[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF HOUSING IN
AMERICA: OVERSIGHT OF THE
FEDERAL HOUSING ADMINISTRATION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 11, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-3
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
ROBERT DOLD, Illinois
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
February 11, 2015............................................ 1
Appendix:
February 11, 2015............................................ 69
WITNESSES
Wednesday, February 11, 2015
Castro, Hon. Julian, Secretary, U.S. Department of Housing and
Urban Development.............................................. 5
APPENDIX
Prepared statements:
Castro, Hon. Julian.......................................... 70
Additional Material Submitted for the Record
Clay, Hon. Wm. Lacy:
Written statement of the Community Home Lenders Association
(CHLA)..................................................... 77
Written statement of various undersigned organizations....... 78
Written statement of the Mortgage Bankers Association (MBA).. 82
Written statement of the National Association of REALTORS... 85
Chart submitted by the Urban Institute....................... 89
Castro, Hon. Julian:
Written responses to questions for the record submitted by
Representatives Mulvaney, Murphy, and Stutzman............. 90
THE FUTURE OF HOUSING IN
AMERICA: OVERSIGHT OF THE
FEDERAL HOUSING ADMINISTRATION
----------
Wednesday, February 11, 2015
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:09 a.m., in
room HVC-210, Capitol Visitor Center, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, McHenry, Pearce, Westmoreland,
Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman,
Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus,
Messer, Schweikert, Dold, Guinta, Tipton, Williams, Poliquin,
Love, Hill; Waters, Maloney, Velazquez, Sherman, Meeks,
Capuano, Clay, Lynch, Green, Cleaver, Ellison, Perlmutter,
Himes, Carney, Sewell, Foster, Kildee, Delaney, Sinema, Beatty,
Heck, and Vargas.
Chairman Hensarling. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today, we welcome the Honorable Julian Castro, the
Secretary of the U.S. Department of Housing and Urban
Development. We welcome him for his first appearance before our
committee.
He is most famously known, of course, for being the brother
of our colleague Joaquin Castro, and as you may have figured
out, not just brother but twin brother.
We are speaking to Julian, I trust, as opposed to Joaquin.
It is often difficult to tell the difference.
Prior to his appointment last year to become Secretary,
Secretary Castro served as the mayor of San Antonio. Before
that, he served on its city council.
And so I must admit, on behalf of the several fellow Texans
here, Mr. Secretary, we take great pride in your appointment.
Secretary Castro holds a bachelor's degree from Stanford,
and a law degree from Harvard.
Again, it is a pleasure to welcome you before the
committee.
The purpose of this hearing is to examine the financial
health of the Federal Housing Administration. I would note for
Members that the Secretary has agreed to come back to the
committee, frankly, in a matter of weeks in order to testify on
the HUD portion of the President's budget submission. So
Members are certainly free to ask about that, but I am
informing Members that there will be another opportunity soon
to ask questions about the President's budget submission.
I also wish to note for Members that Secretary Castro--and
I want to thank our witness--has agreed to stay for as long as
Members are in the hearing room to ask questions. But I will
notify all Members that the Chair intends to call a recess at
approximately 1 p.m. and recess for approximately a half-hour.
Assuming there are still Members left in the queue, the
Secretary will return and we will continue to take Member
questions.
I now recognize myself for 3 minutes for an opening
statement.
Last year, as I think we all know, was the 50th anniversary
of the war on poverty, and 50 years later and $20 trillion
later, unfortunately, still 15 percent of our fellow Americans
remain at the poverty level. So it is hard to judge the war on
poverty as a success. And perhaps the bigger failure is not
living up to President Johnson's goal, ``not only to relieve
the symptoms of poverty but to cure it and, above all, to
prevent it.''
Now, arguably, one of those important weapons in the war on
poverty has been HUD, with its many programs and its many
employees. And this year is the 50th anniversary of HUD. So I
wish to announce to all Members that this committee will make
an extensive review and thorough examination of the successes
and failures of HUD, and not just measure the inputs but
measure the outputs, as well, and most importantly, again, to
paraphrase President Johnson, to find out how these programs
can be designed to lift people from lives of poverty, lives of
government dependency, and lift them to the dignity of work and
self-sufficiency.
I look forward to working with you, Mr. Secretary, on this
examination and exploring various avenues where we can work
together.
Now, to today's hearing, this is the second part examining
what appears to many to be an Administration's taxpayer-funded
race to the bottom to become the Nation's largest subprime
lender. Whether FHA or FHFA wins that contest, I know that the
marginal home buyer on the bubble and the poor, beleaguered
taxpayer will certainly be the big losers in this race.
We all recall the famous admonition from Spanish
philosopher George Santayana, who said, ``Those who cannot
remember the past are condemned to repeat it.'' History has
taught us that the root cause of the financial crisis was not
``deregulation'' but ``dumb regulation,'' in helping put people
into homes they could not afford to keep. And now, the FHA,
with exceedingly low downpayments and a recently announced
approximately 40 percent cut in its premiums, appears to be
doing that--all at a time when the FHA continues to violate
Federal law by keeping a woefully insufficient capital reserve
and right after receiving its first-ever taxpayer bailout. This
cannot be allowed to stand.
With respect to subprime lending, what consenting adults do
with their money is their business, but what the FHA does with
taxpayer money is our business. And do we really want the
Federal Government to be leading the charge into subprime
lending?
We have all heard from our constituents. I heard from a
gentleman named Walter in Mesquite: ``I am one of those who got
a house I never should have gotten. I could not afford to buy a
home, but no one told me that. Now I am behind and underwater
on a house I never should have bought.''
Again, the Administration should not be leading the way,
putting people like Walter into homes they cannot afford to
keep. We need a sustainable housing policy--sustainable for
homeowners, sustainable for taxpayers, and sustainable for our
economy. The best program of affordable housing is a growing
and healthy economy built from Main Street up, not built from
Washington down.
I now yield 3 minutes to the ranking member.
Ms. Waters. Thank you very much, Mr. Chairman.
And welcome, Secretary Castro.
Today, this committee will review the Federal Housing
Administration, an entity that has provided opportunity to over
34 million first-time, low-income home buyers over the past 80
years.
Secretary Castro, I am pleased this committee is holding
this hearing today because it gives me an opportunity to
publicly thank you and President Obama for responding to the
calls of a wide array of advocates, interest groups, lawmakers,
and civil rights organizations in acting to reduce FHA's annual
mortgage insurance premiums.
Groups ranging from the National Association of REALTORS
and the Mortgage Bankers Association to the NAACP and the
National Low Income Housing Coalition have joined with
lawmakers in both the House and the Senate, including myself
and Representative Capuano, to urge the important action you
took in January.
Your decision enjoys such broad support because providing
this much-needed mortgage relief will deliver critical
assistance to millions of families looking to purchase a home
and enable countless others to save millions of dollars in
mortgage payments over the years to come.
Secretary Castro, although today you will likely take a
fair amount of criticism from my colleagues on the other side
of the aisle for your decision, I would like to take a moment
to remind them that when the private sector virtually left our
struggling housing market during the worst of the crisis, the
FHA stepped up and provided the liquidity that kept it afloat.
Despite the steps toward recovery the economy has taken
since then, the housing sector continues to suffer from a tight
lending environment, and a strong FHA is still very necessary.
I would also note that FHA is far from bankrupt, holding
approximately $40 billion in reserves, continuing to generate
revenue, and taking critical steps to recover its capital
reserves, which are projected to show a positive balance in
2015.
So, Secretary Castro, I thank you for your efforts and
encourage you to continue working to expand access to credit to
more low- to moderate-income and minority families.
Thank you, and I yield back the balance of my time.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from Missouri, the
chairman of our Housing and Insurance Subcommittee, Mr.
Luetkemeyer, for 2 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And welcome, Mr. Secretary. We are glad to have you with us
today.
As Yogi Berra said, it is like deja vu all over again. This
committee has examined and sounded the alarm on FHA and called
for more responsible risk management for years, yet nothing
seems to change.
Mr. Secretary, you described the trajectory of FHA as
strong. I am afraid the enthusiasm you expressed isn't novel.
We have heard and continue to hear that the outlook is rosy,
that another bailout won't be needed. But I fear the trajectory
of FHA is a downward one.
If a private company operated the way FHA operates, it
would be shut down. FHA holds less than one-quarter of the
capital it is statutorily required to hold in its Mutual
Mortgage Insurance Fund (MMIF). The private industry has
capital requirements too, but unlike FHA, which has a cap
requirement of 2 percent, the requirement for private-sector
mortgage insurers is 4 percent and will soon be going to 8
percent. Much of the capital FHA does hold has come from a
taxpayer bailout and Justice Department settlements. I fear
that has created a false sense of security surrounding the
fiscal health of the agency.
In spite of all this, the agency has decided to lower
mortgage insurance premiums. This policy change squeezes what
could be a more robust private industry out of the market and
increases taxpayer exposure. FHA keeps trying to grow its way
out of the problem. That hasn't worked, and isn't going to work
this time. FHA needs to return to its original mission and put
in place sound tenets of underwriting to protect against future
taxpayer bailouts.
Mr. Secretary, it is your job to make sure we aren't
heading down the same dangerous road that we traveled during
the financial crisis and leading up to the taxpayer bailout of
FHA. Thank you for appearing today. I look forward to working
with you on this and many other important issues facing your
Department.
I yield back, Mr. Chairman.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Missouri, whom
I know still prides himself on having been from Texas once, the
ranking member of our Housing and Insurance Subcommittee, Mr.
Cleaver, for 2 minutes.
Mr. Cleaver. Thank you, Chairman Hensarling, Ranking Member
Waters, and members of the committee.
Good morning, Mr. Secretary. I do, as a person born and
raised and educated in Texas, take pride in your appearance and
your filling this role for us. I look forward to learning more
about the changes that are being implemented at the FHA and
your thoughts on the future of housing in our country.
The American Dream, to many Americans, is simple. Many tire
and toil just to have an opportunity to raise their family in a
place they call their very own home. Owning a home is a part of
the American Dream. It is a person's private piece of paradise.
The pride of homeownership often fosters not only a desire
to take care of one's personal property but also an effort to
protect the integrity and appearance of the surrounding
neighborhoods, as well. Affordable housing not only is a key
component to a vibrant, expanding, and prosperous community but
also has the opportunity to enhance someone's ``somebody-
ness.'' I speak experientially; I have seen it in my own life.
It is important to take a moment to highlight the important
role that the FHA plays in housing.
The FHA has historically played, and even today plays, a
significant role in aiding first-time home buyers and low-
income families with purchasing a home, a role that is crucial
as the housing market continues to heal. As have many in this
room today, I relied on the FHA to purchase my first home. And
when the economy crashed and the bottom fell out of the housing
market, the FHA played a significant role. What we have to do
is fill this gaping cavity left by private lenders who are not
able to lend.
And so I am looking forward, Mr. Secretary, to the
opportunity not only to hear what you are doing but to also be
of support in the role that FHA has played.
Thank you.
Chairman Hensarling. Mr. Secretary, again, welcome to the
committee. And you are now recognized for your testimony, sir.
STATEMENT OF THE HONORABLE JULIAN CASTRO, SECRETARY, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Secretary Castro. Chairman Hensarling, Ranking Member
Waters, and members of the committee, thank you for inviting me
to speak to you today about the Federal Housing
Administration's efforts to expand opportunities for working
families, to further strengthen the Mutual Mortgage Insurance
Fund, and to help continue the economic momentum our Nation is
building every day.
We gather this morning at an important time for our Nation:
2014 was the best year for job growth since the 1990s, and over
the last 59 months, businesses have created 11.8 million new
jobs, the longest streak of private-sector job growth on
record. And, in recent years, we have seen existing single-
family home sales rise by 50 percent. Housing starts have
doubled, and home equity grew by $4 trillion.
It is clear that housing is reemerging as an engine of
economic prosperity. The Federal Housing Administration has
been instrumental in this progress. It has provided access to
credit for generations of underserved borrowers and has been a
stabilizing force in the housing market.
Unfortunately, there are some who try to include FHA with
all the bad actors that caused the housing crisis. That
couldn't be more inaccurate. FHA never pushed the toxic
products that did so much damage. It didn't bring down the
market; it actually helped to save it. FHA both stepped in and
stepped up to fill the void created when private capital
retreated--work that independent economists say prevented a
further collapse in home prices.
And now that our Nation has turned the page on the crisis,
we have a responsibility to give even more Americans the chance
to participate in this growth.
One challenge that we must address is the high cost of
homeownership. FHA raised its annual mortgage insurance
premiums by 145 percent between 2010 and 2014. Think about what
this means for folks who got an FHA-backed loan last fiscal
year. FHA will collect an average of $17,000 in fees from them
over the life of that loan. And at the same time, for those who
may encounter hardship, we expect the average loss to be only
$4,700.
These numbers show that the costs facing families who want
to pursue the American Dream are too high and unnecessarily so.
And it simply isn't right to unduly burden borrowers in the
present because of the misbehavior of others in the past.
That is why, last month FHA took action to restore some
fairness in the market and to make homeownership more
affordable for working families.
FHA reduced annual mortgage insurance premiums by a modest
half a percentage point. We expect this to save more than 2
million households over $2 billion during the next 3 years.
That is money that can now be used on everything from a child's
education to retirement savings. It will also encourage more
than 250,000 new borrowers to enter the market, and create tens
of thousands of jobs.
FHA is in a strong position to take this modest measure. We
have taken aggressive action to improve our underwriting
standards, including introducing a credit-score floor,
requiring a higher downpayment from borrowers with a FICO score
under 580, and imposing higher minimum-net-worth requirements
for lenders. And FHA is back in the black as a result.
Our Mutual Mortgage Insurance Fund has a net worth of $4.8
billion, according to the independent actuary's most recent
annual report to Congress. It has grown more than $21 billion
in just 2 years. And even with this reduction, premiums are
still 50 percent higher than pre-crisis levels.
Furthermore, we expect the Fund's value to grow by at least
$7 billion annually over the next several years, with the
expectation that we will exceed the 2 percent ratio within 2
years. And our loans will still represent quality because our
underwriting standards ensure that we are lending to
responsible borrowers.
So our actions maintain a careful balance between
strengthening our Fund and advancing our mission. That is why
dozens of nonpartisan groups, from the National Association of
REALTORS to the National Community Reinvestment Coalition to
the Mortgage Bankers Association, are supporting our measures.
And we will continue to work with stakeholders to preserve
FHA's role as a champion for opportunity.
Over its 80-year history, FHA has helped 40 million
families become homeowners--more than half of all first-time
home buyers. In the States that this committee represents,
nearly 7 million households have FHA-insured loans. FHA, as
well as Ginnie Mae, also sparks robust economic activity, from
the construction site to the local hardware store to the
investment community. This work has played a critical role in
growing the American middle class.
With so many Americans working incredibly hard every single
day to advance their position in life just a little bit, the
question you and I must answer now is this: How can we continue
to strengthen the MMI Fund and ensure that everyone who is
responsible and ready and willing to own can achieve their
dreams in a growing housing market?
The good news is that HUD and this committee have a track
record. We have partnered for progress before, from adjusting
the Home Equity Conversion Mortgage (HECM) program to
eliminating seller-funded downpayment assistance--measures that
have strengthened the Fund. Thank you for your bipartisan
support on those measures.
And I look forward to continuing this work to ensure that
FHA provides a pathway to prosperity for the American people.
Opportunity is our mission, and responsibility is our approach.
And that is what this premium reduction supports.
Thank you.
[The prepared statement of Secretary Castro can be found on
page 70 of the appendix.]
Chairman Hensarling. Thank you, Mr. Secretary.
The Chair will now yield himself 5 minutes for questions.
Mr. Secretary, we have spoken about this privately, I sent
you a letter on this matter, about FHA lowering their premiums
by approximately 40 percent and its impact on the MMIF.
You agree, I assume, that the Housing Act, 12 U.S.C. 1711,
says that you shall--shall--keep a 2 percent capital reserve.
It is not ``may,'' it is not ``might,'' it is not ``hope.'' The
statute says ``shall.'' Correct? Do you agree with that?
Secretary Castro. I agree that is a requirement.
Chairman Hensarling. Okay.
Do you agree that currently--because in your testimony I
think you say, even with the one-off items of the settlement,
the taxpayer bailout, you are below the 2 percent statutory
level capital reserve. Is that correct?
Secretary Castro. We still are.
Chairman Hensarling. You are still below it.
So you agree, then, that HUD has been--and, again, you are
relatively new on the job. We have been here before. But you
agree HUD is in violation of the law?
Secretary Castro. We are not at the 2 percent ratio.
Chairman Hensarling. Okay. So, you said it was the law; you
said you are not at 2 percent. Does that mean you are in
violation of the law?
Secretary Castro. It means that we are not at the 2 percent
ratio. We are working--
Chairman Hensarling. I sense you do not care to state the
obvious, Mr. Secretary.
So I guess, here is my question. And with all due respect,
again, you are relatively new on the job, but many of us have
been here before, listening to your predecessors, listening to
Ms. Galante's predecessors saying, ``In no time flat, the
Mutual Mortgage Insurance Fund is going to recover.'' We get
all these rosy projections, and none of the projections have
ever proven accurate. So, we are concerned.
And I guess, after all these years, at what point does HUD
and FHA intend to follow the law? Is there some point?
Secretary Castro. I appreciate the question, Mr. Chairman.
I am actually here today with much better news than you all
have heard over the last couple of years, because we have grown
the Fund by--
Chairman Hensarling. I understand that, Mr. Secretary. The
question I have would be to understand when you expect to
comply with the law.
Secretary Castro. We are working very hard to reach the 2
percent--
Chairman Hensarling. Okay. So there is not--if you are
working very hard, you just cut off an income stream. You just
lowered premiums by 40 percent.
Secretary Castro. The fact is--
Chairman Hensarling. That is revenue that could have gone
back to number one, help compensate the taxpayers for their
bailout; and number two, help get you back to compliance with
the law.
Secretary Castro. The fact is that, over the last several
years since the housing crisis started and with the help at
different junctures of this committee, as I mentioned, several
safeguards have been put in place that have helped strengthen
the economic value of the Fund.
As I mentioned, for the first time ever, we put in place a
credit-score floor of 500. We required--
Chairman Hensarling. Mr. Secretary, that may be accurate,
but I am not quite sure it is relevant to the question.
I guess this is the fear many of us have, particularly with
members of the Obama Administration. We just had the IRS
Commissioner recently testify in front of the House Ways and
Means Committee that, ``Whenever we can, we follow the law.''
And my fear is that FHA and HUD is now adopting even a
lower standard, and that is: ``Whenever we want to, we follow
the law.'' Because, clearly--
Secretary Castro. Not at all. We are working toward getting
at the 2 percent. And, in fact, we have made tremendous
progress over these last couple of years. In fact, we are back
in the black. We have--
Chairman Hensarling. Okay. But is the MMIF stronger or
weaker with less revenue? Because you have just cut out a
revenue stream.
Secretary Castro. The Fund, as I mentioned, is on a strong
path to reaching 2 percent. We anticipate that within the next
2 years, it will reach 2 percent.
It is also important, Mr. Chairman, to note that there are
a series of safeguards that were put in place that have
strengthened the Fund. We have increased premiums 5 times.
However--
Chairman Hensarling. Okay. You also just lowered them 40
percent, Mr. Secretary.
And, again, I am trying to figure out the consequences.
This has been going on for years, predating you. And, for
example, I know that if private citizens in the United States--
in my district or in anybody else's district--violate the law,
there are repercussions.
HUD itself--I am looking at a chart here: ``Failure to
timely submit financial reports.'' I won't name the entity, but
you fined them $40,000. Here is another entity recently:
``Respondent committed knowing and material violations.'' They
were fined $12,000. Here is another $16,000 fine, an $11,000
fine, a $16,000 fine.
Who at HUD is going to take responsibility, who at the FHA
is going to take responsibility and comply with the law? It
appears there is a double standard, one for those who are ruled
and one for those who do the ruling.
So is anybody at HUD going to pay a fine for failure to
comply with the law?
Secretary Castro. All of us at HUD and FHA are working hard
to reach that 2 percent capital reserve ratio. And, in fact,
the proof is in the pudding. We are moving toward that 2
percent capital reserve ratio.
Chairman Hensarling. Again, with all due respect, Mr.
