
Mr. Stevens. They do.
Mr. Stivers. Should it be considered, maybe not a hard
limit, but shouldn't it be considered as a component?
Mr. Stevens. Again, I agree underwriting--
Mr. Stivers. It is--
Mr. Stevens. --the loan income level is the better and more
accurate variable to ensure access to homeownership measures,
and if it can be done with precision, in a way that can be
implemented in the--
Mr. Stivers. Sure.
Mr. Stevens. --housing and system, we would absolutely be
open to that.
Mr. Stivers. Does anybody disagree that FHA should spend
more time and resources on their risk management? If they are
going to do that, they need to make sure they have the money,
and I would just tell you that FHA does not charge the maximum
premium allowed by law.
But let's move to the next topic that relates directly to
that, and that is risk-based pricing, and I do have a question,
sort of for Mr. Thomas, although kind of for Mr. Kelly. A lot
of people brought up risk-based pricing. Mr. Thomas, in your
testimony, you talked a lot about the problem with condominiums
and I recognize that problem.
But to the extent there is a problem there, would--and I
know the REALTORS, the organization you represent hates
increasing FHA premiums or dislikes it. But would you rather
have the ability of people who need condos to buy them at a
risk-based premium, or have the current rules on condos?
Mr. Thomas. The interesting thing is that condos actually
perform better than single-family homes.
Mr. Stivers. Sure.
Mr. Thomas. And condos are also typically the entry point
into housing. So, we need to make sure that is available to
them and currently, with some of the things that FHA requires
of condo associations, the condo associations are not renewing
their ability to have FHA loans in their complexes. So there
are a lot of problems around the FHA in the condo area, and
that is just one of them, Congressman.
Mr. Stivers. It looks like my time is up. I will yield back
and hope for a second round of questions.
Chairman Neugebauer. Thank you. Now the gentleman from
California, Mr. Royce, is recognized for questions.
Mr. Royce. Thank you, Mr. Chairman. And let me start with
Mr. Marzol. In your testimony, you describe a resurgence of
capital to the private mortgage insurance industry, $2 billion
raised this year.
What is the state of the industry? How many companies are
currently offering coverage? And do you expect more capital to
be raised in the near term?
Mr. Marzol. --actually, the question comes at a good time.
I think there have been some very positive developments in
terms of the state of the industry, and there are six or seven,
I think, active companies. I should probably go through and
name them all.
Mr. Royce. No, no, no, don't do that.
Mr. Marzol. I--
Mr. Royce. Spare me that.
Mr. Marzol. But the question comes at a good time. The
industry has, and companies have had access to capital. There
is another new entrant which came into the market this year,
along with Essent having come into the market a couple of years
ago. Another large corporation announced the acquisition of a
smaller industry company in an attempt to turn that company
into a full service provider.
Mr. Royce. --so--
Mr. Marzol. Our feeling is that the capital markets are
open now for mortgage insurers to raise capital.
Mr. Royce. What is the number one thing Congress can do to
ensure that capital gets off of the sidelines?
Mr. Marzol. I think capital comes where it thinks it sees
business opportunity and need. Things have been moving in the
right direction, and I think the extent that Congress continues
to take steps that signals that there is demand and need for
mortgage insurance in the system, like the risk-sharing idea
that has been talked about. Those are the kinds of things that
will be very helpful to continue to bring capital to the
industry.
Mr. Royce. You raised another issue, and it is one that I
raised at the last hearing. You raised this issue on the impact
of the QRM rule and Basel III capital rules on FHA's
attractiveness to lenders and to banks. I am very worried that
the net impact of these rules is that government policies are
going to steer borrowers to the FHA and further crowd out the
private markets.
So let me just ask you, what do you think needs to be done
to change those proposed rules to ensure a level playing field
for private mortgage insurance?
Mr. Stevens. I think on Basel III, it would be any help
that we could get, and we will make our own case, of course, to
the bank. If there has been any help that we can get to
persuade that private MI continues to be recognized for capital
purposes, for banks, assuming that the MI is being provided by
a financially sound mortgage insurance company.
And then on risk retention, actually, our view is that the
thing which would be most helpful would be to actually get
mortgage insurance thought about the right way in the rule. And
what I mean by the right way, is that private mortgage
insurance is long-term risk retention. If we could get private
mortgage insurance recognized as long-term risk retention in
the rule, then wherever lenders end up, potentially having to
have a risk retention obligation, if they don't have the
capital and balance sheet to bear that risk, we would then be
able to step and be that risk retention source for the lender.
