[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
AN EXAMINATION OF THE FEDERAL
HOUSING ADMINISTRATION AND ITS
IMPACT ON HOMEOWNERSHIP IN AMERICA
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HOUSING,
COMMUNITY DEVELOPMENT,
AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 5, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-72
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-629 PDF WASHINGTON : 2020
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on Housing, Community
Development, and Insurance
WM. LACY CLAY, Missouri, Chairman
NYDIA M. VELAZQUEZ, New York STEVE STIVERS, Ohio, Ranking
EMANUEL CLEAVER, Missouri Member
BRAD SHERMAN, California BLAINE LUETKEMEYER, Missouri
JOYCE BEATTY, Ohio BILL HUIZENGA, Michigan
AL GREEN, Texas SCOTT TIPTON, Colorado
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
CAROLYN B. MALONEY, New York DAVID KUSTOFF, Tennessee
DENNY HECK, Washington ANTHONY GONZALEZ, Ohio
JUAN VARGAS, California JOHN ROSE, Tennessee
AL LAWSON, Florida BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas, Vice Ranking
CINDY AXNE, Iowa Member
C O N T E N T S
----------
Page
Hearing held on:
December 5, 2019............................................. 1
Appendix:
December 5, 2019............................................. 33
WITNESSES
Thursday, December 5, 2019
Montgomery, Hon. Brian D., Commissioner, Federal Housing
Administration (FHA)........................................... 4
APPENDIX
Prepared statements:
Montgomery, Hon. Brian D..................................... 34
Additional Material Submitted for the Record
Clay, Hon. Wm. Lacy:
Written statement of the Association of Independent Mortgage
Experts.................................................... 42
Anthony Kellum article entitled, ``National Mortgage News
Opinion FHA's strong financial showing points the way on
policy''................................................... 44
Montgomery, Hon. Brian D.:
Written responses to questions submitted by Representatives
Luetkemeyer, Beatty, Stivers, and Velazquez................ 48
AN EXAMINATION OF THE FEDERAL
HOUSING ADMINISTRATION AND
ITS IMPACT ON HOMEOWNERSHIP
IN AMERICA
----------
Thursday, December 5, 2019
U.S. House of Representatives,
Subcommittee on Housing,
Community Development,
and Insurance,
Committee on Financial Services
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Wm. Lacy Clay
[chairman of the subcommittee] presiding.
Members present: Representatives Clay, Cleaver, Sherman,
Beatty, Green, Vargas, Lawson, Axne; Stivers, Luetkemeyer,
Huizenga, Tipton, Zeldin, Kustoff, Gonzalez of Ohio, Rose,
Steil, and Gooden.
Also present: Representative Hill.
Chairman Clay. The Subcommittee on Housing, Community
Development, and Insurance will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of this subcommittee are authorized to
participate in today's hearing.
Today's hearing is entitled, ``An Examination of the
Federal Housing Administration and Its Impact on Homeownership
in America.''
I now recognize myself for 4 minutes to give an opening
statement.
There was a time when the Federal Housing Administration's
(FHA's) policies explicitly denied access to the American Dream
of homeownership to Black families and people of color, making
owning a home a privilege afforded primarily to white Americans
and contributing to the racial wealth gap as we know it.
As of the third quarter of 2019, the white homeownership
rate is 73 percent, compared to nearly 48 percent for Latinos
and 43 percent for Black homeowners.
Today, FHA plays an important role in our housing finance
system that is helping to ensure that access to homeownership
is broadly available. In Fiscal Year 2019 alone, FHA helped
over 615,000 borrowers become homeowners for the first time,
with over 33 percent of FHA market endorsements serving
minority borrowers, and over half serving low- to moderate-
income borrowers.
FHA also plays a vital role in expanding access to
affordable rental housing through its multi-family insurance
program. Yet, in the midst of the current affordable housing
crisis, it burdens so many families with unaffordable rents.
Secretary Carson chose to terminate FHA's partnership with the
Federal Financing Bank, which provided low-cost financing for
affordable multi-family housing loans.
FHA is designed to play a countercyclical role in the
housing market, meaning that its market share expands when the
private market recedes. This helps provide long-term stability
to the housing market, particularly during economic downturns.
Thankfully, the markets and overall economy have been trending
well, due in large part to the focus and driven policies of the
Obama Administration.
Yet, there remain concerns that FHA is failing to take
adequate measures to help borrowers avoid foreclosure,
including elderly borrowers with reverse mortgages. In
addition, immediately following President Trump's inauguration,
HUD suspended a planned quarter-point decrease in annual FHA
insurance premiums for most FHA-insured mortgages.
According to research from the National Association of
REALTORS, roughly 234,000 creditworthy borrowers were priced
out of the home buying market in 2014, solely due to FHA's high
premiums. Despite the strong financial health of FHA's Mutual
Mortgage Insurance Fund and calls from advocates and
stakeholders to lift the suspension, HUD leadership has
maintained this suspension indefinitely. This decision has
diminished the homeownership opportunities in St. Louis and
across the State, and the nation, locking many hard-working
families into rentership and exacerbating the racial wealth
gap.
With that, I look forward to hearing the testimony of Mr.
Montgomery today. I yield back.
I now recognize the gentleman from Ohio, Mr. Stivers, the
ranking member of the subcommittee, for an opening statement.
Mr. Stivers. Thank you, Chairman Clay. I really appreciate
you holding this hearing today.