Secretary, we have heard that before. I have no doubt that you
are sincere and you believe what you say, but this committee
has not been fooled once, they have been fooled twice, three
times. I am not sure we have been fooled; we have been told
this. We have had this whispered into our ears before. It
hasn't proven true.
And, again, you are in violation of the law that is there
to protect taxpayers and homeowners. That has to stop.
I now yield 5 minutes to the ranking member.
Ms. Waters. Thank you very much, Mr. Castro. As I said in
my opening statement, we are very pleased about the actions
that you took.
And I would like to have you reiterate the amount of
reserves that you presently have. Is it $40 billion?
Secretary Castro. It is $46 billion.
Ms. Waters. Would you say that again?
Secretary Castro. $46 billion in cash reserves.
Ms. Waters. Thank you very much.
Again, I thank you for heeding my call and the call of
countless groups, consumer advocates, and other Members of
Congress, urging the FHA to take a close look at its premium
structure and to weigh the impact of such historically high
rates on affordability and access to credit.
Now that the FHA has taken the important step of reducing
its premiums by half a percent, I would like to focus on how
this decision will benefit first-time home buyers, low- and
moderate-income families, and minorities.
Secretary Castro, how much of a monetary difference do you
anticipate this premium reduction will have on these home
buyers?
Secretary Castro. We anticipate that the average FHA
borrower will save $900 annually because of this premium
reduction and that, over the next 2 years, 2 million borrowers
will save collectively about $2 billion. We also anticipate
that 250,000 new borrowers will be drawn to the market because
of the premium reduction.
Ms. Waters. That is substantial.
Some are concerned that the premium reduction will
jeopardize the Mutual Mortgage Insurance Fund and put taxpayers
at risk.
Can you explain how the premium reductions will actually
benefit the Mutual Mortgage Insurance Fund by increasing volume
and ensuring long-term stability?
Secretary Castro. We do anticipate an increase in volume.
That is accurate. And as I mentioned to the chairman, as well,
the premium increases that we have seen over the last few
years--there have been five of them--have been part of a series
of safeguards of measures that we took to improve the health of
the Fund.
I mentioned the credit-score floor on the borrowers' side
and the 10 percent downpayment that is now required on the
borrowers' side. This committee worked on the elimination of
seller-assisted downpayments, which also has helped improve the
health of the Fund.
On the lender side, we actually have made our net-worth
requirements for lenders more stringent so that our lenders are
more sturdy. We have thrown more than 300 lenders off of the
FHA rolls because they didn't meet our standards.
So, even with this premium reduction, we are still going to
have premiums at 50 percent higher than they were when we
started the housing crisis, and we have each of these strong
safeguards also in place to ensure that the health of the Fund
continues. We anticipate that the Fund will grow in net value
by $7 billion each year over the next several years.
Ms. Waters. Many groups have applauded your decision to
reduce mortgage insurance premiums because it will expand
access to credit for creditworthy buyers who are not currently
being served by the conventional market.
Can you describe for us the impact a premium reduction will
have and who it will primarily benefit?
Secretary Castro. This is going to benefit all future FHA
borrowers and folks who refinance through FHA. It is going to
benefit hardworking families in the United States.
Historically, the FHA has served folks of modest means who are
hardworking, who want to be able to own a home, who are
responsible. These are the folks--everyday Americans who are
working hard, who are trying to have a piece of the American
Dream and want to do it responsibly--who are going to benefit
by this premium reduction and making it more affordable for
them to own a home.
And we believe that we can do both, strengthen the health
of the Fund and also continue to fulfill the historic mission
of FHA to provide everyday, hardworking Americans, middle-class
families, folks from different walks of life, the opportunity
to access credit so that they can own a home.
Ms. Waters. According to 2013 HMDA data, FHA accounted for
46.3 percent of home purchases by African-American households,
47.9 of purchases by Hispanic households, and minority buyers
continued to represent nearly one-third of FHA-insured first-
time home buyers.
Can you elaborate on the importance of FHA for minority
home buyers?
Secretary Castro. You mentioned the huge impact that FHA
has had in terms of first-time home buyers. I mentioned in my
opening remarks that about 50 percent of first-time home buyers
historically have come through FHA. That is particularly true
in communities of color, and that continues to be the case.
And so, across-the-board in communities of color, folks of
modest means who are working hard and who are responsible--and
I really need to stress that point because, again, FHA was not
part of the problem. It did not push the toxic products. People
think of that--those are other entities. FHA has always had
sound underwriting, and we have made that even stronger over
the last couple of years so that we can serve what has been a
unique but responsible market of borrowers for the FHA.
Ms. Waters. Thank you.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Missouri, Mr. Luetkemeyer, chairman of our Housing and
Insurance Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Secretary Castro, as a former bank examiner, one of the
things that we would do when we went into a bank was look at
the capital account, look at its activities, and if it was
short on capital, we would look at its income stream and we
would find ways to encourage the bank to increase its income,
cut its expenses, reduce its liabilities. And it seems as
though you are doing just the opposite of those things here
with what you are doing.
For instance, what is you past-due ratio right now with
your loan portfolio?
Secretary Castro. I would be glad to get you that number. I
don't have that number in front of me, but--
Mr. Luetkemeyer. Mr. Castro, you are telling me that as
Secretary of FHA, you don't know the past-due figure of your
own book of business today?
Secretary Castro. I would be glad to get you that figure.
Mr. Luetkemeyer. Oh, my gosh. How can you tell me, then,
anything with confidence today? Anything you say today with
regards to income for your agency can be taken with a grain of
salt.
Secretary Castro. The fact is that our books of business
from 2010 on are some of the strongest books of businesses that
we have had in FHA history. In fact--
Mr. Luetkemeyer. Mr. Castro, if you look at your income
stream and you take out the $1.7 billion that the taxpayers--
who are the ultimate backstop on your agency, are they not?
Secretary Castro. Yes. Actually, that was the first time in
FHA's history--
Mr. Luetkemeyer. So the ultimate backstop, then, for your
agency are the taxpayers, correct?
Secretary Castro. Again, FHA today has $46 billion--
Mr. Luetkemeyer. Who paid the last bill, Mr. Secretary? The
last bill was paid by the taxpayers. So they are the ultimate
backstop. You can't argue that.
And then we have a whole lot of other income to your
agency. What is the net income this past year for your agency?
And when I say ``net income,'' take out the settlements. What
income did you actually--
Secretary Castro. And we provided this information to the
chairman. If you take out the settlements of $2.2 billion and
the mandatory appropriation of $1.7 billion, that was $3.9
billion that was backed out. Even with that, I may note, first
of all, it is still a positive capital reserve ratio, but,
secondly--
Mr. Luetkemeyer. All right. What is the net figure? What is
the net income figure for last year?
Secretary Castro. To go back to your question before, our
serious delinquency rate this year is 7 percent.
Mr. Luetkemeyer. Seven percent. Okay.
Now, next question: What is your net income for 2014? Do
you know yet?
Secretary Castro. I can get you that figure momentarily
here.
Mr. Luetkemeyer. Oh, my gosh. Okay. We have an income
figure that we don't know for sure. And so how do we know, by
cutting your revenue source 40 percent, that you are going to
even be in the black this next year when you have a 7 percent
past-due ratio?
What is the normal default rate on your past-dues? Do you
know that?
Secretary Castro. In fact, we have improved our default
rates significantly--
Mr. Luetkemeyer. Do you know what your default--do you know
what the percentage number is?
Secretary Castro. The default rate today has fallen
significantly. It is less than--
Mr. Luetkemeyer. Do you know what the default rate is? I
know the numbers in your testimony; I saw them. But it is a
percentage of the figure that you gave us. But I want to know
what the figure--
Secretary Castro. I want to make sure that I am accurate,
and so we will get you that figure.
Mr. Luetkemeyer. Ballpark figure. We are just talking
ballpark.
Secretary Castro. It is less than--
Mr. Luetkemeyer. One percent, 2 percent, 10 percent of your
past-dues are going to default totally?
Secretary Castro. It is 7.2--it is less than 10 percent.
Mr. Luetkemeyer. Okay. So, 10 percent of 7 percent, you are
looking at seven-tenths of a percent of your portfolio is going
to go south on you, roughly. So you are going to seven-tenths
of a percent of your total portfolio.
If you do that, your net income, which we don't have a clue
what it is today, isn't going to cover your losses if you take
a 40 percent cut on your income. I'm sorry, it just doesn't
compute.
Secretary Castro. I disagree.
And I would also note that these projections are not the
projections of FHA or HUD that are made on an annual basis to
determine our capital-reserve ratio and project out where its
headed. Those are projections--
Mr. Luetkemeyer. Mr. Castro, I am asking very simple
questions here. If our bankers ever came in to examine the HUD,
you would be on the problem-shop list, if not closed, tomorrow.
You would be gone. Or you would have to recapitalize. This is
totally unacceptable.
A question for you with regards to this. You don't price
risk like a normal private-sector mortgage insurance company
does. You just have a flat fee.
And I notice that--here it is. I saw a graph the other day
of the private-sector mortgage insurance folks. And anything
under--on a $250,000 home, a 30-year mortgage, 3\1/2\ percent
past-due rate, anything under 680, they are upsidedown on this.
And you are competing with them for that business. So,
basically, you are taking on--if they don't compete for the
business, you are taking on the most risky part of the whole
portfolio. Because they can't afford to insure it at that rate
for which you are insuring it.
Secretary Castro. I want to make sure that we are accurate,
Congressman. Our net income in 2014 was approximately $8
billion.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets and Government
Sponsored Enterprises Subcommittee.
Mrs. Maloney. Thank you very much, Secretary Castro, for
joining us today.
I understand that there has been some concern about FHA's
legacy reverse mortgage book, but I don't think that should
prevent FHA from continuing to offer reverse mortgages. They
are a valuable product in the right circumstances, particularly
for seniors.
In fact, one area in which I think FHA could improve its
reserve mortgage program is by extending it to owners of
housing co-ops. This is an extremely important issue to the
City of New York, where co-ops account for a large portion of
the housing, especially for seniors. Most New Yorkers live
vertically, not horizontally, and a large majority of them are
in co-ops.
And my question is, will you consider allowing owners of
housing co-ops to participate in FHA's reverse mortgage
program?
Secretary Castro. Thank you very much for the question.
And, I want to commend the work of the committee in addressing
issues with regard to our reverse mortgage portfolio. As folks
know, that has been a challenge for FHA.
And I am certainly willing to follow up with you,
Congresswoman, and your staff and have a dialogue on that.
Mrs. Maloney. Okay. Thank you. And we will.
Despite FHA's 50-basis-point premium reduction, FHA's
premiums are actually still very high by historical standards.
And I know there has been a push by housing advocates and those
wanting housing to be affordable so that we can continue the
American Dream of homeownership for the middle class and most
Americans.
In fact, many in the industry had pushed for an even larger
reduction. How did you settle on the half-percentage-point
reduction? And how did you arrive at that number?
Secretary Castro. There has been a tremendous amount of
work over the last several years, and this committee has been a
part of that work, to improve the health of the Mutual Mortgage
Insurance Fund, including putting in several of the safeguards
that I mentioned on the borrower side, and the lender side. And
because of that, we have seen the results. We have seen
delinquencies go down by 27 percent, serious delinquencies,
since 2013. We have seen our recovery rates go up by 62
percent; foreclosure starts, down 61 percent.
So the first concern was ensuring that we will have
continued strengthening of the Mutual Mortgage Insurance Fund.
At the same time, FHA has the historic mission of providing
access to credit for everyday, hardworking Americans of modest
means who are trying to have a part of the American Dream and
own a home.
And we believe that this achieves that strong balance of
continuing to strengthen the Fund. Premiums are still going to
be 50 percent higher than they were at the beginning of the
housing crisis. All of the other safeguards are still in place.
We see the results of that. And so we believe it is the right
time to afford that opportunity.
I will also say, as I mentioned in my opening remarks, we
see that for our 2014 book of business it is one of the two
most profitable years for FHA in its history, and we are
collecting $17,000 from these folks who are borrowing through
FHA. And, at the same time, we calculate our risk at $4,700.
We believe that this 50-basis-point reduction strikes a
good balance between strengthening the Fund and meeting our
mission.
Mrs. Maloney. Okay. Congratulations.
Some of my colleagues have come forward with their
questioning about lowering the premiums and have indicated that
we should instead charge risk-based premiums which would
reflect the likelihood that a borrower would default.
But in your testimony, you said that the credit profile of
FHA borrowers has improved substantially with new standards. So
using a risk-based approach, this should lead FHA to reduce its
insurance premiums since these borrowers are less likely to
default. And that is exactly what you did last month, to
increase affordability for many Americans.
My question is, in your opinion, after the 50-basis-point
cut in premiums, is the FHA charging enough in premiums to
compensate for the risk that these new borrowers pose?
Secretary Castro. Yes, we are. And we will continue to do
so.
The average credit score for the FHA borrower last year was
680, which is a very high credit score historically for FHA.
And, as I mentioned, our net income was $8 billion in 2014. We
are projected to continue to have profitable years in the next
few years to come, in fact, to see the Mutual Mortgage
Insurance Fund grow in net value by at least $7 billion a year
over the next several years.
So we are, I think, in the right spot.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, the chairman of our Capital Markets and GSEs
Subcommittee.
Mr. Garrett. Thank you, Mr. Chairman.
And thank you, Mr. Secretary.
I want to talk to you about a slightly different topic--one
where we may have some agreement on both sides of the aisle--
which is predatory lending and the horrendous problems that it
caused.
Back in August 2012, a White Paper out of the Center for
American Progress talked about this. Julia Gordon decried the
practice of loan originators who ``steered borrowers toward
risky subprime loans, citing predatory pricing gimmicks,
encouraged borrowers to borrow far more than they could
manage.'' I also know that such loans, as you may imagine,
tended to default at a significantly higher rate than
conventional mortgages.
So, as I say, I think this is something that you and I can
agree with her on and decry that practice. As a matter of
fact--I see you nodding--over at the CFPB, Director Cordray has
made it a priority of his to look into predatory lending. I
suppose you agree that is an appropriate role for Director
Cordray to do.
With that all being said, what should we make, then, of the
FHA? The FHA engages in each one of those practices that Ms.
Gordon talked about. They employ various pricing gimmicks and
strategies, many of which you just talked about, such as the
exceedingly low downpayments you have talked about; low credit
scores that you just talked about; inadequate up-front pricing,
which has been talked about in the past; and high maximum
dollar value loan limits, which has also just been talked
about. These are all things that you are advocating at the FHA.
And I guess it would be okay if, at the end of the day, the
results were positive. But the numbers that we see are a
default rate at the FHA nearly 150 percent higher than prime
lending.
So isn't it true, isn't it fair to say that all of what Ms.
Gordon and American Progress, all of what you and I just agreed
to are the criteria as to what Director Cordray should be
looking into are actually the practices right now of the FHA?
Predatory lending.
Secretary Castro. I appreciate the question.
Let me say, Congressman, that there is no doubt that the
FHA has played a unique role in the landscape of lending, and
that role has been a very positive one--
Mr. Garrett. Would you agree that predatory lending leads
to devastating impacts upon families? Would you agree with
that?
Secretary Castro. I agree with that. I don't agree that FHA
is--
Mr. Garrett. Which one of these things that I just listed--
and I am just basically quoting from what you just spoke about
for the last half-hour--are you not doing? Are you not engaging
in low credit scores? Are you not engaging in lower
downpayments? Are you not engaging in lower premiums?
These are all things you just spoke about for the last
half-hour. These are all things that the Center for American
Progress identified for other lenders as being predatory
lending. So why is it okay for you to engage in predatory
lending but not for the other institutions that Richard Cordray
at the CFPB is examining?
Secretary Castro. FHA has done that responsibly, with
strong underwriting--
Mr. Garrett. Would you say it is responsible--if an
individual has a loan with a local institution and it is
predatory lending and they are now out of their home,
devastated because of it, do they care whether that loan was
done responsibly by you or irresponsibly by some other
institution? Either way, they are out on the street. Do they
care that you were responsible or, as in your earlier words,
``working hard at it?'' Either way, this family has been
devastated by your conduct, haven't they?
Secretary Castro. Again, FHA did not push the toxic
products, the no-doc loans, the no income, no job, and no
assets (NINJA) loans--
Mr. Garrett. I am not talking about that. Actually, that is
not true.
Secretary Castro. --the kinds of products that I think
folks associate with the housing crisis.
In fact, you mentioned the downpayments. That has been in
place for 50 years at FHA. For 50 years, it has offered middle-
class families the opportunity--
Mr. Garrett. But now that we see that there is a problem,
now that we see that you are not following the law, now that we
see that the American taxpayer has to bail out the FHA, we see
that the FHA is not rectifying the situation. They are doubling
down.
One of the ways that you are doubling down is by the
lowering of the premiums. And to quote you, you said this will
save $900 per year. That is $75 per month. Other actuaries have
looked at it and said it is only $25, but split the difference,
$50.
Do you look at an individual family and--basically, your
new method is trying to entice people to come to an FHA loan to
save the 25 or 50 bucks? What happens when that family has a
loss--a furnace that breaks, some other hazard problems in the
house, what have you? That is when the family then will not be
able to pay their mortgage again, and they lose and they are
out on the street.
Don't you care about those people? Are you so inclined to
write more loans that you are just trying to entice them for 20
or 30 bucks to get into a house that they can't afford? Don't
you care about these people, that they are getting in over
their head once again? This is what brought us to this crisis
in the first place, and you are going down the exact same road.
Secretary Castro. Well--
Mr. Garrett. It is amazing that you come here and you
basically want to engage in predatory lending and entice people
to go into these things and not show any care for the people
and the devastation it may do to these families.
Secretary Castro. Not at all. I assume intelligence in the
American people and that, with regard to FHA-insured loans,
that we have always had strong underwriting.
I would also note that the premium reduction is not
changing who actually qualifies for an FHA-insured loan. That
is not what we are talking about today. We are not talking
about changing who qualifies for a loan. It is simply making it
more affordable for hardworking Americans--
Mr. Garrett. But it is used to entice them to take the
loans.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Congratulations, Mr. Castro, and welcome to this committee.
By making mortgage payments more affordable, FHA's
reduction in insurance premiums will greatly help first-time
home buyers in high-cost areas such as Brooklyn, where the
median home price is $570,000.
Beyond helping creditworthy borrowers access mortgage
credit, please describe the economic impact FHA expects the
premium reduction to have on high-cost areas.
Secretary Castro. I appreciate the question, Congresswoman.
This is a premium reduction that is going to have a
positive impact across-the-board. Of course, that is also true
in high-cost areas. As I mentioned earlier, we expect that for
the average borrower, this is going to save about $900 per
year. So it is making it more affordable for middle-class
families.
What we see out there is folks who are working hard, who
are responsible, they are ready to own a home, but it often is
difficult for them to get 20 percent as a downpayment. And that
is where, historically, FHA has stepped in.
Ms. Velazquez. What will be some of the economic ripple
effects of such action? Will it create jobs? More construction?
Secretary Castro. There was one analysis recently that
suggested that this premium reduction will support about
140,000 jobs in the United States.
Ms. Velazquez. FHA's move to lower interest premiums will
help minority and first-time home buyers, for whom the FHA
single-family insurance program is a primary source of mortgage
credit. To further help these borrowers, FHA has indicated that
it plans to increase awareness of its housing counseling
programs in Fiscal Year 2016.
How, specifically, does FHA plan to conduct outreach around
housing counseling? And do you have any measurable goals being
set in respect to this?
Secretary Castro. Thank you for that question.
In fact, housing counseling has been, we believe, one of
the most impactful tools in empowering borrowers to make smart
decisions and, also, on the credit-risk side, reducing those
borrowers as a credit risk. And so HUD fully supports ample
housing counseling efforts. In fact, in the Fiscal Year 2016
budget, we have increased our ask by 28 percent in terms of
funding for housing counseling.
And I would be glad to follow up with you and your staff
about--
Ms. Velazquez. Very good.
Secretary Castro. --the robust program that we have out
there on housing counseling.
Ms. Velazquez. Thank you.
As we all know, homes in Hispanic and African-American
neighborhoods disproportionately lost value during the
recession, and the housing recovery in this area is still
lagging.