Mr. Royce. Okay. Thank you. I want to go to Mr. Stevens and
ask a question about eminent domain, because these proposals
have been under consideration in a number of States, certainly
California being an example. These proposals would use the
eminent domain power to seize mortgages at a deep discount, and
then refinance them using FHA insurance. Should FHA be used to
back loans acquired through eminent domain?
Mr. Stevens. Thank you, Congressman. I believe strongly
that the FHA should block the ability for eminent domain rules
to use their insurance fund. Director DeMarco of the FHFA has
said explicitly in a public statement that Freddie Mac and
Fannie Mae will not be a source, as an outlet, for this eminent
domain process and has gone further to say they may ultimately
exclude financing being made available in those communities
where eminent domain is used.
That would leave the FHA solely there to be adversely
selected by these communities and that should not be allowed.
Mr. Royce. Do you want to jump in, too, on the QRM rule and
the Basel III, Mr. Stevens?
Mr. Stevens. I think Adolfo's point about recognizing other
credit enhancements in these rules is critically important. But
I don't think it is enough to recognize credit enhancements in
QRM, because still the cost of capital for a government
guarantor is cheaper, and so if there is a downpayment
threshold, even if a private credit enhancement is recognized,
that ultimate cost of capital for the private credit
enhancement won't compete with a government-guaranteed credit
enhancement.
So, we really need to make certain that the QRM rule is
defined as equaling the Qualified Mortgage rule and not set
another barrier in place that creates an additional cost for
private capital to engage in the market.
Mr. Royce. Thank you, Mr. Stevens.
Chairman Neugebauer. I thank the gentleman. The gentleman
from California, Mr. Sherman, is recognized for 5 minutes, and
my apologies for not acknowledging you before.
Mr. Sherman. You got the State right. I want to pick up on
what Mr. Royce had to say. I am a bit confused on what basis--I
don't know if the other side is represented here--someone would
argue that private mortgage insurance is not a risk mitigant.
How is it that the folks defining both QRM and Basel III
would say, just ignore this? Does anybody have any insight into
how these two regulatory processes are going the wrong way? I
see nothing but heads shaking and I look forward to working
with you and with others on this subcommittee to try to make
sure that both processes recognize the obvious, which is, if
you own a mortgage that is insured, you have less risk than if
you have a mortgage that is not insured. Mr. Thomas, maybe you
could tell us a little bit about what it is like in the
marketplace? Is PMI now thought of as a way to help, making
some headway, expanding its share?
And particularly with regard to condominiums, it is
difficult to get FHA insurance for condominiums. What role does
private mortgage insurance play there?
Mr. Thomas. We are not seeing the private mortgage
insurance back into the market back in a big way. We would love
to see it. And we would love to see the lenders back in as they
were before the crisis.
But, the rules that are still out there, the QM, the QRM,
and the Basel III, once those are finally finalized, I think we
will then start to see the restructuring of our whole mortgage
system, so that we understand where the rules are and everybody
can play by them.
The problem is now, the lenders are not ready to get back
into the market until they know what the game is that they have
to play. And so, we are seeing just a continuing tightening of
credit, both from the availability of it, to the qualification
of it. I tell any of the borrowers I deal with that they are
going to go through an inquisition, not a normal process.
And so, that is what the borrower is facing today. It is
much more difficult than it needs to be, but a lot of it is
because of the regulations and the unintended consequences of
not knowing what they are going to be.
Mr. Sherman. Does anyone else have a comment on what is
actually happening in the marketplace? Yes?
Mr. Marzol. Just a comment. Individual markets are
different, but the private mortgage insurance industry in 2012
did write $175 billion of--
Mr. Sherman. And that is a substantial--
Mr. Marzol. --of insurers, and definitely were up from the
bottom when we were only at one time in 2010, I think between 4
and 5 percent of the market. So we are a little bit of the
invisible man of private capital in the mortgage market, but it
is, it is not an insignificant sum of mortgages that are
getting access to mortgage credit with private capital on them
through private mortgage insurance.
Ms. Wartell. Congressman--
Mr. Sherman. Yes, go ahead.