Beyond the recent reduction in FHA insurance premiums, what
additional steps will FHA take to ensure that Hispanic and
African-American borrowers are not left behind in the housing
recovery?
Secretary Castro. Of course, as I mentioned earlier,
communities of color have long been a significant portion of
FHA business. In fact, as Ranking Member Waters mentioned,
today, nearly half of African-American and Hispanic borrowers
go through an FHA-insured product.
So we believe that there has been an ample track record of
success of outreach. Of course, we are always sensitive to
that, and we believe communities of color and the mainstream
community, that folks who are hardworking, folks of modest
means but who are responsible, that they ought to have the
chance, through FHA, to access credit so that they can purchase
a home.
And the results of the hard work that have been done over
these last few years, including work by this committee, have
improved FHA's standing. The fact that FHA is stronger today
because of these safeguards that have been put in place means
that we can do more responsible loans to communities of color
and help to lift them up.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The gentlewoman yields back.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, chairman of our Financial Institutions
Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Secretary, thank you for being here this morning.
I want to go back to some of the comments from Chairman
Luetkemeyer, and probably Chairman Hensarling brought this up,
as well.
But the current status of the Fund is that it doesn't meet
the minimum requirement. In fact, it hasn't met the minimum
requirement for a very long time. And we have had some of your
predecessors come in with some very interesting predictions of
when the Fund would be back into the statutory requirement. And
since I have been on this committee, that has obviously not
happened.
So when we come in and we say in just 2 years or 4 years
that you will be able to get to 2 percent, that is not
necessarily--it is kind of hard for me to actually believe
that.
But one of the issues that comes up that bothers me a
little bit is that you are currently not meeting the minimum
standard, and now you are proposing to reduce the premium by 50
basis points.
The question I have is, when you decided to do that, did
the independent actuary know that prior to making their report
in November, or did you decide to do that after that report had
been issued?
Secretary Castro. This was a decision that was made after
the annual report was released so that we could have the
benefit of understanding the stronger standing of the Mutual
Mortgage Insurance Fund.
Mr. Neugebauer. So I am just wondering what the independent
actuary would have said if they had known that you were going
to reduce your premium by 50 basis points.
Did anybody get back with those folks and say, hey, we are
thinking about lowering the premium by 50 basis points, how
would this impact our ability to reach the goal within the
period that you are projecting?
Secretary Castro. First, again, this was a decision that
was made after the annual report--
Mr. Neugebauer. I know, but when you are making decisions,
it is good to make decisions with good information. And so my
question to you is, did anybody at FHA call the independent
actuary and ask them, hey, what if we did this, how would that
impact the Fund?
Secretary Castro. I don't want to make a categorical
statement on that. However, I do not--
Mr. Neugebauer. It is either, yes, you did, or no, you
didn't. I don't know that it is--
Secretary Castro. That is an independent actuary, and so
that is not someone on FHA's staff--
Mr. Neugebauer. I know, but--
Secretary Castro. --that regularly consults, in terms of
coming up with numbers.
Mr. Neugebauer. But you rely on that information to make
your decisions, right?
Secretary Castro. And we look forward to getting the 2015
actuarial report, as well, that will give us, I believe,
another strong measure on the progress of the Mutual Mortgage
Insurance Fund.
Mr. Neugebauer. Mr. Secretary, you have a book of business
that you say is seriously delinquent, 7 percent. I understand
that the percent of loans past due at FHA is actually 14
percent.
And if the FHA is going to be, as you say in your
testimony, the buffer for the marketplace, the countercyclical
safety net--and so you have a 14 percent delinquency, you have
a 7 percent serious delinquency, and you just lowered your
premium by 40 percent.
I guess what all of us are trying to understand is, if that
was any other financial institution in this country, you would
be under regulatory supervision. Nobody else gets to operate
that way.
And, as many of my colleagues on both sides of the aisle
have said, if FHA is going to be that buffer, it has to be a
strong financial institution. And the independent review also
said that you needed $85 billion to survive another major
housing downturn like the one we experienced in 2008, and you
are nowhere near that.
So I guess the question is, why didn't you talk to the
people who did that review to see how that might impact them?
Because that is a fairly major business decision.
Secretary Castro. Again, the FHA staff conducted its
analysis in terms of receiving the 2014 annual review, and then
projecting what the impact of the mortgage insurance premium
reduction would be. We also look forward to getting the 2015
annual review from the independent actuary. We have seen
serious delinquencies drop by 27 percent since 2013, and 2013
and 2014 have been the most profitable years for the FHA. So we
are, the FHA and its Mutual Mortgage Insurance Fund is on a
much stronger path to reaching 2 percent than it has been
before.
Mr. Neugebauer. I assume my time has expired.
Chairman Hensarling. The Chair will recognize the gentleman
from California, Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman. I wanted to commend
you, Mr. Secretary, for running the FHA program so well that
you are able to reduce the premiums, help homeowners, and still
be actuarially sound. If you were running the program poorly,
taking bad risks, your actuarially calculated necessary premium
would be much higher. It is my understanding that even at this
reduced premium, you are still going to be making what, for
want of a better word, is a profit, and building your reserves
over 2015. Is that correct?
Secretary Castro. That is correct.
Mr. Sherman. And I point out that some have cited the
statute and said, well, you are supposed to be at 2 percent.
You are not at 2 percent. You are getting to 2 percent. And to
think that you have to get to 2 percent immediately would--you
could try to get there in a month by raising your premium to 28
percent instead of point whatever percent, and then nobody--you
would kill the program. It is physically impossible for you to
get to a 2 percent reserve immediately even though the statute,
if you read it absolutely literally, would tell you that is
what you should do, and so you are doing the only thing you can
do, which is set a premium that generates a profit, and builds
you toward a 2 percent reserve of the future. Is that correct?
Secretary Castro. That is what we are doing.
Mr. Sherman. Good. My first home was a condo. Condos are
often the first home for a lot of first-time home buyers. Yet,
purchasing a condominium with FHA mortgage insurance is
sometimes difficult due to requirements that FHA has in place.
I understand that FHA is reforming these policies. I would like
to know when the new rules will be out, and whether you are
confident that they will make it easier for that first-time
home buyer to buy a condominium.
Secretary Castro. Thank you very much, Congressman. Yes, we
have certainly heard the concerns on condo ownership, and it is
something that our staff has been working on and a process that
we are going through. I would be glad to follow up with you on
a more exact date within 2015 when we anticipate getting that
work done.
Mr. Sherman. And I would also point out that as we build
communities, because you are not just ``H,'' you are also
``UD,'' urban development, as we build communities, if we get
people in the condos, that is more transit-friendly-type of
development. It is less energy, less water, which is very
important in not only your State, but particularly mine. And so
it makes a lot of sense to allow people, particularly first-
time home buyers, to buy condominiums.
Another thing that would make some sense is everything we
can do to wean the world and the United States off of oil, and
create energy efficiency. A number of my State is going to have
its EV-ready standards for electric vehicles just to say to
those who are building new homes, put the wiring there just in
case. Just run the conduit so that they can recharge their
vehicles. I believe it is Boulder, Colorado. Some other
jurisdictions say, run some conduit up to the roof so that if
they are going to put in solar panels--I wonder what you can do
either by who FHA decides to grant insurance to or other
policies in your Department, to have new homes spend the very
small amount necessary just to have the wiring get to the roof
and the garage.
Secretary Castro. I appreciate the opportunity to discuss
this a little bit. In fact, FHA, for some time now, has offered
several products for folks who are interested in greening up
their homes, or having an energy-efficient home in the first
place, including capacity for electric vehicles, as you
mentioned, and solar panels. The 203k program is a good example
of that, and we can get you and your staff more information on
the menu of items that the FHA offers.
Mr. Sherman. We look forward to working with you on that,
but I am talking about just kind of what I would call light
green lines. The whole home isn't green. It is just green-ready
at a very low cost to have the--it is a lot easier to put the
wiring in before you put the walls in, or before you complete
the structure.
So I look forward to working with you on that, and I yield
back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman, and thank you,
Secretary Castro. I have a lot of ground that I want to cover.
Just to tell you very briefly, I come from western Michigan
which is a mix of sort of gentrified suburban and urban, and
very, very rural. In fact, one of the 10 poorest counties in
the Nation resides in my district. And I am concerned about
buyers, not the builders' organizations, not the REALTORS'
organizations, and in fact, I am a former REALTOR, and I am
still part of homebuilders' organizations locally.
I am not concerned about the lenders. I am not concerned
about the title companies or the attorneys, and certainly not
the guarantors such as FHA because all of those people are
simply vehicles for the families who are trying to realize a
dream. And I care about them. I care about those buyers who are
in there. I was actively involved in real estate in the late
1980s through the late 1990s, and saw 20 percent down became 10
percent down, became 5 percent down, became 0 percent down, and
it is indelibly marked in my brain.
At the first closing I went to--and we are not talking
about big massive houses--they slid a check across to the
seller and to the buyer and it was a 120 percent loan to value.
And I cannot allow, with all that is in my power, us to slide
back in there. I wanted people in homes. Your historical role
has been to help those low- and middle-income families. I
understand it is maybe not statutorily what you are supposed to
do, and I think with a $600,000-and-some-odd loan to value, it
is hard to argue that is low- and moderate-income. But I want
people in homes because it adds to stability if they can keep
their home.
And probably the most satisfying moment I ever had in my
real estate career was when I got Jill--Jill had become a
friend of the family, and Jill's husband had left her and she
was in a mobile home--into her first home with her two kids.
Jill, and frankly, me, were crying at the closing because of
what this meant for her and for her kids. And I had to sit
there, and as her kids are kind of like what is going on with
mom, right, I had to explain to her why that was so important
for that. And the downturn ruined people of all creeds, color,
and frankly, economic status. We can't repeat this.
And it is not about your balance sheet, frankly. It is not
about the bank's balance sheet. It is not about the business
for the REALTORS and for the developers and the builders. It
is for their sakes that people are trying to get in there. Now,
you have stated the premiums are too high. But in April of
2014, in a Washington Post interview, FHA Commissioner Carol
Galante said, ``I don't think that we have reached a tipping
point though, and I can clearly say we are not going to
continue to increase premiums. But it is also not a time to do
a wholesale rollback of the premiums. FHA's financial condition
is not where it should yet be.''
I am concerned that there is kind of a two-tiered system
here as well. FHA is exempt from the qualified mortgage rule,
the QM rule that the CFPB has been putting out. And if it is
good enough for our community banks and our credit unions, why
would it not be good enough for FHA? The most basic thing that
I learned when I got my REALTOR'S license is that people
aren't brown, they are not yellow, they are not white, they are
not red; they are green. People are green. They can either
afford it, or they can't afford it. All right? And I am afraid
that the actions that FHA has put forward are sending us back
on a path where people are going to be potentially ruined.
I would like to hear from you in the remaining few moments
here why you believe that this is the right direction to go,
and why not serving those low- and moderate-income families,
why that can't be done in the private sector when you have
consumed so much of that marketplace, and are exempt from some
of the rules, and as my friend Blaine Luetkemeyer has pointed
out, exempt from any of the sort of regulatory boundaries that
are put in place for our credit unions and our community banks
that service these people?
Secretary Castro. You and I agree that we need more stories
like Jill's story of folks who are hardworking and able to
access credit so that they can afford to own a home. And the
fact is that we have taken, in addition to increasing premiums
5 times over these last several years, several measures to
ensure that the Mutual Mortgage Insurance Fund is healthy. We
never had the kind of lesser underwriting standards that a lot
of the private sector had. FHA has always had stronger
underwriting standards. We have strengthened those even more by
creating that credit score floor of 500, requiring 10 percent
down for the riskiest borrowers in our portfolio, those with
less than a 580 credit score. We have improved lenders that we
work with by requiring a higher net worth there. So all of that
adds up to the place we are today where we can say, look, 3
years ago we started hearings on this issue. And we are in a
much stronger spot, and on a strong path to reach that 2
percent capital reserve ratio.
The question then becomes, how do we strike a strong
balance between continuing to strengthen that Fund, and also
affording opportunity for folks who are hardworking to be able
to access credit. Now remember, we are not changing any of the
policies on who can access that credit. This is simply a
reduction in the cost to those borrowers. And the fact is that
by reducing this cost, that we are going to--
Mr. Huizenga. That is not going to be the reality of it,
and my time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman, and thank you, Mr.
Secretary. Let me just go back. FHA has been in existence since
1934, is that correct?
Mr. Cordray. That is right.
Mr. Meeks. And basically what FHA has done is help promote
long-term stability in the housing market over that whole
period of time, is that not correct?
Secretary Castro. That is true.
Mr. Meeks. And in 2008 when there were no-doc loans that
were going out, when there was zero down, when there was no
verification for anything, just giving folks--was FHA the one
that was giving out those kinds of loans, or encouraging those
to be utilized? Was that FHA?
Secretary Castro. FHA never pushed the toxic products. When
folks think about the no-doc loans, the NINJA loans, that was
not FHA. FHA has always had stronger, full underwriting, and we
have strengthened that even further in the last few years.
Mr. Meeks. And so in one extent, as a result of the bad
acts of some who are still in business, and some who still want
people to come to them for mortgages that we are not talking
about them now, but you were victimized and because of the
financial crisis, and the bad acts of others, is what caused
you for the first time in the history of FHA when we were in
the worst recession of our country since the Great Depression
to fall under that 2 percent, is that correct?
Secretary Castro. We did require a mandatory appropriation
in 2013 as a result of going through the worst housing crisis
that we have seen in quite a while.
Mr. Meeks. And let's look at who your customers are. Are
they taxpayers?
Secretary Castro. Sure, our customers are borrowers.
Mr. Meeks. And so, these are taxpayers who are concerned
about everything and would like to benefit. In fact, I think on
a bipartisan basis, we have all been talking about the one area
of individuals who have been left out of the recovery. It has
not been the banks. It has not been the corporate America. It
has not been--you look at the stocks. All I can see it, it has
been who? The middle class. Is that not correct?
Secretary Castro. It has been very difficult for middle-
class Americans to be able to access credit. That is true.
Mr. Meeks. And don't you think that the middle class of
this country--many of them are renters are they not, currently?
Secretary Castro. A lot more of them are renting today
because they can't access credit or it is not affordable.
Mr. Meeks. And in fact, those middle-class people that we
say that we want to help, that we say have been locked out of
this economy, there was an article in Forbes that found that
over a quarter million renters had been priced out of the
housing market because of the high FHA premiums. Is that
correct?
Secretary Castro. Yes, there was one analysis, I believe,
by the National Association of REALTORS that said that in
2013, there were 400,000 folks who were priced out because of
high FHA premiums.
Mr. Meeks. And those are all potential middle-class U.S.
taxpayers who could be your customers, and that would create a
greater opportunity for you to get the revenue back in so that
you can get back to that 2 percent. Can you do it without them?
Secretary Castro. We can't do it without the borrowers, and
we are on a strong path to getting there.
Mr. Meeks. I know when I go shopping on Christmas, a lot of
these businesses have reduced prices. Why? Because they are
trying to entice me to get into their store so that I can buy
from them because they look at Christmastime and those times as
what, the largest opportunity to create income for their
businesses so they can survive through the year. So what do
they do? They slash the prices to make what? More money. Is
that something that you think you are trying to do here?
Secretary Castro. What we are trying to do is ensure that
we can affordably offer access to credit and still strengthen
the health of the Mutual Mortgage Insurance Fund, that we can
strike a strong balance there.
Mr. Meeks. So you are going to make sure then--you are not
going to do what some others did--that the people that you are
loaning money to have the ability to pay it back. You are going
to make sure of that, right?
Secretary Castro. We always have at FHA, sure.
Mr. Meeks. Others didn't do it. That caused the crisis,
right? You are going to make sure that there is a downpayment,
that there is a reasonable downpayment, 10 percent. You are not
going to give them 0, like some others did that created the
financial crisis, you are going to make sure that there is a
reasonable amount for a middle-class family who would like to
participate in the American dream, in this case, a taxpayer
will have that opportunity to live that dream. Is that correct?
Secretary Castro. That is our goal, yes.
Mr. Meeks. And in that, you will make sure that--and we
have learned from not your irresponsible behavior, but others'
irresponsible behavior--you will not allow anyone to go below
that, but yet, give an opportunity for others who desire to
be--who are taxpayers and want to live the American dream. Is
that your mission?
Secretary Castro. That certainly is.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations
Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman. I was listening to Mr.
Meeks' questions and I thought he was going to go somewhere
else--I am over here, Mr. Castro. How are you doing? I thought
he was going to go somewhere else with the Christmas analogy
where stores lower prices to lure more customers in, and it is
true, American consumers go and buy more. And then in January,
they are slapped upside the head with massive credit card bills
that they have a really hard time paying back. So they are
enticed into low prices, but then they realize how hard it is
to pay back some bad decisions they made in December. I think
that is all too good of an analogy of what we are talking about
today.
I want to go back to some of the questions that the
chairman asked earlier. You are required by law, you have
admitted it, to have a 2 percent capital reserve. You agree
with that, right?
Secretary Castro. Sure.
Mr. Duffy. And you are at about a quarter of that now, is
that right?
Secretary Castro. We are at .41 in the latest annual
report.
Mr. Duffy. Okay, and is it your testimony today that by
lowering your fee by 40 percent, that is going to allow you to
more quickly get into compliance with the law?
Secretary Castro. My testimony is that this is not going to
have a significant impact on the timeframe for reaching the 2
percent.
Mr. Duffy. So decreasing your fees by 40 percent is not
going to have any impact. How do you analyze that? What is the
rationale?
Secretary Castro. We believe that this will not have a
significant impact, that we will still be able to get, within 2
years, the 2 percent capital reserve.
Mr. Duffy. No, no, no. I heard you say that. But I am
concerned when you are lowering your fee by 40 percent that
your testimony is you have done the analysis and you are going
to get there about the same time. What is the analysis, because
I don't get that?
Secretary Castro. It goes to the comments that I made
earlier. The only reason that we strengthen the Fund is not due
to just an increase in premiums. It is a series of safeguards
that we have put in place that have enhanced recovery, also
ensured that the lenders we work with--
Mr. Duffy. No, no, that is not my question though. You have
said that by lowering the fee, it is not going to affect your
ability to get to that point of 2 percent any quicker. If you
have done all of those great things, I applaud you for that,
your recovery, and better underwriting standards. But if you
had the current fee of 1.35 instead of .85, you would get there
more quickly because in conjunction with the current fee, not
the reduced fee, and all of the great reforms that you have
had, we would get to 2 percent far more quickly, right?
Secretary Castro. I agree with you that we would get to 2
percent a little bit more quickly, but not significantly more
quickly than we are on a path to get there now.
Mr. Duffy. But that is our point. You are in violation of
the law. You should do everything you can to get into
compliance with the law. And reducing those fees at a time when
you are not in compliance, for us, really rubs us the wrong
way. We don't like it.
I am going to switch gears on you. I have been on this
committee for a little over 4 years and I have heard a lot of
my colleagues across the aisle talk about the financial crisis.
And they are able to talk about real stories from their
communities. Oftentimes, these communities are minority
communities who have been hit hard, where people who bought
homes they couldn't afford have lost those homes. And now they
have lost their homes, they have been financially wrecked, and
they are out on the street. Right? And I just heard you testify
that half of the loans you guarantee are African-American
borrowers, and a quarter of them are Hispanic borrowers, is
that correct?
Secretary Castro. No, that of loans to African-Americans
and Hispanics, nearly 50 percent are FHA-insured loans.
Mr. Duffy. Is there any correlation between the fact that
in the crisis it is Hispanics and African-Americans you see
getting hurt, who we hear about on this committee, but it is
the very policies that you are advocating for that are getting
these same folks in the homes that they can't afford. You don't
see that correlation?
Secretary Castro. I have a very different perspective on
that, Congressman. The FHA, for 80 years now, has been a part
of ensuring that hardworking folks of different backgrounds
could access credit responsibly.
Mr. Duffy. Did FHA avoid the crisis in 2008, the financial
crisis?
Secretary Castro. FHA didn't cause the crisis.
Mr. Duffy. I didn't ask that.
Secretary Castro. FHA felt the effect.
Mr. Duffy. In 80 years, you know how financial crises can
affect FHA and can affect home consumers. So following on Mr.
Garrett, low downpayments, low credit scores, which concerns
us, but the qualified mortgage put out by the CFPB, is that to
protect consumers or protect banks?
Secretary Castro. I--
Mr. Duffy. Answer the question. Who is it for?
Secretary Castro. The--
Mr. Duffy. Protect consumers or protect banks?
Secretary Castro. My hope is that consumers are effectively
protected by measures--
Mr. Duffy. Consumers. I hope that Mr. Cordray would agree
with you that he is trying to protect consumers. I have some
disagreements with Mr. Cordray, but on this one, he is saying
he is trying to protect consumers and not banks. Why is it good
for everybody else to follow the QM rule and protect consumers,
but you at FHA, you don't have to follow the same--
Secretary Castro. FHA has always had very strong
underwriting. FHA is different, markedly different from a lot
of the--
Mr. Duffy. Are you committed to following the QM rule now?
Yes?
Secretary Castro. We are committed to ensuring that we
enhance our underwriting.
Mr. Duffy. I will take that as a ``no.''
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts, Mr.
Capuano.
Mr. Capuano. Thank you, Mr. Chairman. Thank you, Mr.
Secretary. Mr. Secretary, I want to get back to this massive--I
am over here, way over to the extreme--well, your left which is
good, Jeb's right, which is not possible. Mr. Secretary--
Chairman Hensarling. Not possible.
Mr. Capuano. It is not possible. Not desirable by either
one of us either. This 2 percent deal, as I read the law, there
are two requirements that we have set forth when you go below
that 2 percent reserve fund. One of them is that you endeavor
to get back to the 2 percent, ``endeavor,'' a word that
Congress picked, not you. And the other one is that you are
required to draw down Treasury funds to bounce up that
percentage. Are you endeavoring to get back to the 2 percent?
Secretary Castro. Very strongly, absolutely.
Mr. Capuano. Because you are not just passing out loans
like water anymore. You have a lot of other restrictions on the
loans that you give out, and you are heading in the right
direction.
Secretary Castro. We were always much stronger than most
private-sector actors and we are even stronger today in part
because of the work of this committee.
Mr. Capuano. And you are--and you drew the funds down from
the Treasury, correct?
Secretary Castro. We drew $1.7 billion.
Mr. Capuano. Did you use any of that Treasury money?
Secretary Castro. We did not. That was money to cover the
future potential losses.
Mr. Capuano. I know what it is for, but I think that law is
stupid that requires you to borrow taxpayers' money that you
don't need, and you have proven that you didn't need it because
you didn't use it. So I happen to think that law is stupid and
I am trying to change it. But to my reading, you have adhered
to the law. You are endeavoring to do what you are supposed to
do, which is the word that Congress used, number one; number
two is, you took down money that you didn't need to do--to sit
there. So as far as I am concerned, you are doing well. I
actually think that you also have other mandates for FHA and
for HUD which is to encourage homeownership amongst responsible
people. You are trying to balance that need, as we balance
different things that are required of us. Thank you, Mr.
Secretary. I think you are doing a good job.
As far as I am concerned, too, the fact that we don't have
any good stories about certain people who have been priced out
of the market is because you cannot have a good story when you
don't create good stories. You were trying to create that good
story, according to Moody's, which is not known as a liberal
bastion of thinking or policy. They say that this half percent
cut will open up at least 60,000 more people to buy a home. The
REALTORS Association has a much higher number. So I actually
think you are trying to create more of those good stories while
being fiscally responsible.
One last question on this issue: If the reserve fund is
challenged tomorrow because your assumption was wrong, and all
of a sudden things go bad, is there anything to prevent you
from increasing this fee again?
Secretary Castro. It is fair to say that we put several
tools in place, safeguards in place so we will continue with
those safeguards. Obviously--
Mr. Capuano. My friends on the other side want you to raise
that fee. We don't want you to raise this fee because we want
more people to qualify, and it looks like with the lower fee
you can manage it in a responsible way. If I am wrong, if you
are wrong and by lowering the fee somehow you put the Fund in
jeopardy, is there anything that prevents you from increasing
the fee tomorrow?
Secretary Castro. There is nothing that prevents that. That
is one tool in the toolbox, and we will continue like--
Mr. Capuano. So you can do exactly what they want to do if
you were forced to do it because we were wrong. Nothing is
jeopardized. And you have plenty of money in the Fund to allow
you the time to do that. We are talking about a problem that
doesn't exist. I want to talk about one other issue that does
exist where a policy that I do disagree with HUD and FHA on,
and that is the Distressed Asset Stabilization Fund. Right now,
as I understand it, for those properties that you are forced to
take, you basically sell them to the highest bidder and the
highest bidder has no interest and no knowledge of where these
properties are; they are simply buying paper.
I personally don't think that is the best way that HUD
could be going. First of all, I think you would be getting more
money if you broke them up, individual properties to individual
consumers are worth more to one--than it is to one consumer who
is there to make profits, and you would be helping stabilize
neighborhoods because those individuals or those community
groups would care about those communities, and I would strongly
encourage, Mr. Secretary, as your next step, to break that
monopoly up.
I am not here to enrich or to not enrich the Lone Star
fund, which bought thousands of properties recently, and I
don't know where Somerville, Massachusetts is. They just bought
a piece of paper. I would much prefer that those distressed
properties in my district be offered to the highest bidder on
an individualized, at least a small lot process, preferably to
community organizations whose responsibilities are to create
affordable homeownership and to build communities. I think you
can make more money, and I think you could service our
communities better if you took a more mayoral approach towards
this as opposed to a macroeconomic approach. I know it is a
different issue that you came in to talk about, but I wanted to
get my 2 cents in, since I think you are doing a great job in
the FHA.
Secretary Castro. Thank you very much, Representative. Let
me just say, I look forward to following up with you and with
your staff. We have heard concerns about the DASP program. One
of those has been, for instance, from nonprofits who would like
to be able to participate and perhaps with, they feel, a keener
eye toward neighborhood revitalization, and so we are looking
at how we might accomplish that and would love to follow up
with you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from New Mexico, Mr. Pearce,
the vice chairman of our Housing and Insurance Subcommittee,
and I ask that he yield to the Chair for a brief moment.
Mr. Pearce. I do.
Chairman Hensarling. What the Majority is interested in, is
having the Obama Administration actually obey the law, and the
law says, 12 U.S.C. 1711(f), written on November 5th, enactment
day of November 5, 1990, ``The Secretary shall endeavor to
ensure the Mutual Mortgage Insurance Fund attains a capital
ratio of not less than 2 percent within 10 years after the date
of enactment, and shall ensure that the Fund maintains at least
such capital ratio at all times thereafter.''
That is what the statute says. I yield to the gentleman
from New Mexico.
Mr. Pearce. Thank you, Mr. Chairman. And thank you, Mr.
Secretary. I appreciate your comments today. I think Mr.
Huizenga was making a very critical point that many times we,
you, whomever, will sit in these chairs and we speculate what
we are going to do to help those people, to be more fair to
those people. I participated in my first year in making an
award from some department in HUD that allowed a young woman to
move into a home in Anthony, New Mexico. Anthony is
predominantly a poor community, so it was nice to have the help
there. Several years later, she caught me at a town hall and
said, ``Do you remember coming to my house? You actually helped
move boxes in from the trucks.'' And I said, ``I do remember
that.'' And she said, ``I was sort of led into that by this
free money from the government. What I did is put my money
down. I bought a house that I could not afford because I just
wanted to believe that I could do it. I ended up losing the
whole thing. Everything I owned went with it.'' That is what we
do in the sense of fairness. That is what we do when we do not
have adequate underwriting standards, when we don't bother to
take a look at if people can make the payments or if they
can't.
Now, people in New Mexico are relatively ambivalent about
the whole concept of GSEs, and the problems that the GSEs
caused, until I explained that you, the taxpayer, are getting
to pay for the bad mortgages for your neighbor down the street,
whether they made it or they are enticed into it, or whether
the government helped them, doesn't matter. If it goes bad, you
the taxpayer are paying for their mortgage and yours. That is
when people get hostile. So a couple of years ago we actually
started concentrating on that in this committee, and the
President began to talk about needing to reform the GSEs.
Now, that wasn't being driven by polls, because there are
probably not 10 people in the world who understand the function
of GSEs out there in the voting public. So he was aware just
how angry people were getting because they were having to pay
for other people's mortgages because of lax underwriting
standards. You have made the comment several times today that
you, FHA, did not cause a problem. Would you care, in 15
seconds, to talk about how the problem was created or is that
not something you care to get into?
Secretary Castro. Of course, I am here to testify on FHA,
Congressman, and I know that--
Mr. Pearce. Basically then, let me fill the gap for you. In
order to drive housing goals set by this body and many people
in this committee, we are pushing banks to give loans, no-doc
loans, doesn't matter. We are going to take them over here. We
are going to transition them out of your hands really quickly,
going to put them on those GSEs and it never matters, because
we are going to securitize. And we are going to spread the risk
out over the entire world. We are going to chop them into
pieces. Nobody would ever know exactly what went wrong. And as
soon as the first house didn't continue to escalate in price,
the whole damned thing collapsed down and took away about half
of the minority homeowner's value.
Blacks and Hispanics have suffered more under the abuses
coming from Wall Street than any other population. And so when
you hear us sitting in this committee being concerned that you
are not watching the balance sheet, understand that it is
because poor people end up paying the bill all the time. You
have made the assertion that you have 47 billion there for your
stable. Is that basically--is that a fair characterization?
Secretary Castro. Forty-six.
Mr. Pearce. How much money did you have in the bank when
you took the money from the taxpayers? How much money did you
have in the bank at that point?
Secretary Castro. So--
Mr. Pearce. No, just the number. How much money did you
have in the bank when you took--
Secretary Castro. I want to make sure that I am correct on
this. We were at a negative capital reserve ratio at that time.
We still have--
Mr. Pearce. My point is that you had money in the bank and
you still had to take funds from the government. I would like
to get into just the issue of the False Claims Act, if you are
actually helping to mitigate the problems there, because that
is going to shut off more loans to low-income potential
homeowners than anything else. So again, we have major troubles
down the road and I think this hearing is just trying to clear
the air. Are you watching the circumstances around it? Our past
experience says we doubt it. But we will still--in the west, we
trust our neighbors, but we brand our cows, so I am just here
to brand the cow.
Secretary Castro. Just to answer your question, we had $40
billion at that time, at the time of the mandatory--
Mr. Pearce. This cash in the bank does not say that we are
solvent.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr. Green,
ranking member of our Oversight and Investigations
Subcommittee.
Mr. Green. Thank you, Mr. Chairman, and I thank the ranking
member as well, and I thank you, Mr. Secretary, for appearing
today.
Mr. Secretary, I think it appropriate to examine some of
the history of FHA. It is important to note that before FHA,
loans were, generally speaking, 3 to 5 years, there was no
amortization, and you had these huge balloon payments. FHA
transformed the housing market such that middle-class Americans
could afford housing. It has been a real friend, if you will,
to this country. And why is FHA below 2 percent? Because FHA
played a countercyclical role in the debacle that took place
that brought this economy to its knees, or nearly to its knees,
depending on who you were. For many people, it was a
depression. For some, it was a recession.
FHA, according to the Center for American Progress,
prevented home prices from dropping 25 percent. FHA saved 3
million jobs. FHA saved $1 trillion in economic output. FHA
saved $3 trillion in lost property values. FHA kept interest
rates from skyrocketing. FHA prevented another Great
Depression. And as has been indicated, the law required and FHA
complied and received $1.7 billion, of which FHA has not spent.
Truth be told, FHA has been the reason that this economy is
in the shape that it is in today. Probably not solely, but
generally speaking, it has made a significant contribution.
Now, with reference to the 2 percent, the chairperson is
imminently correct. It does say, ``shall endeavor.'' And it
does say, ``shall insure thereafter.'' My suspicion is that you
are endeavoring to bring us back to 2 percent, and that you
will thereafter keep us at 2 percent. But I think the law also
anticipates, and we who passed the law, obviously anticipate,
that things might not go as well as anticipated, else we would
not have built into the law the opportunity for FHA to receive
moneys from the Treasury in difficult times.
So I am greatly appreciative of the work that you are
doing. I think that without your good deeds and good works, FHA
could continue to bump along. But I think you are going to help
us to bring it back and revitalize it. And in the process,
continue to allow people who, but for FHA, could not afford a
home.
Finally this, and I will give back some time. I appreciate
people who care about the least among us. I appreciate it.
Although I must tell you, some of us are not part-time freedom
fighters. Some of us were born into this. Some of us wake up to
it and go to bed with it. Some of us inherited it. Some of us
don't have the luxury of selective outrage. Some of us have
received a duty and an obligation to continue to make a
difference in the lives of the least of us, not on some days,
but every day.
So for some of us, this day is not unlike any other. We are
here to do what we can to help the least among us. And
sometimes that requires that we take some difficult positions.
Sometimes we have to stand in the face of some extreme
challenges. But I want you to know this, Mr. Secretary, Dr.
King was still right. The arc of the moral universe still bends
toward justice. Carlyle is still right: ``No lie is going to
live forever.'' William Cullen Bryant is still right: ``Truth,
crushed to earth, shall rise again.'' Stand strong, Mr.
Chairman. Stand strong, Mr. Secretary.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman, and thank you,
Mr. Secretary, for being here. Basically, FHA is a mortgage
insurance company, correct?
Secretary Castro. Correct.
Mr. Westmoreland. What percentage of the mortgage does FHA
guarantee?
Secretary Castro. Generally, our most common product is 97
percent of the value.
Mr. Westmoreland. For a normal mortgage insurance company,
what percentage of the value do they insure, typically?
Secretary Castro. Typically, in the private sector, there
would be a 20 percent downpayment and so the mortgage would
be--
Mr. Westmoreland. Well, not necessarily. But what would
they go up to?
Secretary Castro. That would be 80 percent under a usual--
Mr. Westmoreland. They guarantee 80 percent of the
mortgage?
Secretary Castro. Insure 80 percent of the mortgage.
Mr. Westmoreland. Okay. So if the mortgage is, if the house
is $100,000--
Secretary Castro. I'm sorry, insure 100 percent of the
mortgage, which is 80 percent of the sale. There is a 20
percent downpayment, and the mortgage is insured.
Mr. Westmoreland. So if you have a $100,000 house, with an
$80,000 mortgage, the private insurance company will insure the
whole $80,000?
Secretary Castro. I guess I was a little bit confused, if
you are talking about FHA, or if you are talking about the
private mortgage insurers.
Mr. Westmoreland. FHA, what is that number?
Secretary Castro. We insure 100 percent, and--
Mr. Westmoreland. Of the mortgage amount?
Secretary Castro. That is right. Yes.
Mr. Westmoreland. And what percent does that private
mortgage insurance company--
Secretary Castro. Typically, the mortgage insures 30
percent of the UPB at 95 percent of loan to value.
Mr. Westmoreland. Okay. So you all--you insure quite a bit
more, correct?
Secretary Castro. Sure.
Mr. Westmoreland. I am a little confused here about a
couple of things in your testimony. I am a builder. I was a
builder, and a real estate agent. And in your testimony, you
said that home building had doubled. Since when?
Secretary Castro. Over the last several years, we have seen
home building double since the beginning of the housing--
Mr. Westmoreland. Could you get me where you saw that
information--
Secretary Castro. Sure.
Mr. Westmoreland. --because I want to share it with some
people at home.
Secretary Castro. I would be glad to do that, Congressman.
Mr. Westmoreland. Okay, thank you. And also, but you said
home prices have rebounded about 20 percent in the last 3
years. Could you get me that data, too? Because I want to share
that with my appraiser, so we can go over that.
The other thing you said in testimony is that the average
fees I guess you will collect is $17,000, and FHA expects that
the average loss from borrowers for these loans would be
$4,700. So you are insuring 97 percent, or 95 percent of the
loan, but if something goes south, you are only going to lose
$4,700?
Secretary Castro. Across our class of 2014 borrowers, we
expect that loss to be $4,700 per borrower, the average loss to
be $4,700, and we are collecting $17,000 in mortgage insurance
premiums from those 2014 borrowers.
Mr. Westmoreland. Okay. Can you tell me how many mortgages
you all insured in 2014?
Secretary Castro. Sure. We can get you that number.
Mr. Westmoreland. Do you know how many loans that you will
insure in 2015?
Secretary Castro. We expect that in this year, we are going
to do about 800,000 loans.
Mr. Westmoreland. About 800,000?
Secretary Castro. Yes.
Mr. Westmoreland. Okay. You were talking about how many
loans that you did. How many of those loans in 2014 were
refinance loans, and how many do you project will be refinance
loans in 2015?
Secretary Castro. My best recollection is that it is in the
range of 150,000 are refinances, and we expect between 100,000
and 200,000 refinances in 2015.
Mr. Westmoreland. Okay. But you don't know what dollar
amount those loans are going to bring in, correct?
Secretary Castro. We would be glad to get you that,
Congressman.
Mr. Westmoreland. And I know that you were mayor of San
Antonio. Did you ever lower taxes?
Secretary Castro. During my tenure of service, sure. We
did.
Mr. Westmoreland. You lowered your taxes in town? Did your
revenues go up?
Secretary Castro. San Antonio is a growing city, so they
did.
Mr. Westmoreland. Okay, so you cut your taxes and revenue
went up. Sounds like a good idea to me.
Mr. Pearce [presiding]. The gentleman's time has expired.
The Chair now recognizes the gentleman from Missouri, the
ranking member of our Housing and Insurance Subcommittee, Mr.
Cleaver. And if the gentleman would suspend, I believe we are
going to take a 5-minute break right now. We will recess for 5
minutes. We will be right back.
[recess]
Mr. Pearce. I notice the palace guard has arrived. You
didn't lose your charge, did you?
Mr. Cleaver, I regret to inform you that under an arcane
rule of the House, your time elapsed while his time elapsed,
and so, but with unanimous consent, we would recognize Mr.
Cleaver for 30 seconds.
Mr. Cleaver, go ahead, 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Mr. Chairman, in
keeping with the Christmas motif of this hearing, is it in
order that I ask Mr. Perlmutter a question?
Mr. Secretary, do you believe that all people who purchase
merchandise on sale during Christmas experience regret in
January?
Secretary Castro. I don't believe that everyone who makes a
purchase in December regrets it in January, no.
Mr. Cleaver. Thank you. Are you familiar with the term
``disambiguation?'' It is esoteric. It actually means time
travel. And how long have you been Secretary?
Secretary Castro. I have been Secretary for about 6 months
now.
Mr. Cleaver. Yes. So I am amazed at your command of all of
the facts, but unless you can go back in time for a year, do
you think that in 6 months, you have acquired all of the
information that you will acquire, say, in another 6 months?
Secretary Castro. I have no doubt that in another 6 months,
I will have acquired even more information than I have today.
Sure.
Mr. Cleaver. Yes, I believe so as well.
And I think Einstein was wrong, but I have a degree in
sociology. Let me find out, Fair Isaac says that a good credit
score is 550. Tell me again what the HUD, FHA score for
borrowers is at presently?
Secretary Castro. The average credit score for an FHA
borrower in 2014 was 680.
Mr. Cleaver. So that is hardly giving loans to unworthy
borrowers based on credit scores. Is that--
Secretary Castro. These are strong credit scores. I just
also would note again, that we set a credit score floor of 500
and also for folks with FICO scores under 580, we now require a
10 percent downpayment.
Mr. Cleaver. Yes, so Fair Isaac says 550 is good, and most
of us, most creditors look at that score, is that accurate? So
FHA does, in fact, have strong underwriting criteria.
Secretary Castro. Absolutely.
Mr. Cleaver. The one thing that I think is kind of
important, at least to me, is that about a half million
Americans, even though they were minorities, were able to get
FHA loans in 2014. And I think you were projecting 800,000 this
coming year.
Secretary Castro. That is correct.
Mr. Cleaver. Is there any projection on how many people
actually apply for FHA loans but are determined not to be
creditworthy, and are turned down?
Secretary Castro. We can certainly get that you figure.
Mr. Cleaver. But it would be a substantial number?
Secretary Castro. Of course, sure.
Mr. Cleaver. Yes. I guess I am trying to get to the point
where--there seems to be this belief that FHA is just giving
money away to people who are not creditworthy, and I didn't
want this hearing to end with anybody believing that is, in
fact, happening.