Ms. Wartell. I think the one thing to remember is that FHA,
with its premium increases has now, and for many loans, not all
of them, gotten to the point where it is more expensive than
many of the MI products. The real barrier, one of the real
barriers for the MIs, strictly in the purchase money as opposed
to refinance market, is that they are limited to what the GSEs
will purchase in much of their business.
And so the dynamics here about where, how FHA market share
can shrink and the MIs can grow, is not principally determined
by FHA policy. There are other factors in the economy,
including the regulation of the GSEs by the, in
conservatorship. And so, I think we are getting--
Mr. Sherman. So--
Ms. Wartell. --to a place that will be--
Mr. Sherman. --if I can interrupt--
Ms. Wartell. --in that process.
Mr. Sherman. --but we all want to see mortgage insurance
play its role in the economy. We all want to see more private,
less FHA, with returning FHA to more its traditional role, but
ultimately, it is the lenders and the securitizers that control
this process.
And if you have the lenders affected by Basel III and QRM
rules, that prefer FHA to private mortgage insurance, if you
have Fannie Mae and Freddie Mac rules that prefer FHA to
private mortgage insurance, then our whole goal of having
private mortgage insurance return to its traditional role is
distorted.
Ms. Wartell. A level playing field is absolutely the goal
and I think there is sometimes too much emphasis on making FHA
change the rules to level up the playing field. And I think
often it is these larger structural issues that are going to
create the opportunity for us to see more private capital
return.
Mr. Sherman. I believe my time has expired, but I look
forward to working with my colleagues to try to push the
securitizers and those who draft QM and QRM and Basel III in
the right direction.
Chairman Neugebauer. I thank the gentleman. And now the
gentleman from Wisconsin, Mr. Duffy, is recognized for 5
minutes.
Mr. Duffy. First off, Mr. Kelly, did you want to make a
final comment there? I see you had your hand up.
Mr. Kelly. No, simply that I mentioned this earlier in the
hearing, that in response to Mr. Sherman's question regarding
what are we seeing, as I indicated, NAHB does a regular survey
of its members and asks questions regarding the challenges they
face in producing and selling homes, and the top of the heap at
the moment is the credit access and availability and standards
that their prospective buyers face.
Mr. Duffy. Thank you. I am one who supports the traditional
mission of FHA. I think it is important, however, that we
balance that traditional mission of FHA with securing American
taxpayers from having to step in and bail out more housing
programs.
Last year, we were in the hole $688 million at FHA. We had
a mortgage settlement of a billion dollars that was able to
plug that hole, per Mr. Stevens' insightful comments, the
budget came out with a request for $943 million for FHA, right
under a billion dollars per year.
To the point, a lot of us are concerned about the solvency
of the program and taxpayers stepping in and bailing out the
program. I think all of you on the panel had agreed that you
are in favor of some form of risk sharing, is that correct? I
think Mr. Neugebauer asked that question, and you all agreed to
it.
What kind of ratio do you think is appropriate? And I open
it--is it 80/20, is it 50/50?
Mr. Stevens. Congressman, there are a couple of things that
I would suggest. One is that FHA already has the authority to
implement a risk-share pilot and that has not been done to date
for a couple of reasons, but one of which is just resources to
get it going.
Mr. Duffy. But what ratios? What kind of ratio do you have?
Mr. Stevens. The thing that I would suggest, and a ratio is
a difficult one for the pilot, but I would suggest that we need
to make sure that we do it in a way that doesn't, that creates
a clear market where there is not an option other than risk-
sharing and the FHA for the pilot. Because otherwise, the
execution will never work, and the pilot won't work, so--
Mr. Duffy. But you--
Mr. Stevens. --and I--
Mr. Duffy. --start off with, what, 10 percent as a goal, or
some small percentage to test the pilot before you expand it?
Mr. Stevens. I think that is where you need to stop.
Mr. Duffy. I want to give everyone a chance to answer, but
I am a little confused on why we are asking for a pilot? Isn't
our pilot the VA and isn't the VA really a pilot program for
us, and it has worked? Why do we have to do another pilot? If
we are talking about pilots, I wish we would have talked about
pilots with regard to Dodd-Frank, not FHA.
But we have already tested it out with the VA. Why are
you--it seems like we are kind of slow walking this thing a
little bit when we have seen it tested, and we have seen it
works. Why don't we just do it?
Mr. Stevens. Sarah, do you want to take that?