Secretary Castro. It is a very good point, Congressman. I
can't stress enough that FHA, for its 80-year history, has been
lending to responsible, hardworking Americans. And it continues
to do so to this day with very strong underwriting standards--
folks who may be of modest means but are responsible Americans.
And I know that there has been some discussion, as well,
comparing FHA to the banks. FHA is not a private bank. FHA has
a distinct mission, and it has been fulfilling that mission in
a strong way, lending to responsible Americans who are of
modest means, hardworking, lower-income and middle-class-income
folks. And we have seen a track record of success over its 80-
year history. More recently, we have seen a strengthening of
the Mutual Mortgage Insurance Fund, even against the backdrop
of the challenges that we had before.
Mr. Pearce. The gentleman's time has expired.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Pearce. Thank you.
The Chair now recognizes the gentleman from Ohio, Mr.
Stivers.
Mr. Stivers. Thank you, Mr. Chairman.
Mr. Secretary, thank you for being here.
Just taking off on the gentleman from Missouri, would you
be surprised to know that Fair Isaac actually calls a 550 to a
620 credit score subprime?
Secretary Castro. That would not surprise me, no.
Mr. Stivers. And did you know that they call a 620 to a 680
score acceptable? And the first time they actually define it as
good credit is 680 to 740. So I just wanted to clarify some of
the previous remarks.
I know some of the other questioners asked you about the
$1.7 billion bailout, and your response, essentially, was that
you didn't really use that money. But it is in your account;
Treasury designated that to your account.
So when it goes to your account--just like if I gave you
$1,000 from my account to yours, can Treasury or the rest of
the Federal Government use that $1.7 billion while it is in
your account?
Secretary Castro. That became part of the cash reserves
of--
Mr. Stivers. So they can't use it, right?
Secretary Castro. --FHA. It was assigned to FHA.
Mr. Stivers. So it is your money now. Whether you use it or
not, it is in your account, right?
Secretary Castro. It is in FHA's account, true.
Mr. Stivers. Great.
My next question goes back to something everybody is kind
of asking about, the 2 percent capital-reserve requirement. Do
you see that as a requirement or a suggestion?
I understand you were not there then, and it has actually
improved during your tenure. But do you consider that a
requirement under the law or a suggestion?
Secretary Castro. I certainly do consider it a requirement
for us to get there. And that is why we have worked very hard,
and, as you know, we are--
Mr. Stivers. Great.
Secretary Castro. --projected to get there within--
Mr. Stivers. And how long do you think it will take you to
get there?
Secretary Castro. We believe that within the next 2 years
we will reach that 2 percent capital-reserve ratio.
Mr. Stivers. So I did some back-of-the-napkin math, and
maybe it is not right, but you said you have a 0.7 delinquency
rate on your $1 trillion portfolio. That is a $7-billion-a-year
loss for those delinquencies. You were bringing in about $8
billion in cash flow before you lowered your rates. When you
subtract those out, that means you are probably putting about
$1 billion towards your reserves.
You had, I will be generous and say $5 billion, because it
was $4.8 billion. You need to get to $12 billion. So, by my
math, it takes 7 years.
What do you think is going to change in your cash flow that
maybe I am not accounting for here?
Secretary Castro. Our net income this year was $8 billion.
We expect the value of the Fund to grow by at least $7 billion
over the next several years. And because of that strong and
steady growth, we anticipate getting to the 2 percent within
the next 2 years.
And the result of that is going to be all of the actions
that we have taken in conjunction with this committee to put
safeguards in place to recover more revenue than we used to, to
ensure that our borrowers are as strong as possible--we have
strengthened our underwriting. The result of all of those
actions is going to be us getting to that 2 percent capital-
reserve ratio.
Mr. Stivers. I hope you are right. I have seen rosier
projections from FHA every year than that reality. I have only
been here for 4 years on the committee, but it has been my
experience that every year FHA comes in and tells me how great
it is going to be, and then it doesn't turn out that great. But
I hope you are right, Mr. Secretary.
I just have, I guess, two more questions.
The first is on risk-sharing. You have had the authority to
do risk-sharing since way before you became Secretary, and FHA
has never used it. The value of risk-sharing would be we could
see whether FHA is underpricing or overpricing based on the
risk you have.
And I am curious if you plan to work with the private
sector to do some type of risk-sharing so we can see what the
cost of the risk you are insuring actually would be in the
private marketplace?
Secretary Castro. Yes. I appreciate the question very much.
We are, at FHA, pursuing our two missions: to play that
countercyclical role; and also to afford opportunity to
hardworking Americans of modest means to be able to access
credit and own a home. And to the extent that we can accomplish
that, we are willing to consider ways of doing business that
might make sense. And so, I am certainly willing to follow up
with you--
Mr. Stivers. I will follow up personally on that. I really
appreciate it. I have been asking for more risk-adjusted
pricing at FHA for the entire 4 years I have been here. Because
I think, frankly, some homeowners are overpaying at FHA and
some are underpaying. And if you did underwriting where you
charged people based on the risk they bring to the Fund, you
could appropriately price it for everybody.
I only have 14 seconds left, but last week there was a
report from your Inspector General. I don't know if you have
had a chance to read it, but I want to read a quick quote out
of it.
It says, ``Because HUD failed to implement adequate
policies to monitor the agency's compliance with lobbying
requirements, HUD lacked assurance that other agencies did not
spend Federal funds on lobbying activities.'' I will just do
``dot, dot, dot'' there.
Are you working on that?
Secretary Castro. We absolutely are. In fact, I know the IG
testified that at the very beginning of my tenure one of the
things that we did was to send out a joint letter to all of our
employees, saying that we expect our employees to comply with
ethical standards and also to cooperate with the Inspector
General in any reviews or investigations.
With regard to the question you are asking about, about
anti-lobbying, the anti-lobbying law, we have specifically
included or highlighted that in the ethics training that we
just did a couple of months ago.
Mr. Stivers. That is great, because we don't want people to
get--
Mr. Pearce. The gentleman's time has expired.
Mr. Stivers. --more Federal dollars.
Thank you, Mr. Secretary.
I yield back.
Mr. Pearce. The Chair now recognizes the gentleman from
Colorado, Mr. Perlmutter.
Mr. Perlmutter. Thank you, Mr. Chairman.
And, Mr. Secretary, thank you for being here.
You have gotten a lot of leading questions and cross-
examination from my friends on the Republican side of the
aisle, so obviously they want to see what you are made of and
how tough you are in taking these questions. The trouble is
their questions are, sort of, out of ``Alice in Wonderland,''
through the looking glass.
If you look at the report that you have given to us today
and just start with Exhibit 1, where it shows that in 2005,
2006, and 2007, FHA made very few of the mortgages or endorsed
very few of the mortgages--it was all in the private sector.
But they failed miserably, the toxic assets there. And this was
all under the Bush Administration, I would remind my friends.
Then the only game in town, starting in 2009, was FHA.
Is that sort of what Exhibit 1 shows?
Secretary Castro. That is right. We saw our market share go
up very significantly.
Mr. Perlmutter. Because the private sector either was wiped
out because they made so many lousy loans or they were too
afraid to be in the market at that time. So FHA, as the
backstop, was the only thing available. Is that right?
Secretary Castro. That is--
Mr. Perlmutter. I think I will do some cross-examining--I
will lead you, too.
Secretary Castro. Yes. We played our countercyclical role
and did see market share go up.
Mr. Perlmutter. So looking, then, to kind of the subject
that we are all talking about, you want to lower some of your
fees, because, if you look at Exhibit 8, which is credit
scores, in 2008 almost 50 percent of the loans endorsed by FHA
at that time were less than 619 FICO score. Okay?
Today, October to December of 2014, only 2.3 percent. So 25
times more in 2008 than today. Today, in 2014, 48 percent of
the loans the FICO score is over 680, compared to 18 percent
back in 2008.
So you are making loans to--at least, buyers on paper, by
their FICO score, are much better borrowers--pardon me,
``borrowers'' is what I meant.
Secretary Castro. That is correct.
Mr. Perlmutter. Okay.
And we can see, as we go through these exhibits, especially
exhibits 12, 13, 14, 15, 16, 17, and 18, delinquencies are way
down compared to 2006, 2007, 2008, 2009, and 2010. Is that a
fair statement?
Secretary Castro. That is fair. That is correct. We have
seen--
Mr. Perlmutter. They are about one-tenth of what they were.
Secretary Castro. Yes. And just in the last 2 years, as I
mentioned, we have seen serious delinquencies go down by 27
percent.
Mr. Perlmutter. All right.
So the one that I really want to focus on, which goes to
the solvency and the productivity of this program, is Exhibit
2-8. It is on page 40. Or, pardon me, 2-7, book value by
cohort.
If you look at that--and I would suggest to my friends on
the Republican side of the aisle that they do that--the book
value of the FHA loans under the Bush Administration was
terribly in the red; before, under the Clinton Administration,
just barely positive; under the Bush Administration, deeply in
the red--broke, if you will. And since the Obama Administration
took over, now very valuable in terms of the book value.
Is that a fair statement?
Secretary Castro. Yes. It is fair to say that the value of
these books has increased tremendously over the last several
years.
Mr. Perlmutter. Okay.
So what you are trying to do now is you are working towards
fulfilling that capital-reserve requirement. You are not doing
it overnight, but you are doing it steadily, and every year you
are adding to that. But you have limited many of your borrowers
to these very high credit scores. Wouldn't you say that is fair
to say?
Secretary Castro. That is right. The average borrower, as I
said, has a credit score around 680. So it is a higher category
of borrower.
Mr. Perlmutter. So you are in a position now--with a
stronger economy than we had in 2006, 2007, 2008, the end of
the Bush Administration; you have strong borrowers, where the
bulk of your borrowers are above 680 now--to be able to move
forward with another mandate that you have, which is to provide
funds for responsible borrowers and to move affordable housing
forward where possible.
Secretary Castro. We absolutely are achieving both of those
things. We are committed to both of those things.
Mr. Perlmutter. Isn't that what you want to do? Isn't that
what this is all about?
Secretary Castro. And, sir, as I said, we are striking that
strong balance between continuing to improve the financial
health of the Fund and also meeting our historic mission of
opening up opportunity for hardworking Americans who are
responsible to be able to access credit to own a home.
Mr. Perlmutter. Okay. Thank you.
I yield back.
Mr. Pearce. The gentleman yields back. The gentleman's time
has expired.
And the Chair recognizes the gentleman from South Carolina,
Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
I want to come back to some of the discussions we have had
earlier about the 2 percent capital requirements and the
projections.
I hope you understand our frustration when we start talking
about future trajectories and future projections. Before you
were responsible, we got an estimate in 2009 that the 2 percent
statutory requirement would be hit in 2012. In 2010, we were
told it would be hit in 2014. In 2011, we were told again it
would be hit in 2014. In 2012, that date moved to roughly 2017.
Last year, we were told it would be hit in 2016. And, again,
you are telling us here again today it will be hit in 2016,
even with the change to the premium, which I want to talk about
in a second.
I had a chance to look at the actuarial review and the
assumptions that were made. Were you aware, sir, in the
assumptions in the 2014 projection that you have used here
today and relied on very heavily to say you will be at the
statutory requirement by 2016, were you aware that the baseline
study assumed no recession, ever?
Secretary Castro. As you know, Congressman, this is a--
Mr. Mulvaney. I am just asking you, Mr. Secretary, if you
were aware of it or not.
Secretary Castro. I--
Mr. Mulvaney. If the answer is no, believe me, it wasn't
easy to find, so I am not going to think you are a bad person
because of it.
Would it surprise you that the baseline assumption never
assumes a recession? In fact, would it surprise you that the
baseline assumption assumes that unemployment never goes down
below 5 percent after 2018, ever?
Secretary Castro. This is an independent actuary's
assessment. This is not FHA's or HUD's assessment.
Mr. Mulvaney. No, but it is what you are relying on when
you come to tell us, don't worry, we are still going to hit our
statutory requirement by 2016. Yes, it is performed by somebody
else and it uses somebody else's analytics, Moody's more
specifically, but it is the basis for what you are testifying
to, to Congress.
So I am simply asking you if you knew that it assumed there
were no recessions and that unemployment was at historic lows
for long periods of time?
Secretary Castro. I had a chance to review the annual
report, yes, if that is the question.
Mr. Mulvaney. So you were aware, then, in your review of
the annual report that under three of the eight scenarios the
Fund actually goes negative and needs another bailout at some
point in the future?
Secretary Castro. We believe that within the next couple of
years, 2 years--
Mr. Mulvaney. Let's talk about that, because you mentioned
that to Mr. Duffy, and he asked you specifically a question of
whether or not the premium reduction would materially change
the date you expect to hit 2 percent. You said, no, not
significantly.
So let's talk about that. How does it change the date?
Secretary Castro. First, still within 2 years we anticipate
reaching--
Mr. Mulvaney. But it must change, right?
Secretary Castro. It does. And I acknowledged--
Mr. Mulvaney. So how much does it change by?
Secretary Castro. --earlier that does change it by a few
months--
Mr. Mulvaney. And what is your basis for saying that, sir?
Secretary Castro. --less than a year.
We would be glad to share with you our analysis on--
Mr. Mulvaney. Great. Because I couldn't find that on the
Web site.
So you are saying you did do analysis, and the end result
of that analysis was that it changed it by no more than a year,
maybe only a couple of months.
Secretary Castro. There was analysis done on that, of
course.
Mr. Mulvaney. Thank you very much.
We have heard today--I heard Mr. Sherman talk before about
endeavoring to follow the law. Maybe it was somebody else. Mr.
Sherman said that we don't expect it to be immediate. And I
think that makes sense.
When was the last time that FHA was in compliance with the
legal requirement of the 2 percent capital reserve?
Secretary Castro. I believe that was 5 or 6 years ago.
Mr. Mulvaney. I think that is right. Would you recommend to
a private citizen that they come to an entity to borrow money
that hasn't been in compliance with the law for 6 years?
Secretary Castro. I certainly would recommend that folks
come to FHA who are looking for an affordable, proven way--
Mr. Mulvaney. So you would recommend that they come to FHA
even though FHA is undercapitalized by law?
Secretary Castro. I absolutely would recommend FHA--
Mr. Mulvaney. And you would recommend to them that they
would come to FHA even though FHA right now, with the change in
the premium, is offering what essentially amounts to and what
many folks on both side of the aisle would have called several
years ago teaser rates on the premiums in order to build market
share.
Secretary Castro. No. I just have a different perspective,
Congressman, on that.
Mr. Mulvaney. I appreciate that.
Let me finish with this--assuming that I can find my notes,
which I can't.
You testified earlier that you threw a couple of lenders
off the rolls at FHA. I assume you did that because they
weren't following the rules.
Secretary Castro. For different reasons.
One of the things that we did was that we increased the
net-worth requirement from $250,000 to $1 million to strengthen
the financial standing--
Mr. Mulvaney. In order to make sure they are more
financially stable, I guess.
Secretary Castro. Certainly.
And we also--
Mr. Mulvaney. You also sued some of the larger banks in the
Nation and won and received payments from them. I assume that
was because they didn't follow the rules either.
Secretary Castro. There certainly has been fraud, and,
because of that fraud, there have been--
Mr. Mulvaney. So I guess my point is this. And we have had
this similar conversation in the past--in fact, the recent past
with Mr. Watt at FHFA. And it seems like what we are seeing
once again is a habit with the Administration, before you were
here and since you have been here now, to not only not follow
the law but to hold yourself to an entirely different standard
than you are holding everybody else. And I just don't think
that is appropriate.
But I thank you for your time.
Mr. Pearce. The gentleman's time has expired.
The Chair now recognizes the gentleman from Delaware, Mr.
Carney.
Mr. Carney. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here, you and your
team. I appreciate it. This has actually been helpful to me to
think through this issue.
Mr. Duffy, my friend Mr. Duffy, said earlier in the hearing
that you are in violation of the law. I think I got that right.
And he said you should be doing everything to get back in
compliance. We have heard from a number of lawyers on both
sides of the aisle; I am not one. But this issue of endeavoring
to get in compliance I think is the appropriate way of looking
at this.
It seems to me it would be inappropriate--and I think Mr.
Mulvaney suggested he agrees with this in his questioning, as
well--immediately, because you would be imposing that burden on
borrowers who would have to absorb that higher rate in that
particular short-term period of time, and that gradually you
would gradually increase the rate or set it at a level that
would get you in compliance over a period of time.
Is that what you are trying to do?
Secretary Castro. Yes. We are trying to continue to
strengthen the health of the Fund, certainly. And we are
projected to grow by at least $7 billion in net value over the
next several years because of all of the measures that we have
taken. And premiums are still 50 percent higher than they were
when the housing crisis started.
And, at the same time, as you suggest, be able to serve the
Americans that FHA has always served.
Mr. Carney. Right. So that was, kind of, the next part of
my questioning. And that is, how do you feel like you are doing
that part of your mission right now, when, as I say--I heard
you say your average credit score now is 680. To the extent
that reflects your target market, it seems a little high. You
have a floor of 500, and for those under 580, you require 5
percent.
How do you feel that you are addressing that part of your
mission, to help those potential home buyers?
Secretary Castro. I certainly see these steps that we have
taken as prudent and necessary to return the Fund to the 2
percent capital-reserve ratio. At the same time, what we want
at FHA is to be able to afford as much opportunity--
Mr. Carney. So it is kind of a balancing act, right?
Secretary Castro. It certainly is. It always is.
And, for instance, the fact that we have now put a 10
percent downpayment requirement on folks who have less than a
580 FICO score, that didn't used to be the case before. And so
the effect of that, of course, is that you are making it harder
for folks who would be responsible and--
Mr. Carney. So, as we think about this capital number or
target, 2 percent, kind of like we would the national debt when
there was a lot of discussion about that, we wouldn't want to
pay down the national debt next year, would we? Because that
would impose a huge burden on the taxpayers next year. We would
want to stabilize it first and then gradually lower it by
responsible fiscal and tax policy, wouldn't we?
Secretary Castro. Yes, I think doing it smartly. And that
is what we are doing at FHA.
Mr. Carney. Right.
I am disappointed that my friend Mr. Stivers left, because
he talked about the pricing of risk and the market pricing of
risk and risk-sharing. It sounded like you said you are not
actually doing that. I would encourage you to do that. And I
have a method in mind, because Mr. Delaney, Mr. Himes, and I
have been working on a GSE reform bill, the essence of which is
to--Mr. Perlmutter hates our bill, but anyway--appropriately
price risk.
So it would be helpful--right now, Fannie Mae and Freddie
Mac are doing that. Right? They are selling off some of that
risk, and we are getting a better idea of how those mechanisms
work. So it might be helpful for us to understand what that
pricing mechanism might look like if you would do it, as well.
Do you intend to do that? You said you are not doing that--
Secretary Castro. What I said is that we are open to
thinking through that and following up with you. That is not
something that we are doing right now. We are open to
considering ideas like that as long as we can meet our
fundamental mission.
There also is, as you know, Congressman, a cost involved to
FHA to be able to administer that. And so we are concerned
about ensuring that, to the extent that ever came to pass, we
would have the resources to be able to do that.
But we would love to follow up with you on--
Mr. Carney. Yes, I would love to. We have had some
assistance from your folks already, and we appreciate that very
much.
It is really the unfinished businesses, if you will, of the
near financial collapse, we think, where there has been some
considerable disagreement here on this committee. Members of
this committee want the government to be completely out of
that. We think that would risk the 30-year fixed-rate mortgage.
We think our mechanism appropriately would price that risk, and
we hope to move that forward.
So thank you very much for your testimony today, and good
luck to you.
Secretary Castro. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, Chair of the House Foreign Affairs Committee.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Secretary, it is good to see you.
Secretary Castro. It is good to see you.
Mr. Royce. It is good to see Castros in both of my
committees today.
But as it relates to housing finance reform, the
President's budget, recently released, had these words. It
said, ``The Administration will continue to work with Congress
to pass comprehensive reform centered on several core
principles.'' And then it goes to the first among those
principles, and it says we need to ``require more private
capital in the system.''
I would ask you, Mr. Secretary, do you agree with that
concept?
Secretary Castro. Certainly.
Mr. Royce. Okay.
So if we then go to the January announcement by the FHA
that it would lower the annual premiums charged to borrowers by
50 basis points, wouldn't that run counter to the principle of
getting more private capital back into the system?
Secretary Castro. I really appreciate having the
opportunity to answer this question, because I know that this
is an issue that has come up. And there is no question that
there is some overlap there.
However, I think you saw fairly assertive statements by
folks like Radian and United, these private mortgage insurers,
that their business is not going to be significantly impacted
by this change in policy.
So we have seen private capital in fact increase in the
market. Significantly, we have seen our market share at FHA
come down as we played our countercyclical role. And I don't
believe that this is going have much of an impact on their
business.
Mr. Royce. I know you will have an opportunity to come back
and testify on the budget. I think that is later this month,
isn't it, or next month? But--
Secretary Castro. Next month, yes.
Mr. Royce. Next month. But it just seems to me, at the end
of the day, Mr. Secretary, that if--and I would just ask you
this question. Do you believe the move to cut premiums by 40
percent will increase or decrease the amount of private capital
in the system? I understand your explanation, but logically,
what will be the consequence of that?
Secretary Castro. I don't believe that there is going to be
much of a consequence. And folks like Radian and United have
made it clear that they don't believe there is much of a
consequence either.
Mr. Royce. Economically, there is a consequence. And
increasing the already outsized or oversized role that the
government has in this and in housing finance, the FHA appears,
in this case, to be attempting to restore its own solvency here
by growing out of the problems. And, thus, you compete in a
system like that with the GSEs. You end up competing, and the
private sector, logically, is crowded out, as your market share
grows and grows and grows.
If we hadn't been down this road before and had we not been
debating this in 2005 and 2006 and 2007, I wouldn't be as
concerned about it. But I watched the consequences of this. And
as we talk about pricing risk, I watched the consequence of not
being able to price risk adequately.
And, clearly, the President is right when he says, if we
get more private capital into the system, that is going to
provide more stability, that is going to make it easier to
properly appropriately price risk.
But to the extent that you have government-sponsored
enterprises that can short-circuit the supply and demand on
this and arbitrarily take risks, especially when they are
undercapitalized, the long-term consequence is that the private
sector is crowded out, and the taxpayer is left holding the
bag.
And that is my concern at the end of the day and why I wish
that you would look more towards the stability and getting the
reserves up so that when we hit headwinds again financially or
hit troubled waters, you can stay afloat, rather than what
happened last time.
Secretary Castro. We absolutely are committed and working
toward getting to the 2 percent. And we have seen a $21 billion
increase in the net value of the Fund. We anticipate that it is
going to grow at least $7 million a year over the next several
years.
Mr. Royce. I know, but I see where the premium cut directly
affects the ability to reach that 2 percent, pushes it off into
the far-distant future. And so that is why we are raising the
point. It just logically is not taking us where the words put
out by the White House in the budget statement--it doesn't
comport.
But thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Kildee, for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, for your testimony today.
I would like to go in a slightly different direction than
some of the discussion that has taken place so far.
First, I understand that HUD has begun its preparations for
the--as the U.S. national committee for Habitat III, which is
the U.N. Conference on Housing and Sustainable Urban
Development, is set to take place in October of 2016. And I
would just like to take the opportunity to contribute in the
development of the U.S. report, particularly in the theme areas
of equity, opportunity, affordable housing, and capacity-
building. So if your staff could let my office know how we
might offer suggestions and participate in that, I would really
appreciate it.
I would like to comment on my principal area of focus and
ask for your commentary. I worked on urban revitalization as a
career before I came here, and particularly the challenges of
our older industrial cities.
And I certainly want to reiterate that the challenges in
these particular communities can't be underestimated. We can
talk a lot about how we rationalize the marketplace and
particularly in the housing sector, but I am sort of focused on
the ``U-D'' part of HUD's charge in this context. There are
many communities for which even a rising economic tide is not
sufficient to restore opportunity. Older industrial cities
particularly fit that description.
So, knowing that, I wonder if you might comment on, first
of all, the difficulty of getting more direct support through
programs like CDBG, the Neighborhood Stabilization Program,
HOME, knowing that it is going to be a challenged environment
to increase resources coming from Congress, as much as I think
that would be a good investment.
Has HUD considered any flexibility for CDBG, for example,
for those recipient communities that might have an allocation
but have limited infrastructure to wisely use the dollars,
either through direct support through nonprofits--I know we
have the SC2 program as an example. I think that could be more
robust, quite frankly. Or maybe even in the case of Michigan,
where we had a strong NSP2 allocation, thinking about some
flexibility in terms of program income.
And then, finally, if you could comment on HUD's
consideration of the creation of a renovation reserve fund. If
a fund such as that were federally-capitalized, I think there
would be significant opportunity for redevelopment of abandoned
properties, derelict properties in our older industrial
communities, which I think would leverage private capital soon
thereafter.
If you could comment on your thoughts on those areas, I
would certainly appreciate it. Thank you.
Secretary Castro. Thank you very much, Congressman, for the
opportunity to address, as you say, the urban development
aspect of HUD. It is something that is important to me, as a
former mayor.
And you are right that resources have been constrained,
particularly when we look at CDBG and HOME, over the last
several years. We have seen since 2010 a 50 percent decline in
HOME funding and a 25 percent decline in CDBG funding. That has
a real impact on communities throughout the United States.
One of the things I am encouraged by in next year's Fiscal
Year 2016 budget and I am sure we will have an opportunity in a
few weeks to discuss at greater length is an upward-mobility
initiative that would allow up to 10 communities, as part of a
pilot project, to combine CDBG with CSBG and two other programs
and would invest $300 million in Health and Human Services to
administer funds that would flexible across those four program
areas that I think would give some of the flexibility to
communities that you are talking about. I certainly know how
valuable that is in making projects happen on the ground.
We are also, though, very proud of the work that has been
down by the Administration to try and break down the silos that
exist within the Federal Government and also locally. The
Department of Education now is speaking to HUD, is speaking to
Energy, the EPA, and so forth, and that is being mirrored on
the ground through SC2, Promise Zones, the work that Choice is
doing with planning grants and also implementation funds.
All of that adds up to, I think, getting a bigger bang for
the buck in local communities. And whether it is doing
something about vacant lots or making housing more affordable
in an area or just, as we used to do a lot of in San Antonio,
investing in infrastructure--
Mr. Kildee. Right.
Secretary Castro. --bottom-line infrastructure, we are
trying to find creative ways that we can make those resources
go further.
With regard to the U.N., the Habitat III meeting, we just
had our first meeting. And as the Chair of the U.S. national
committee, I look forward, of course, to visiting with you and
your staff on how we can work together.
Mr. Kildee. Thank you very much.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Secretary Castro, you manage a trillion-
dollar book of business--larger than any other aspect of our
insurance mortgage market, greater than half of it. The scope
of your mission, as you defined it, is first-time buyers and
low-income, minority people. You said clearly several times
that you are not a bank.
I would ask you, though, sir, do you believe that the scope
of your mission in the practices that you have stated that you
said are prudent practices, do you believe that these practices
should be commensurate with the same kinds of standards in the
private market?
The private market is competitive. They are trying to
aggressively build their book of business. They are out there--
do you feel that your standards should be somewhat consistent
with who they are and what they are doing and what their
standards are?
Secretary Castro. I agree with you that whether it is a
bank or it is FHA, we need to take prudent measures to ensure
that we are in good financial health.
Earlier, a question was asked, for instance, about
qualified mortgages. We have our own QM that tests the ability
to pay and ensures that the loans that we insure at FHA are
sound ones.
So I think you and I agree with regard to implementing
prudent policy--
Mr. Pittenger. My point, though, is that you believe that
if you had a competitive private market out there which is
trying to build a book, that certainly they are trying to be as
aggressive as they can, with prudent standards, to build their
business.
I think the point I want to drive toward is the very people
that you seek to represent are the same people, that
demographic group, who have been hurt the worst because of the
very low standards that we had.
I would like to point out, I had a conversation yesterday,
Mr. Secretary, with a risk management officer of a major
financial institution. And we went over some of their standards
with those of FHA.
Your percent of loans past due is 14 percent. Is that
correct? Their percent of loans past due is 2 to 3 percent.
The minimum required downpayment is 3.5 percent by FHA. The
minimum requirement downpayment for this institution was 20
percent.
Then the required FICO score, 580. You said that your
average is 680. The average for this institution is between 730
and 740.
These are enormous, significant differences in the
underwriting standards between the private market and FHA, and
yet they are seeking to be as aggressive as they can to build
their portfolio.
I would ask you, then--we want you to be successful. The
footprint of the government is very heavy there, and, as such,
the American taxpayer, we don't want a demise. And yet it seems
to me, with the lowering of the premiums, the downpayment
requirements, you are setting yourself up again for failure,
and inconsistent with the private market, who is seeking to
attract these same individuals.
Could you kindly respond to that?
Secretary Castro. Yes. The FHA has been a profound success
throughout its history. If we think about the unique market
that FHA serves, to have a default rate that is less than 10
percent--now, you mentioned delinquencies. We have seen our
serious delinquencies fall by 27 percent in the last 2 years.
So, because of these safeguards that we have put in place,
at times in conjunction with the work of this committee, to its
credit, we are on a much more solid footing than--
Mr. Pittenger. Right.
Secretary Castro. --we were before.
Mr. Pittenger. Mr. Secretary, my dad used to say that
beauty is in the eyes of the beholder. And perhaps, from your
view, that could be. But I have just outlined to you the
differences between the private market and FHA in their
underwriting standards. They are trying to be aggressive out
there to build their book. And yet your standards are far
lower, and, as such, the outcomes are much more deficient. With
14 percent past-dues and the private market at 2 to 3 percent,
that is a big variation.
So I would suggest to you that you need to look at stronger
standards if you want to be successful in the long term.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair wants to remind all Members that I intend to
recess the committee in 10 minutes. We will reconvene at 1:30
in order to give the Secretary a break.
Rough translation: Mr. Ellison, Mr. Barr, you are in luck.
Mr. Heck and the rest of you, you are temporarily out of luck.
The Chair now recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Mr. Secretary, thank you very much.
And let me also thank the chairman and the ranking member.
We have spent a lot of time today--and I have tried to
watch the proceedings on TV, given that we have so many things
happening at the same time around here--talking about single-
family portfolio.
But I would like to ask you to offer your views on the
multifamily portfolio and how you believe it has performed and
why its performance is important for housing in America.
Secretary Castro. Thank you, Representative Ellison, for
giving me the chance to comment on another very significant
part of the work that FHA does.
Our multifamily portfolio is immensely important. It also
plays, to some extent, this countercyclical role. We saw, I
believe, the volume during the housing crisis go up from about
$3 billion to $13 billion of FHA-insured loans in multifamily.
That is particularly important now because FHA helps create
more affordable multifamily housing at a time when, from
community to community, we are seeing a crisis in terms of
rental affordability.
Mr. Ellison. Right.
Secretary Castro. So the ability of the FHA to underwrite
and insure sound loans for affordable multifamily housing, I
would argue, is important or perhaps even more important to
housing options as it has ever been.
Mr. Ellison. Thank you very much for that.
And I just want to mention that we have sort of a historic
spike in the number of people who are spending significantly
more than a third of their income in rent. And, of course, what
does that do? That means less food, less other things that the
family needs. And so, I certainly appreciate the role that FHA
has played in this area.
Also, I would like, if you would, to discuss FHA's
requirement to hold reserves that cover claims over a 30-year
period. How does that compare to the Financial Accounting
Standards Board's requirements for reserves, the need to be
held by private financial institutions? And are you aware of
any other Federal loan program that has such a stringent
accounting requirement?
Secretary Castro. Yes. So for the Federal Government and
each of its lending entities, the fact that we have a 2 percent
capital-reserve ratio is unique in the government. There is no
one else that is required to have the kind of capital reserves
that FHA is required to have.
It was mentioned earlier and it is accurate to say that in
the private sector there is a higher reserve ratio that is
often held. But FHA is unique in its role and in its
requirements in terms of our capital reserve.
Mr. Ellison. So, apples to apples.
Secretary Castro. That is right.
Mr. Ellison. Yes.
So I also just, kind of, want to make this comment. I
represent the Fifth Congressional District of Minnesota. All of
us here have to represent our districts, although we have a
national purview, too, as well. And there are about 113,000
homes with mortgages in the Fifth District, and more than half
are FHA-insured. And I don't think these families I represent
would say that they are subprime borrowers.
I just want to just make the point, and I think it is
important to say, that FHA has in the past and does play a very
important role. And I know that this is the place where we
argue over these things all the time, but I just think that, as
you have to deal with the criticism and the counter point of
views, that there are some people who really appreciate the
role that FHA has played and HUD has played.
And, also, in terms of just making sure that diverse
communities get a chance to have homeownership, FHA has insured
loans to a high percentage of African-American and Latino
communities. I wonder, would you care to comment on your work
in that area?
Secretary Castro. FHA has been enormously important for the
ability of folks who are of modest means of all different
backgrounds but particularly communities of color, African-
Americans and Latinos, to be able to access credit so that they
can afford a home. Ranking Member Waters was very, I think, apt
to point out that nearly 50 percent of African-American and
Latino home buyers have an FHA-insured loan these days.
And so, when we think about ensuring that there is
opportunity for everyone in the United States, FHA is an
invaluable component of that.
Mr. Ellison. Thank you, Mr. Secretary.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, after which we will recess.
The gentleman is recognized.
Mr. Barr. Thank you, Mr. Chairman.
Mr. Secretary, welcome to the committee.
As you know, the Consumer Financial Protection Bureau has
finalized its Ability-to-Repay/Qualified Mortgage Rule. We have
talked about that a little bit today. Ostensibly, that rule is
designed to promote safe and sound mortgage loans. It is
designed to prohibit private lenders, mortgage originators from
making loans that the Bureau deems too risky.
The Basel capital ratio rules that are applied to community
banks require those institutions to reserve at least 6 percent
capital. The FHA's policy of insuring 97 percent loan-to-value
mortgages is arguably, seriously more risky than these QM
compliance loans. And yet the FHA's capital-reserve ratio,
which you are currently not meeting, is only 2 percent. And you
are below that. You are well below that. And the only reason
you are at 0.4 percent is because of a taxpayer bailout of $1.6
billion.
So the question is this: If your loans were not statutorily
exempt from the QM rule, how many of your loans, what
percentage of your portfolio, of the loans that you insure
would be QM-compliant?
Secretary Castro. First, in the legislation that spelled
out QM, FHA was specifically singled out--
Mr. Barr. Right.
Secretary Castro. --as separate from that. And that is why,
legislatively, statutorily, we are not under the umbrella--
Mr. Barr. I recognize that.
Secretary Castro. --just to be clear.
Mr. Barr. But if you were not exempt, what percentage of
the loans that you insure would be compliant with what the
Consumer Financial Protection Bureau deems to be non-risky
loans?
Secretary Castro. We have our own QM rule to ensure ability
to pay, and so my--we can get you the exact figure.
Mr. Barr. Let me ask you this. I understand you have a
different set of underwriting standards. Do you believe that
the Bureau's rule is flawed and that you have a better
methodology?
Secretary Castro. No. What I believe is that we were told
to--and we have--come up with a separate process.
Mr. Barr. So the separate process is inconsistent with the
Bureau's process?
Secretary Castro. No. I would say that both are intended to
ensure that loans that are made--that underwriting is strong.
FHA has historically and continues to this day to have very
strong underwriting.
Mr. Barr. You didn't answer the question about the
percentage. Maybe you don't know exactly the percentage of your
loans that you insure that would be noncompliant with QM.
But let me ask the question this way: By lowering the
mortgage insurance premium by 50 basis points, by insuring
mortgages with an ultra-low 3\1/2\ percent downpayment, is the
FHA more likely or less likely to insure non-QM loans that the
Bureau would deem risky?
Secretary Castro. We will continue to insure loans of the
same quality, because this is not changing anything about who
is actually able to qualify for a loan. This is all about the
affordability for folks who do qualify.
Mr. Barr. The American people are looking at this. They are
looking at the Bureau, a Federal regulator, new Federal
regulator, that is restricting access to mortgage credit. They
are looking at FHA and FHFA and seeing a return to some of the
more lenient standards of mortgage underwriting. And they are
wondering, what is it that the Federal Government is telling
us? Very conflicting messages.
What do you say to the American citizens who are looking at
this and are very, very confused about what the government is
telling them?
Secretary Castro. I would say that we are fighting for
everyday Americans who are working hard, who are playing by the
rules and want an opportunity to be able to get a home loan in
a time when it has been very difficult, that we believe in them
and we believe that they can responsibly own a home because the
FHA has had strong underwriting, but it also affords folks the
opportunity to get--
Mr. Barr. But your underwriting would promote loans that
another Federal agency would deem risky. It is a double
standard.
Let me just continue on the idea of this double standard.
You talk about the noncompliance with the capital-reserve
ratio, a congressional mandate, that you are below 2 percent,
and that you are working hard to come into compliance.
My question would be, for a community bank that is not
meeting the Basel requirements of 6 percent, would a Federal
regulator, an examiner conducting an exam at a bank--how would
a Federal regulator look at that community bank if the bank's
excuse was, ``We are working hard to come to compliance?''
Would the regulator excuse that kind of a response in an exam?
Secretary Castro. I can only speak to FHA. And at FHA, we
have seen a $21 billion increase in the net value of the Fund
over the last 2 years. We have taken these very aggressive
measures to improve the health of the Mutual Mortgage Insurance
Fund, and it is expected to grow by at least $7 billion a year
over the next several years and get to that 2 percent. So, the
results are there.
Mr. Barr. The lack of coordination between what FHA is
doing and what the Bureau is doing is puzzling to a lot of
Americans. I would suggest you take that into consideration.
Thank you. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair wishes to advise Members that Floor votes are
expected somewhere in the 1:50 to 2 p.m. range. I encourage
those who have not had a chance to question the Secretary to
return promptly at 1:30.
The committee now stands in recess until 1:30.
[recess]
Chairman Hensarling. The committee will come to order. The
Chair now recognizes the gentleman from Washington, Mr. Heck,
for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman, and Mr. Castro. Welcome
to Washington, D.C., and to the committee. Earlier in your
comments, you made repeated references to your mission, which I
would paraphrase, but I think accurately, to meet housing needs
of the borrowers that the Single Family Mortgage Insurance
program is designed to serve. I have a problem with that
assertion. My problem is, when you use the term, ``mission,''
it renders it or has the connotation of something some
consultant facilitated your executive management group to come
up with. But in fact, Mr. Secretary, it is a legal obligation,
is it not?
Secretary Castro. It certainly is part of the DNA of the
FHA, sure.
Mr. Heck. Not just culturally, but statutorily?
Secretary Castro. Sure.
Mr. Heck. So last night, an incredible earth-moving event
occurred. Jon Stewart announced his retirement from The Daily
Show, and it got me to thinking about all the things that he
had said over the years that caused me to sit back and ponder,
one of which was, when we amplify everything, we hear nothing.
And I fear that we have amplified something here today which
caused us not to hear something else, namely, that you are ``in
violation of the law.'' But of course, the law has many faces.
So I thought I would go back and check, as it were, the
controlling legal authority. And here is what the National
Housing Act says. And I want to make it really clear that this
is an 81-year old statute that was reaffirmed both in 1959 and
in 2008 by this Chamber. It says that if you determine that the
Fund is not meeting the operational goals established under
paragraph (7), you may make appropriate premium adjustments.
And here is one of your operational goals. Here is one of your
legal obligations. This language will be familiar to you: ``To
meet the housing needs of the borrowers of the single family
mortgage insurance program it is designed to serve.''
So I think my point, and I am soliciting your response, is
yes, you have a legal obligation under the law to get to 2
percent reserve, but you also have a legal obligation to serve
the borrowers that this program was designed to serve. And it
just seems to me, Mr. Secretary, and please respond, that what
you have attempted to do is balance those two legal
obligations, and it seems to me that the reduction of the
insurance premiums was a way you were able to reconcile what
could be construed as conflicting legal obligations. Do you
agree?
Secretary Castro. Yes, I agree that we have both of those
requirements in front of us. We are working hard to get to 2
percent. We have seen incredible progress toward that, so there
is better news today than there has been in the past. At the
same time, from its very beginning, FHA has had the mission and
the responsibility to afford opportunity to Americans who are
working hard, who may be of modest means, but who are
responsible, and also deserve the opportunity to be able to own
a home.