Ms. Wartell. Well, a couple of things. First of all, VA is
a much smaller program, and although it has a much lower
default rate, the borrower pool that is eligible is different.
They tend to have better FICO scores and there is a set of ways
in which--
Mr. Duffy. By its very nature--
Ms. Wartell. --the VA has indirect--
Mr. Duffy. --the definition of a pilot, it is a smaller
program.
Ms. Wartell. It is more than a smaller program. It has very
different and targeted borrowers who are eligible, and most of
us would not predict that you would see the same behavior and
the same performance on a pilot that was applicable to the
entire FHA borrowers.
Mr. Duffy. What leads you to believe that?
Ms. Wartell. Because the borrower is in VA, first of all,
they are all military and eligible through their service in the
military.
There are ways in which they may have lost some eligibility
for other VA benefits, if they fail to perform on their FHA,
which creates a different incentive for them to perform on
their loans, and they also tend to be concentrated in
particular markets where some of the risks that FHA has borne
aren't there. So if this were expanded to the FHA's traditional
markets, you may see very different performance.
That is why we would propose taking an FHA-eligible
borrower, and find ways to share risk. In many loans, it is not
risk sharing at all, because it is a 25 percent top loss
coverage, and many of us would propose that FHA design a real
true sharing of risk through the borrower, to align incentives
better between the insurer and FHA.
Mr. Duffy. I appreciate your quick answer, getting it all
in there. Maybe we can continue a dialogue on it. There are
some more questions I have on the pilot program. In regard to
premium increases, we are at 1.35 percent, we have a cap of 1.5
percent, so we are not there yet.
But I think you all indicated that you support the
legislation that passed last year which would bring us up to a
cap of 2.05 percent. Do you all support raising that
percentage, where you pass the 1.5 percent, something closer to
the 2 percent that was in the legislation that you all said you
support? Anybody? My time is up, but I am not getting called,
so I am going to ask you to answer the question.
Mr. Stevens. Congressman, the one thing I would say is that
FHA, the good news is FHA has risen their premiums, raised
their premiums multiple times and it wouldn't--
Mr. Duffy. And it hasn't--
Mr. Stevens. --they wouldn't have that--
Mr. Duffy. --and it hasn't worked yet, we are--
Mr. Stevens. --they wouldn't have--
Mr. Duffy. --still short.
Mr. Stevens. --that capability if they hadn't done it here,
they just raised premiums April 1st by another 10 percent and
our, and application activity was in the FHA, dropped 14
percent this last week. We are already losing share as a result
of raising those.
Mr. Duffy. A $943 million shortfall this year. So I guess--
Ms. Wartell. It is on the HECM program.
Mr. Duffy. Go ahead. What is that?
Ms. Wartell. The shortfall this year has to do with losses
on loans that they have already insured, and the predicted
performance--
Mr. Duffy. Are you--
Ms. Wartell. --of the forward-looking--
Mr. Duffy. --are you calling Mr. Stevens out for his
performance at a--
[laughter].
I will yield back and maybe we can we can chat further on
this at some other time.
Chairman Neugebauer. I thank the gentleman, and now the
gentleman from Delaware, Mr. Carney, is recognized.
Mr. Carney. Thank you, Mr. Chairman, and thank you for
giving me an opportunity to ask a few questions and to welcome
my friend Kevin Kelly at the outset. I am not a member of this
subcommittee, but I have to tell you, this hearing has been
great.
It has been very thoughtful, a great discussion. Starting
off with your questions, Mr. Chairman, and there was quite a
bit of agreement among the panelists which is not something
that we often see in this hearing room, and it was really good
to see, for me.
Mr. Kelly knows that we have something in Delaware that we
call the ``Delaware way.'' And when we have a problem, we kind
of put our political differences aside, we get the experts in
the room, and we try to figure out how to address the problem.
It seems like if we did that here, on this issue, how to
reform the FHA, we could put this panel together, maybe add
some other folks and you all could write legislation that would
represent a consensus among your groups.
And I know we have done that in Delaware. We have done it
on occasion where Mr. Kelly has led those kinds of initiatives
and I just throw that out there as a suggestion, maybe to bring
the Delaware way to resolve some of the differences we have
around these issues here over the FHA and the reforms that are
necessary.
We very much appreciate all your input. I had to leave, and
I really apologize for that. I don't know if you had any
discussion about the GSE reform, but I would be particularly
interested in hearing your perspective on what we should do.