Mr. Heck. Not just a mission, but a legal obligation to
serve them.
So quickly, let me ask you once again about HECM, the
reverse mortgage program. As you know, I was involved with my
friend, Congressman Fitzpatrick, in reforming that legislation
a year-and-a-half ago. If I read the balance sheet correctly
and the independent actuary's assessment, you are making
progress, but what is not clear to me is whether or not the
changes brought about by passage of the Reverse Mortgage Reform
Act that Mr. Fitzpatrick and I worked on together, have
themselves, if you can bifurcate the performance of your legacy
HECM program with those reverse mortgages that have been
underwritten since enactment of the reform legislation. Can you
do that?
Secretary Castro. I believe the analysis can be done. I am
not sure that it has been done. But we would love to follow up
with you if you would like for us to look at that analysis.
Mr. Heck. I would very much appreciate the clarification.
Secretary Castro. I will say more generally, that I thank
you and the committee for working on this. You are right that
HECM has been a challenging part of our portfolio, and we
believe that the legislation will help to stabilize it and to
strengthen those books of business as HECM goes into the
future.
Mr. Heck. You are welcome, Mr. Secretary. Please extend
your gratitude to Mr. Fitzpatrick as well. I had one more
question, but I yield back the balance of my time. Thank you,
Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman, and Mr. Secretary,
it is good to see you. It is always good to see a Texan in
Washington. I am a private-sector guy. I come from the private
sector. I have been a small business owner for 44 years. Much
like you, I am a salesman. You are selling houses; I am selling
cars. And I believe that less government is the best
government. I believe government out of our lives is a good
thing. I believe in competition. I believe in fair competition.
I believe in not having to compete against the Federal
Government every single day that you get out of bed.
I have listened to the talk of FICO scores, and
downpayments, and I am glad you are doing that, but I would
like to tell everybody that that is nothing new in the private
sector. That is not a new concept. It is a concept that has
always been done. As I said, I am in the car business. And when
I listen to what you have to say, it reminds me of our
business. And I have to tell you, your business model scares
the heck out of me. When we talk about volume, and without
margin by reducing fees, and trying to improve capital
standards, that doesn't work. It doesn't work in business. And
it won't work in what you are doing. And also the comment about
reducing, or reviewing lenders and taking them out of the
ability to do business with a lot of people because they don't
meet standards, when we talked a lot about today how you all
are not meeting any standards, and are probably breaking the
law. I think it is laughable when we talk about that.
And so, I would ask you this: We talked about the $1.68
billion that you all drew on the U.S. Treasury. Similar to the
flood insurance program, should FHA be required to borrow with
interest the $1.68 billion, as opposed to just pocketing it?
And would you support the FHA repaying that back to the
taxpayers and the small business owners who invested in that,
because if I am a business owner, I am going to have to pay it
back. Why should you not have to pay it back? It is the
peoples' money.
Secretary Castro. I appreciate the question. I think we
have a different perspective on the value of FHA, obviously.
And the fact is that FHA has served a fundamental purpose in
offering opportunity to responsible Americans throughout its
80-year history. In terms of the mandatory appropriation that
we received, that is governed by statute, Congressman, and so
I--
Mr. Williams. I understand, but do you think they should
pay it back? Do you think you should pay it back, because it
bailed you out? So should you pay it back to the people?
Secretary Castro. We are going to administer the Fund as we
need to to get to that 2 percent and as we are governed by
statute.
Mr. Williams. Okay, we talked about that past due. What is
past due? Is it 30 days, 90 days, 120 days? What is it?
Secretary Castro. You have different types of
delinquencies. A delinquency, a serious delinquency obviously,
an overall default, our default rate is less than 10 percent.
We have had a reduction in serious delinquencies of 27 percent
since 2013. So I just want to say, again, and give the
committee some credit for putting in place the safeguards that
have allowed us truly to be at a spot today where we have
better news than we have had in the past, and understand our
commitment to working with you to get to that 2 percent.
Mr. Williams. But what constitutes when you say, okay, we
have to foreclose on this? Or we have--tell me, what is that
period of time?
Secretary Castro. Yes, it is--
Mr. Williams. In the car business, if you fall 60 days past
due, that is not a good thing.
Secretary Castro. Just so that I am clear, serious
delinquency is 90 days past due.
Mr. Williams. Ninety days. I got you. All right. And then
also, in our time remaining, I would ask you this: Do you
believe the FHA should be run and operated like a private
insurance company? The private sector, of course, has to be
accountable. They have to update technology and they have to
manage it right, manage the personnel and so forth. Do you
think it should be run like a private insurance company and do
you believe that right now your agency is what I would say
nimble enough to handle $1 trillion in insurance risk?
Secretary Castro. I believe that FHA has been a profound
success. It is not a private business. It is not a bank. It has
served a unique set of borrowers, and the question is, do we
believe in that mission, or do we not? And I fundamentally
believe that we can accomplish getting to that 2 percent ratio
and also fulfilling that obligation that we have to afford
opportunity to middle-class Americans.
Mr. Williams. Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the gentleman from New Hampshire, Mr. Guinta,
for 5 minutes.
Mr. Guinta. Thank you, Mr. Chairman. And thank you, Mr.
Secretary, for being here. I want to look at this from a little
bit of a different perspective. You and I share a very similar
background. You were a mayor. I was a mayor. So I want to ask
you the question from this perspective. I understand you are
running a $46 billion budget now. When I was mayor, I ran a
$300 billion budget. San Antonio was significantly larger. We
had relationships with the public housing organization in my
city. I am sure you did in yours. My question would be, as a
mayor, if an agency or entity came to you with the facts and
figures that you are presenting to us, would you as a mayor
feel and deem those facts acceptable: $1.7 billion in a
taxpayer bailout, the repayment rate--or the delinquent rate
from 14 percent down to 10 percent. Would you look at that as a
mayor, and feel that would be a reasonable risk for the people
that you represent to continue to take?
Secretary Castro. As you know, as mayor the thing that you
are concerned about is results. And what we have seen is we
have seen the results of strong safeguards that we have put in
place. So we have seen serious delinquencies go down by 27
percent, recovery rate go up by 62 percent. We have seen a $21
billion increase in the net value of the Fund and projections
for $7 billion increases each year over the next several years.
So from the perspective of getting things done, we have gotten
improvement done. So yes, I do have confidence in FHA.
Mr. Guinta. So you are making improvements. Are you meeting
the metrics that you are setting for FHA?
Secretary Castro. We are working to get to the 2 percent
capital reserve ratio and we are having very good success at
getting there.
Mr. Guinta. When was the last time you were at the 2
percent, FHA? When was the last time?
Secretary Castro. It was, I believe, 6 years ago.
Mr. Guinta. So 6 years ago, if you took over FHA, at what
time period would you say would be acceptable to get back to
the 2 percent?
Secretary Castro. Well--
Mr. Guinta. In terms of being a results-driven kind of guy.
Secretary Castro. I would say, Congressman, of course I was
not here at the time and so I don't want to speak for anything
in the past. I would just say, as someone who has been on the
job 6 months, I have been impressed by the results that FHA is
now getting. The two most profitable books of business in the
history of FHA have been 2013 and 2014. And we are projected
within the next 2 years to get to that 2 percent. So if we talk
about results, and that is what we are concerned about on the
ground, as mayors, there is no question that today we have a
story of results at FHA.
Mr. Guinta. Earlier in the testimony, you had talked about
decreasing the premiums. I understand that from 2010 to 2014,
premiums increased 145 percent. Did you think that was good
public policy to increase premiums on these very people that
you were advocating to try to provide homeownership?
Secretary Castro. I believe that was one of the tools, one
of the safeguards that was put in place. I see the value of
having done that.
Mr. Guinta. So then what changed from that period of time,
to now, where the premium is reduced--where you have reduced it
by 40 percent knowing that you still have an obligation of
almost 1.6 percent to get to the 2 percent cap?
Secretary Castro. A couple of things. Because of this
panoply of safeguards that have been put in place, the health
of the Fund has grown $21 billion over the last--
Mr. Guinta. And these are safeguards that had not been in
place ever in the history of FHA?
Secretary Castro. Most of them, that is true, or had not
been in place in a while. A good example of this is eliminating
seller-assisted downpayments. That is something that this
committee led the charge in. That helped. Our estimate is that
if those had not ever been--had not been a part of the calculus
of the business that we were doing, that the Fund would have
$16 billion more in value. So just to answer your question, the
fact that the results are there, the strong improvement is
there; secondly, that the projection is that we are going to
continue to have strong results; and then the third thing is,
we are charging these folks $1,700, collecting from them $1,700
when we expect the loss to essentially work out at $4,700. We
have to do something for average--
Mr. Guinta. Reclaiming my time for a moment, so you are
comfortable with a balance sheet that looks, that has a $1.7
billion exposure on it despite the fact that you feel we are
making results and we are going to get there eventually.
Despite the fact that we haven't met that goal in 6 years, you
are comfortable with a $1.7 billion deficit on the balance
sheet?
Secretary Castro. It is incorrect to say that we have a
$1.7 billion deficit. We have $46 billion in cash reserves
right now. And let me just--
Mr. Guinta. But you took a loan, essentially taxpayer-
backed, of $1.7 billion.
Secretary Castro. We took a mandatory appropriation from
the Treasury, sure.
Mr. Guinta. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania, Mr.
Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman, and welcome, Mr.
Secretary. I want to call your attention to a recent Politico
magazine article entitled, ``The Real Bank of America.'' This
article highlights the fact that the Federal Government has $3
trillion in loans on the books. In addition, the article
discussed the September 2013 taxpayer bailout of the FHA which
cost Americans $1.7 billion. It cited HUD's former Chief
Financial Officer saying that, ``In fact, the FHA has been
receiving silent taxpayer-funded bailouts throughout President
Obama's first term, bailouts that went unnoticed because of the
odd process the government uses to calculate the budget costs
of credit programs.'' Could you elaborate further on what the
former HUD CFO in the article was referring to?
Secretary Castro. Yes, of course. I won't speak for other
folks. Let me just say, if it is the same article that I
believe you are referring to that suggested that somehow there
was a $75 billion bailout or something to that effect, that is
just a completely inappropriate way to characterize the revenue
that has flowed between the capital reserve account and the
financing account of FHA.
In fact, we did take a $1.7 billion mandatory
appropriation, but I would not characterize that as a bailout
either, and I certainly would not suggest that the usual
business that statutorily designated of moving dollars from one
account to another account that all came in through FHA fees,
that is somehow a bailout either. That is completely incorrect.
Mr. Rothfus. I want to talk a little bit about what you are
referring to with the $70 billion-plus. In fact, the article
went on to say that the well-publicized $1.7 billion figure
ignored tens of billions of additional dollars in unpublicized
budget re-estimates after FHA mortgage losses repeatedly turned
out worse than expected. Re-estimates don't require a public
announcement or a congressional appropriation. Agencies just
use what is known as their ``permanent and definite authority''
to stick the shortfalls on the government's tab. ``That's real
money,'' is what the HUD former CFO said. Quote: ``They
forecast bogus profits every year and when it turns out they
are way off, they just say oh, well.'' Re-estimates of FHA
losses have produced $73 billion worth of, ``Oh, well,'' since
credit reform, most of it since the housing bust.
Is that really the attitude that the FHA should have about
taxpayer balance, ``Oh, well?''
Secretary Castro. I disagree completely with the premise of
the article and the comments. In fact, these transactions are
transactions that are statutorily required and they are a
regular part of doing business. And they represent the
transferring from one account to another account to be able to
ensure that all potential losses to the book of business are
covered. These are not funds from the taxpayer. These are funds
from fees collected by FHA.
Mr. Rothfus. We talked a bit about today about trying to
get to the 2 percent requirement that you are supposed to have.
Can you assure the committee that the FHA will not need another
taxpayer bailout?
Secretary Castro. There are certainly no guarantees that I
can make except to say that we have had two of the most
profitable years in FHA history in 2013 and 2014 and I do not
anticipate at any time in the foreseeable future, another
mandatory appropriation.
Mr. Rothfus. We talked a little bit earlier about--I think
you testified that the average was what, $900 in savings
because of reducing the premium from 1.35 down to .85?
Secretary Castro. That is right.
Mr. Rothfus. What is the average mortgage that you are
talking about, mortgage size that is recognizing that kind of
savings?
Secretary Castro. The average mortgage is about $180,000.
Mr. Rothfus. So for the average $180,000, you are
testifying that the average savings can be $900?
Secretary Castro. To the average borrower in 2015.
Mr. Rothfus. Okay. Thank you. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Vargas, for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. Mr.
Secretary, it is a pleasure to be here. I have to say, I have
driven through Texas a few times and I always wonder how you
guys can stand those long drives. I see it today why it is. You
guys have stamina. Stamina.
Now, I do want to ask this: The FHA has played somewhat of
a countercyclical role since the financial crisis, and I know
that you guys have been criticized for bringing down the rates
on your mortgage insurance premiums, but others have criticized
the other way saying you haven't come down low enough, in the
sense it still has a historically high level compared to the
past. Could you comment on that, because we still get a lot of
pressure at home from a lot of the REALTORS saying, we have to
do more. And the FHA should do more. Here you are hearing the
opposite, you ought to do less, but at home we hear the
opposite, you guys have to do more. Could you comment on that?
Secretary Castro. That is a good question and one that has
been asked of FHA over the years. Certainly, there have been
many voices calling for lower premiums and some voices since
the announcement saying that perhaps we should have gone lower,
as you say, and it is clear, we have folks saying don't do it
at all. But as we said, again, after the annual report came out
in November, our responsibility is to make decisions that are
consistent with our fundamental statutory obligations and also
meet our historic mission. And so we wanted to be sure to
strike that strong balance between continuing to improve the
health of the MMI Fund and also affording opportunity for folks
of modest means who are hardworking to be able to access credit
for a home loan. And 50 basis points in that regard was the
best lending spot, we felt.
Mr. Vargas. I guess I would ask this: There is that
continued--the economy seems to be recovering. You take a look
at the stock market, certainly, and look at the job growth. One
of the things that doesn't seem to be coming back as robustly
as before, and certainly not in California, certainly not in my
district, is the sale of homes and the home market. So some
people are pushing saying, you ought to do more. In fact, the
reality is that it is pretty healthy, as you have been saying.
The Fund is somewhat healthy. I was, just like some of my
colleagues here, I was the vice president of Liberty Mutual and
we did insurance, and the reality is that you have up markets,
and you have down markets. And here there seems to be an
opportunity for you, and it seems like you could do more.
And so, again, I just want to push you. And I know they are
pushing you the other way. But when you go home, they push the
other way saying you ought to do more. So could you just
comment a little further on that?
Secretary Castro. It is the case that we are always
monitoring each of these things, the volume, of course, the
health of the Mutual Mortgage Insurance Fund. We want to be
able to afford opportunity to folks. I believe that the 50-
basis point reduction is sound and it makes sense. If the
question is, will it make sense in the future to lower the
premiums again, that could be the case. But we are going to
make a decision based on the evidence in front of us, and
ensuring that we continue to strengthen the Mutual Mortgage
Insurance Fund and balance our mission of affording
opportunity.
Mr. Vargas. But the indices seem to show that you are going
the right way. In other words, even though you have been beat
up a little bit here by violating the law, even though you just
got there, the reality is, the Fund is strong and getting
stronger. So, will you continuously look at this? Because,
again, the pressure at home is very different from what I have
heard here today.
Secretary Castro. We will continue to look at the insurance
premiums as we look at all aspects of FHA. As I mentioned
before, 2013 and 2014 were the most profitable books of
business in FHA's history. And we will have a better sense of
this, I believe, when we get the next annual report in November
of this year.
Mr. Vargas. Thank you very much, and again, thank you for
staying here for so darn long. I haven't seen that in any other
committee. So thank you very much.
Secretary Castro. Thank you.
Mr. Vargas. I yield back.
Chairman Hensarling. The gentleman yields back. The Chair
now recognizes the gentleman from Arizona, Mr. Schweikert.
Mr. Schweikert. Thank you, Mr. Chairman, and Mr. Secretary,
we really are appreciative that you have given us this much
time. Let's see if I can bounce through a series of concepts
and questions as fast as possible. You have an executive risk
officer. Has that risk officer signed off on where you are
going right now ratio-wise?
Secretary Castro. We do have a Chief Risk Officer and this
was another one of the safeguards that was put in place, and I
think very--
Mr. Schweikert. That risk officer has put their little
stamp or seal, or however it is done, saying where we are at is
acceptable, and our growth in the reserves is acceptable?
Secretary Castro. That has certainly been a part of the
formulation of this and calculation, sure.
Mr. Schweikert. But they said yes?
Secretary Castro. To the extent that they are part of the
team working on it, then absolutely yes.
Mr. Schweikert. But that is not a risk officer's job. A
risk officer's job is sort of a binary, ``go, no go.'' Did they
give you a ``go'' or a ``no?''
Secretary Castro. I have not received any negative word on
it.
Mr. Schweikert. Okay, so you so far have a risk officer who
has basically been part of the team but been silent on this is
acceptable where we are at. And it is okay to grab something
from the staff because that is a big--
Secretary Castro. Because I want to make sure that I am
answering the right question here. The Chief Risk Officer has
said, yes, that he supports this measure. I think if your
question is, has he said that verbally or has he signed
something--
Mr. Schweikert. Typically we want them to sign things, and
look, remember, you are managing a huge book of business as
ultimately a loan guarantor, and the Risk Officer is
comfortable with your ratios where you are at and where you are
going. Has that Risk Officer also sat down with you and said,
here is what happens if over the next 24 months, 36 months, we
move into an upward-moving interest rate environment?
Secretary Castro. Yes, the Chief Risk Officer has been part
of the dialogue in the room with myself and the staff as we
discussed this in terms of where we are at now, and the
projections.
Mr. Schweikert. One of my side suggestions, because you and
your brother--many folks believe have great political
projectories, have them sign off on it as just sort of an
indemnification of life. Remember, black swans do happen. Do
you know what your 60-day impairment is?
Secretary Castro. In terms of our delinquencies?
Mr. Schweikert. Yes, right now, last month, what was your
impairment on 60-day?
Secretary Castro. We can get--I don't have that figure
right in front of me, but we can get it to you, Congressman.
Mr. Schweikert. It is a quick mission question. If you were
to define the mission of the FHA guarantee system, when I am
one of those who got his real estate license when he was
literally still in high school. So I remember sitting through
those classes, and looking at your age, it was probably long
before you were even paying any attention to this. We used to
hear the stories--FHA first-time home buyers. What do you think
the mission of an FHA loan is today?
Secretary Castro. The mission of FHA today is the same
mission that it has always been, to afford opportunity for
folks who are of modest means, who are hardworking and
responsible, be they first-time home buyers or other folks to
be able to access credit so that they can purchase a home, and
there are millions and millions of Americans, 40 million who
have been served by FHA with that mission.
Mr. Schweikert. And when we heard the discussions that
bounce up around here of you are also a countercyclical
provider, do you roll that into part of your FHA's mission?
Secretary Castro. I do, absolutely. I mentioned earlier it
has both of these missions and we have seen that recently. We
have seen it play a countercyclical role. In fact, as the
committee knows, and has been testified to before, there was a
very on-point analysis that demonstrated if it had not played
that countercyclical mission, then home prices, for instance,
would have declined another 25 percent, and--
Mr. Schweikert. I would love to, and staffers, can you send
me that data, just because there is something, I believe, wrong
in those calculations, so I would love to get my hands on that.
For many of us who have spent our lives around substantially
what you are specializing in now, and this may be a difference
between one side of the dais to the other side, a neighborhood
has a foreclosure. It is bad. Two, three foreclosures, it is
now the entire neighborhood that begins in a cascade effect of
suffering. And so in many ways, that mission you talk about is
to help that hardworking taxpayer have access to credit, but at
the same time, I would beg of you to also think about the
entire neighborhood, and the protection of the entire
neighborhood from what happens when the cascade effect begins.
And with that, I yield back, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr. Clay,
the ranking member of our Financial Institutions Subcommittee.
Mr. Clay. Thank you so much, Mr. Chairman. Thank you for
conducting this hearing, and thank you, Secretary Castro, for
coming before us today. And before I get into my questions, Mr.
Chairman, I would ask unanimous consent to enter several
documents into the record.
First, I have four letters from outside groups urging FHA
to reduce its premiums, one of which is signed by over 40
organizations. I also have a chart prepared by the Urban
Institute that shows a distribution of volume and share of GSE,
VA, and FHA originations in 2014 broken down by loan-to-value
ratio and FICO score. The chart demonstrates the importance of
FHA for higher LTV loans and the stark differences between
borrowers served by the FHA and the GSEs.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Clay. Thank you, Mr. Chairman. And also, I listened to
my friend from Arizona and others about the FHA and its role in
the housing industry. And I just wanted to make my colleagues
aware that in the 1930s when the FHA was originally founded,
that agency initially conducted as official U.S. housing policy
over discrimination practices in barring African-Americans from
securing FHA-backed mortgages, and purposely steering African-
American borrowers to higher-priced predatory loans.
In other words, they couldn't get the regular FHA-backed
mortgage that most other Americans were getting at the time to
realize the American dream. So they were steered into these
higher-priced loans at the behest of official government
policy. And it took the elimination of restrictive covenants
through the Supreme Court's ruling in Shelley v. Kraemer, as
well as the passage of fair housing laws into the 1960s, in
order to level the playing field in the U.S. mortgage market so
that people could be treated fairly when they went to apply for
a mortgage.
I am sure the Secretary is aware of the history of the FHA.
And I would like to make my colleagues aware of that history
also because for 30 or 40 years, people were at a disadvantage,
who tried to play by the rules, who tried to get money at a
rate that was affordable to them to purchase a home. And they
were put at a disadvantage, and so I heard the word
``foreclosure'' mentioned and what happens to neighborhoods
when there are foreclosures.
I know all too well what happens. I represent an area in
north St. Louis County which has been devastated. Up to 10
years ago, it was a middle-class neighborhood with home values
that were considered upper-middle-income levels. And then all
of a sudden, people wanted to refinance their homes, and they
were steered into these high-priced mortgages. Equity was
stripped out of the homes, and what do we have now? We have a
lot of vacant houses. People don't live in them. They can't
afford to finance them, and so that is what happens in
foreclosure to communities that are vulnerable. And let me
mention that most of these homeowners were upper-income
African-American homeowners who did not, for some reason,
qualify for conventional mortgages, and were steered into
predatory loans and now they have gone through foreclosure and
lost their property.
But let me ask the Secretary, I just have one question--oh,
my time is up. I yield back.
Chairman Hensarling. Indeed, the gentleman doesn't have any
time to yield back, but I certainly listened carefully to the
gentleman, and indeed, that was a fairly accurate history and
we will work with him to continue to make sure that these
scourges do not occur again on our watch. At this time, I will
recognize the gentleman from Colorado, Mr. Tipton.
Mr. Tipton. Thank you, Mr. Chairman. Mr. Secretary, thank
you for taking the time to be here. Sir, traditionally, the FHA
has had as its mission to provide access to creditworthy low-
and moderate-income and first-time borrowers, and play a
countercyclical role in the market in times of credit
contraction. Is that still the parameters that you believe are
the mission of the FHA?
Secretary Castro. That is still the heart of our mission,
playing a countercyclical role and affording opportunity for
hardworking, responsible Americans to be able to access credit
to purchase a home.
Mr. Tipton. Okay. Right now, the FHA has roughly 50 percent
of the market share that is in place in the whole mortgage
market, insurance market. Do you think that is too high?
Secretary Castro. Congressman, I would just say that we
fulfill our mission and we play a countercyclical role. We have
seen our market share from the beginning of the housing crisis
go up and we have started to see it come back down. So we see
that FHA is playing its countercyclical role. We welcome
private capital into the market, and I mentioned earlier that
is something that we recognize of--
Mr. Tipton. To step back a little bit, when you just
defined what the mission of the Federal Housing Administration
is, is 50 percent of the market in that low-income, underserved
area countercyclical area, 50 percent of the whole market? Does
it meet that criteria?
Secretary Castro. I would say, first of all, that it
depends on where the market is at, whether it is playing a
countercyclical role or not. And we have seen over the last
couple of years that the FHA did play its traditional
countercyclical role as its market share increased, and now has
started to decline as private actors have come back with more
force into the market.
Mr. Tipton. I will come back to this, but since you bring
up the countercyclical portion of this, you had indicated that
you have had two of the most profitable years, so the market
stabilized, but yet you are trying to get a bigger share of the
market by lowering rates, is that correct?
Secretary Castro. What we are trying to accomplish by
lowering these premiums, is to strike a strong balance.
Mr. Tipton. But you are at 50 percent plus now.
Secretary Castro. We are--our goal is to strike a strong
balance between continuing to improve the health of the Fund
and also afford opportunity for the folks that FHA--
Mr. Tipton. So that 50 percent, that is all low-income,
underserved markets is what you are telling us?
Secretary Castro. Well--
Mr. Tipton. 50 percent of the market right now.
Secretary Castro. It is the folks that FHA has historically
served. It is folks who are--some of them are lower-income,
first-time home buyers.
Mr. Tipton. Just my basis for a little bit of reflection
here, the overall market share has fluctuated from as little as
3 percent in the 2000s, to more than 30 percent of new mortgage
purchases during the crisis. Normally, it is in the 10- to 15-
percent range, so you are already well above that.
Secretary Castro. We did see--I agree with you that we saw
the market share increase. We have also seen it start to come
back down. That is the countercyclical role that FHA plays. I
believe that there is a strong value--
Mr. Tipton. So again, has the market normalized pretty
much? You just said you had two of the most profitable years in
your history.
Secretary Castro. That is correct, 2013.
Mr. Tipton. So why are you trying to get more business by
lowering rates?
Secretary Castro. Getting more business--
Mr. Tipton. You are at .41 percent capitalization.
Secretary Castro. Again, getting more business was not the
primary driver of our--
Mr. Tipton. Is that going to happen? Are you going to take
a bigger share than 50 percent now that the--
Secretary Castro. The primary drivers of our decision have
been ensuring that we have a strong and growing Mutual Mortgage
Insurance Fund; and also, we think that everyday hardworking
Americans deserve a shot to own a home in the United States,
and that FHA has played a unique role in making that happen,
and we are committed to it continuing to play--
Mr. Tipton. In a normalized market that you say we are now
in, what would be the proper size of the FHA?
Secretary Castro. I won't get into hypotheticals about the
market except to say that I believe that it is very clear that
we have produced results in terms of improving the Mutual
Mortgage Insurance Fund, and we are committed to working with
the committee to continue to strengthen the Fund.
Mr. Tipton. And you have indicated that you are obviously
comfortable with lowering the rates, and just a final question
here in the waning moments that we have here, how big is too
big for the FHA in terms of the overall market?
Secretary Castro. We are going to continue to serve the
unique market that we have served for 80 years now and this
premium reduction helps ensure that we continue to strengthen
the Fund, but at the same time, we make a home loan a little
bit more affordable to everyday, hardworking Americans.
Mr. Tipton. Thank you, sir.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maine, Mr.
Poliquin.
Mr. Poliquin. Thank you, Mr. Chairman. Mr. Secretary, you
and I have been looking at each other across these 2 tables for
4 hours. We both should have medals for doing this, but I am
thrilled to death that we finally have a chance to have a
dialogue, sir. You received a very large agency, Mr. Castro,
about 8,000 employees with an annual budget of $46 billion. Is
that right, sir?
Secretary Castro. That is correct.
Mr. Poliquin. Okay, and Mr. Tipton mentioned just a minute
ago, along with others, that you folks backstop with taxpayer
dollars more than half of every home mortgage in America. Is
that correct, sir?
Secretary Castro. We have a significant market share.
Mr. Poliquin. Thank you, and you do that by using, again,
taxpayer dollars to backstop this insurance in the event that
there is a problem in the market. Now in 2007, before the
housing crash, before the Great Recession, you folks had about
$410 billion worth of mortgage insurance for which the
taxpayers were on the hook. Now, that number is $1.1 trillion.
Okay. So my question is, and to dovetail what Mr. Tipton said,
how big do you want to get, sir?
Secretary Castro. Congressman, thanks for the question. I
think you and I may have a different way of looking at this. If
you are talking about the amount of insurance in force, then it
is certainly true that I believe that is over $1 trillion now.
Mr. Poliquin. Yes, $1.1 trillion, sir.
Secretary Castro. And as I mentioned in the conversation,
we saw FHA play its traditional--
Mr. Poliquin. Is $2 trillion--how about $3 trillion, maybe
$4 trillion? Do you have a number, sir? You must have a plan.
You are running a very large, very significant organization.
You must have a business plan. How big do you want to get, sir?
Secretary Castro. We are going to continue to serve the
market that FHA was created by statute to serve.
Mr. Poliquin. Do you think going from $410 billion before
the housing market crash now to $1.1 trillion, and you have
just said, I think, or you implied that you are not quite sure
how far you want to go, do you think that increases the risk to
the taxpayer who is backing up your product or not, sir?
Secretary Castro. Yes, the goal that we have is to ensure--
Mr. Poliquin. I think we can both agree it probably
increases the risk to the taxpayer since they are more on the
hook now than they were several years ago, is that correct?
Secretary Castro. Not at all. I think that confuses the
case. I think that is just a confused way of looking at this.
The fact is that we have $46 billion in cash reserves right
now. There has not been a time--
Mr. Poliquin. But the taxpayer is on the hook for $1.1
trillion.
Secretary Castro. There has not been a time at FHA where--
Mr. Poliquin. But they are on the hook for $1.1 trillion,
is that correct?
Secretary Castro. There has not been a time--
Mr. Poliquin. We have been sitting here for 4 hours, Mr.
Castro, looking at each other. It is a very straightforward
question. We are on the hook for $1.1 trillion.
Secretary Castro. They are not on the hook for that because
that has not been presented in terms of claims, and so the fact
is--
Mr. Poliquin. But if there were to be claims, we would be
on the hook for that amount of money, is that correct?
Secretary Castro. I am not going to address a hypothetical
that has--
Mr. Poliquin. Okay, the mortgage bankers have indicated
with data that FHA loans are much more delinquent than those
from the nongovernment financial institutions. We have talked
about that. In addition to that, your mission statement says,
in part, operate with a high degree of public and fiscal
accountability, fiscal prudence. Do you think having a huge
government organization that is responsible for more than half
of all the mortgage insurance in America that puts the
taxpayers on the hook for $1.1 trillion, and then you folks
don't know how big you want to get, do you think that lives up
to your mission statement of being fiscally accountable,
fiscally prudent, sir?
Secretary Castro. We have taken steps to continue to be
fiscally prudent. Perhaps we just have a different view of
whether the government has any role. I believe that it does. I
believe that it is important, and we have seen at times when
the private sector did not serve this unique market, and FHA
has done so.
Mr. Poliquin. Let's talk about the private sector, Mr.
Castro, if you don't mind. I believe that your organization is
a classic example of a large government entity that is crowding
out nongovernment entities from participating in this market,
that puts the taxpayers more and more on the hook because you
want to get, presumably, as big as you can. Now, is there
someone by the name of Carol Galante who works for you, sir?
Secretary Castro. Carol Galante was the previous FHA--
Mr. Poliquin. Does she work with you now? Is she at your
organization?
Secretary Castro. She is not. As of November, she is no
longer there.
Mr. Poliquin. Okay. About a year-and-a-half ago, she
indicated that you folks, and I will be thrilled to end this
way, sir, would be open to an opportunity to help open up the
mortgage insurance market to nongovernment entities. Would you
be willing to consider having nongovernment entities work in
tandem with you folks such that they can participate in a
market that you now dominate that will add more jobs and more
stability to the housing market? Would you be interested in
that, sir?
Secretary Castro. Yes, if your question, Congressman, was
about risk-sharing--
Mr. Poliquin. Yes, it is.
Secretary Castro. --and we indicated earlier that that is a
dialogue that we are willing to have.
Mr. Poliquin. Great. I will call your office tomorrow, and
I appreciate it very much. Thank you, Mr. Castro.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Utah, Mrs. Love.
Mrs. Love. Thank you. Thank you for being here, Mr.
Secretary. I know that these questions are really hard and I
just want you to know, I acknowledge that. What is the expected
default rate among the homeowners that you expect to help
through lower premiums and the lowering of some of these
standards?
Secretary Castro. We have a default rate of less than 10
percent. It has improved over the last couple of years. We also
have seen our serious delinquencies, which refer to 90-day
delinquencies, drop by 27 percent since 2013, because 2013 and
2014 have been some of our strongest books.
Mrs. Love. All right, 10 percent. So you said about 10
percent or less is what you are expecting the default rate.
Okay, so what happens to those people when they go into
default? What happens to them?
Secretary Castro. That is a great question. And in fact,
and I want to thank, in part, the committee--
Mrs. Love. Do they lose their home?
Secretary Castro. There is a long process before that
happens. In fact, I think, to the credit of FHA, and in part,
to the committee, we have improved our loss mitigation process.
Mrs. Love. Okay, I just--
Secretary Castro. So we work with folks through housing
counseling, and through other measures to try and avoid
default.
Mrs. Love. So they lose their homes. They end up losing
their credit. Yes? When they lose their home, they end up
losing their credit for a while, is that correct?
Secretary Castro. Not everybody who goes into serious
delinquency loses his or her home.
Mrs. Love. Okay, now what happens to the value of the homes
in that neighborhood? What happens to the other people who have
gotten into homes responsibly when somebody ends up defaulting
on their home? What happens to the values of the homes in that
neighborhood?
Secretary Castro. I would just disagree with the premise of
your question.
Mrs. Love. I just asked you what happens to the value of a
home in the neighborhood where somebody has defaulted on their
loan.
Secretary Castro. I think the answer to that is that it
varies. Sometimes those homes are sold, and somebody new moves
in, and so you have a variety of experiences out there in terms
of what happens under the circumstance.
Mrs. Love. Okay, Federal Reserve Bank of Atlanta Economic
Review: ``Given that foreclosure properties generally sell at a
discount, the natural question arises as to whether these
distressed properties, in turn, put downward sale prices
pressure on neighborhood properties resulting in negative
externalities.''
Another quote from the White House blog, your predecessor,
Shaun Donovan stated that, ``We all understand the impact the
foreclosure crisis has had on homeowners, but the crisis hurt
communities, too. Foreclosed and vacant homes have a
debilitating effect on neighborhoods, and often lead to blight
neighborhoods, decay, and reduced property values.''
We have talked about what is seen here. There is a great
economist named Frederic Bastiat who talks about what is seen
and what is unseen. One of the things that he says is that
there is a difference between good economists and bad
economists, and good directors and bad directors. The bad ones
confine themselves to the visual effects of what is seen, get
more people into homes, but then a really good one actually
looks beyond that and sees both accounts. That which is seen,
and that which must be foreseen. What I am trying to say is,
this is not just the fiscal issue for me. This is a moral
issue. This is about us taking people and bringing them to the
lowest common denominator.
What happens to the values of homes when people default on
homes? What do these neighborhoods start to look like? Think
about that. What do you say to the people who have gotten into
their homes responsibly, and all of a sudden because of so many
different foreclosures around that area, realize that their
neighborhoods are going into decay, that they have lost the
value in their home. What do you say to those people?
Secretary Castro. I would say that, first of all, if they
are in that neighborhood, the chances are that those
responsible home buyers went through FHA, because we have been
doing our work.
Mrs. Love. Okay, you are a mayor. I am a mayor. I have
seen--are you telling me that you haven't seen the effects of
neighborhoods that had the potential of being great and that
you see all of these neighborhoods that are foreclosed and
people lost the value of their homes, and neighborhoods turn
into something that is less than desirable, what they wanted in
the first place, somewhere where they can grow and they thrive.
This is about bringing people from the lowest common
denominator up.
The last thing I want to bring up is a map that was
actually sent here by our ranking member that was introduced,
and this shows distressed neighborhoods from 2008 to 2012. And
the only thing I want to leave you with is that the people who
are in--who run these areas have the same political view as you
do. In the words of the President during the State of the Union
Address, if it is not working, it is time to do something
different. We need to do everything we can, by not just
worrying about one family, but worrying about as many people as
possible.
Chairman Hensarling. The time of the gentlelady has
expired. The Chair now recognizes the gentleman from Arkansas,
Mr. Hill.
Mr. Hill. Thank you, Mr. Chairman. Mr. Secretary, I am glad
to have you with us. You can just pretend you are on the river
walk and we are having a margarita and it is all peaceful. We
are glad to have you and thanks for your service to your
country. I have heard a lot of talk today about hardworking and
responsible people that FHA tries to serve, and as a former
banker, I certainly had many customers who availed themselves
of the FHA program and the reverse mortgage program. So I
certainly know and appreciate the products of your mission.
But I want to talk to you a little bit about something we
haven't really touched on too much today, although my
colleagues from Colorado and Arizona did briefly, and that is
narrowing the scope of truly, the folks you are trying to help.
This issue of trying to help first-time, low- to moderate-
income home buyers at FHA, clearly FHA has had mission creep
over the years, some statutorily directed to do that, others
not. And I am curious, in an effort to help truly low- and
moderate-income people, would the Department consider dropping
its maximum loan size that it would approve under the FHA?
Secretary Castro. Thank you for giving me the opportunity
to address that, Congressman. I do know that this is an issue
that has been quite the subject of debate and conversation. Of
course, as you know, these loan limits are set by Congress, and
so FHA is working within the loan limits that have been set by
Congress. We believe that they are workable loan limits that do
help us meet our mission to serve lower-income and moderate-
income hardworking families. And so we realize there is a
conversation happening in Congress, but that is set by you all.
Mr. Hill. But you have really almost 80 percent of your
loans are certainly under $300,000, and you have an average
loan size in Fiscal Year 2014 of $168,000 if you include refis.
I think you said a few minutes ago 180, so we don't need to
quibble over that small difference. And I am just wondering,
why would the Department accept direction from Congress to
lower the maximum loan limit size for FHA if you were so
directed? In other words, you wouldn't lobby or testify against
it, is my question?
Secretary Castro. We are always willing to work with
Congress on this issue, and other issues, of course. But we
believe that we are meeting our mission right now, and with the
loan limits we have in place, and as has been brought up, there
has been a lot of talk about ruining neighborhoods, or other
things. That is not FHA. The FHA has been lending with strong
underwriting to responsible folks throughout its history with
this 3, 3.5 percent downpayment for 50 years. And so I just
want to put that very clearly on the record and let you know
that I credit the committee with some of the work it has done
in the past to help us strengthen the MMI Fund and we look
forward to continuing to work with you to do that.
Mr. Hill. Thank you for that. We talked about loan limits.
The George Washington School of Business noted in May 2012 that
more than 30 percent of FHA loans went to families making 115
percent or greater of the average median income. So again,
consistent with this mission, do you all have a target for
median incomes that you are trying to hit since that is
relatively affluent by national standards? Talk to me a little
bit about that.
Secretary Castro. We are at FHA serving the market that we
are intended to serve, folks who are lower- and moderate-income
folks. I can't say that there is a numerical target for that.
There is a range that exists.
Mr. Hill. But HUD sets a low- to moderate-income target.
They define it. What is the definition of low- to moderate-
income under HUD's current rulemakings?
Secretary Castro. I would say that it sets it, but not in
the context of the FHA. What we want to do with FHA is, first
of all, ensure that a borrower is qualified and if a borrower
is qualified within the loan limits that had been statutorily
passed down to FHA, then we are going to loan to that borrower.
Does it make sense to look at those loan limits from time to
time? Congress has certainly done that. We are comfortable with
the loan limits where they are, but are always open to a
conversation with you all about that in the future.
Mr. Hill. I appreciate that. It just seems to me that we
want to be focused on our low- to moderate-income focus at HUD
for all of your programs and anything we can do to target that
is the mission. And that when you don't, you crowd out the
private sector as many people have suggested here. So thank you
very much, Mr. Chairman. I yield back.
Chairman Hensarling. The gentleman yields back. There are
no other Members remaining in the queue.
Secretary Castro, we very much appreciate your appearance
here today.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his 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.
This hearing stands adjourned.
[Whereupon, at 2:32 p.m., the hearing was adjourned.]
A P P E N D I X
February 11, 2015
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