The President asked us, a couple of years ago, actually
Secretary Geithner came here to this committee with their White
Paper, which included a continuum from complete privatization
to some sort of public/private partnership there, and I would
be interested if any of you have some--Ms. Wartell is leaning
forward. I suspect she has some views and I would her first, my
friend Mr. Kelly, and Mr. Stevens, and anyone else who would
like to add your thoughts on that? Thank you.
Ms. Wartell. Clearly, it is appropriate for the Congress to
remedy some of the failures of the past in the GSEs. That means
that we should not have an unpriced and unpaid-for implicit
guarantee.
We need the government's role to be limited to stand behind
private capital, to be priced and paid for in some kind of
catastrophic risk insurance fund, which will--and I think over
time, that fund should stand behind a smaller portion of the
market and gradually be phased out over time.
The mechanism by which private capital can stand ahead of
the taxpayers in that, I think can be diverse, but they--we
don't--the advances made by FHFA in creating a new
securitization platform means that we can separate what the
GSEs have been doing between securitization and credit
enhancement, and come up with a way to ensure that there is
well-capitalized entities with access to capital market
mechanisms to stand ahead of the tax--
Mr. Carney. Does the Urban Institute have a proposed
solution or on--
Ms. Wartell. I am working on a proposal that may come out
in some weeks with some bipartisan colleagues.
Mr. Carney. Thank you very much. Mr. Kelly?
Mr. Kelly. Thank you, Congressman. NAHB has taken a
position and I will reiterate it that we believe the most
effective means of benefiting the taxpayer is a comprehensive
reform, both to FHA as I said earlier in my remarks, as well as
GSE reform. That--
Mr. Carney. And we have heard that from many people who
have come before our committee to do it--
Mr. Kelly. And--
Mr. Carney. --in a comprehensive way.
Mr. Kelly. And we always encounter the law of unintended
consequences. We think the mortgage finance system in America
is in need of a holistic reform. We are in favor of reforming
Fannie Mae and Freddie Mac. That should be done. We think that
is a paramount concern. But we, again, think FHA reform should
march along at the same time.
With that said, we are emphatic in our position that it is
essential that there be a government backstop, back in the
primary and secondary mortgage markets to ensure continued
access to credit for all homebuyers.
Mr. Carney. Thank you--please.
Mr. Thomas. Yes. The National Association of REALTORS has
had a White Paper out for about 3 years on this, and I think if
you read through it, you will see that we agree that there
still needs to be a Federal backstop, and we need to have
access to capital in any kind of a market.
But there are many things that need to be contemplated in a
reform of the GSEs and we are in support of that, and if you
read through our White Paper, you will see that.
Mr. Carney. Thank you very much, Mr. Stevens?
Mr. Stevens. The only thing I would say is, we have a White
Paper out also. All of our papers generally recommend the same
relatively similar construct. In fact, the BPC is in all that--
Mr. Carney. So why is it so hard for us?
Mr. Stevens. We believe strongly that we have to start
taking steps in that direction, having these institutions
perpetually on, in conservatorship is untenable. They are
controlling 70 percent of the liquidity in the housing finance
system today. The decisions they make are extraordinarily
impactful.
The housing finance, both in terms of the government's role
and the private sector's role and we really would encourage
steps now while interest rates remain low, while the market's
in recovery, to deal with the future of the state of these two
institutions in an organized way, because if we fail to do so,
down the road when rates rise and tinkered with guaranteed fees
for legislative purposes and otherwise we will be in a much
worse position.
So doing this now, we--in an organized way, is very
important.
Mr. Carney. I see my time has long expired. I appreciate
the chairman for his forbearance and I will look at your White
Papers, and I may call you and we can discuss it further. Thank
you very much, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman and I thank our
panelists. I think we have had a good discussion today, with a
lot of good ideas. I would just encourage the panel and the
groups that you recommend that we are--the next step in this
process is to begin to take some of these ideas and to put them
into some sort of an action plan, which would probably be some
legislative reform.
If you have any other ideas--we don't want to just limit it
to the ones that you had today. As this debate begins to
unfold, if you have thoughts and ideas, we certainly would
welcome them.
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, this hearing is adjourned.
[Whereupon, at 2:20 p.m., the hearing was adjourned.]
A P P E N D I X
April 10, 2013
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