Commissioner Montgomery, I appreciate you being here before
the subcommittee today. I know you wear multiple hats at HUD,
and today we welcome you in your capacity as Commissioner of
the Federal Housing Administration (FHA).
FHA has a critical mission: helping individuals achieve
their dream of homeownership. Achieving that dream has real
consequences. Homes act as savings vehicles and are long-term
investments that generally appreciate in value. In other words,
owning a home and building equity helps families generate
wealth. In fact, according to a 2018 study by Duke University,
reducing disparities in homeownership by race would narrow the
racial wealth gap by 31 percent.
Earlier this year, when some of my colleagues on the other
side attacked the idea of gentrification, I urged them to join
me in addressing a real solution to the real problem, and that
is the disparity in racial homeownership. And I want to call on
the chairman today to work with me on those efforts because I
think we both believe in that and want to work on that in the
future.
And, Commissioner Montgomery, I would ask you to join us as
we try to address that effort because I think it is a very
important effort to help ensure everybody can achieve the
American Dream, and I want to talk more about that.
FHA, I think, is a very important tool in that, and we
should view FHA and private mortgage insurance as important
tools for helping people climb the economic ladder. But, that
ladder needs to be stable. Families cannot climb the FHA ladder
if the insurance fund is imploded before they get there.
Commissioner, you have now served in HUD in different roles
in three Administrations--for President Bush, President Obama,
and President Trump--so I know you have real bipartisan
credentials of working in three Administrations of different
political folks.
Your time spent in public service gives you some unique
insights into the housing sector and how it has evolved during
and after the financial crisis. I want to hear some of that
today. I am sure your experience has given you an appreciation
for FHA's importance as a countercyclical buffer, as the
chairman talked about, and I think that is really important,
particularly important during downturns, but also understanding
how razor-thin the FHA insurance fund is right now. And
although it is a lot better than it was, it is still not where
we want it. That puts taxpayers at risk.
I appreciate all the work you have done to rebuild FHA's
fund, in fact, to its highest level in 12 years, and I want to
congratulate you for that. I think there is still more to be
done, and I am glad that we are not putting it at risk by
artificially cutting rates before the fund is stable.
It also begs the larger question of, how can we further
reform and strengthen housing finance reform by transferring
risks from the taxpayers to the private sector? The Federal
Government has a terrible record of pricing risk, and you only
need to look as far as the Federal Flood Insurance Program to
see that. FHA sometimes does that, too. But by the same token,
government can also be less capable of determining which
individuals are good risks and therefore should pay less.
So, I think there are some reforms we can do on pricing.
Instead of a one-size-fits-all approach that uses the private
sector for price discovery, some unique partnerships in the
future. And I look forward to talking with the chairman and you
about that because I think some folks deserve to actually do a
little better.
With that, I ask unanimous consent to insert an opening
statement from Ranking Member McHenry, the ranking member of
the full Financial Services Committee, into the record this
afternoon, Mr. Chairman.
Chairman Clay. Without objection, it is so ordered.
Mr. Stivers. Thank you, and I yield back.
Chairman Clay. The gentleman from Ohio yields back.
Today, we welcome the testimony of Commissioner Brian
Montgomery of the Federal Housing Administration.
The witness is reminded that your oral testimony will be
limited to 5 minutes. And without objection, your written
statement will be made a part of the record. You are now
recognized for 5 minutes to give an oral presentation of your
testimony.
STATEMENT OF THE HONORABLE BRIAN D. MONTGOMERY, COMMISSIONER,
FEDERAL HOUSING ADMINISTRATION (FHA)
Mr. Montgomery. Thank you very much, Mr. Chairman, Ranking
Member Stivers, and distinguished members of the subcommittee.
I am honored to appear before you to discuss the progress and
improvements FHA has made recently in the areas within our
programs that warrant further attention.
FHA has made significant progress in improving the
financial performance of its insurance fund, mitigating risks
within its programs, reducing regulatory burdens, and
modernizing its technology platforms. The successes of these
actions were presented to you last month in our 2019 Annual
Report to Congress on the State of the Mutual Mortgage
Insurance (MMI) Fund.
As you know, Congress has a statutory minimum 2 percent
capital ratio with the MMI Fund. The capital ratio is a strong
indicator of the fund's financial health and includes our
forward and reverse mortgage products.
Our annual report showed that the capital ratio increased
from 2.76 percent last year to 4.84 percent in Fiscal Year
2019, well above the mandatory 2-percent minimum. Additionally,
the MMI capital, what we used to refer to as economic net
worth, was $62 billion, more than its $27.5 billion from the
previous year.
While the improved health of the MMI Fund is welcome news
to us all, the number of households served by FHA is equally
good news. In Fiscal Year 2019, FHA insured forward mortgages
for almost one million households, of which 616,000 went to
first-time home buyers.
FHA remains an important option for minority communities,
as well. In fact, last year, minorities represented 36 percent
of all FHA purchase mortgage borrowers, compared to just 20
percent in conventional lending channels.
HUD's Housing Finance Reform Plan submitted to the
President in September proposes a number of recommendations to
further reduce risks to the MMI Fund, to protect taxpayers, and
to ensure that FHA maintains its focus on providing mortgage
financing for low- to moderate-income families not served by
traditional underwriting.
All of the recommendations in HUD's plan are important.
Several priorities are particularly noteworthy for the purposes
of today's hearing.
One priority is the need to radically modernize FHA's
information technology infrastructure. Our single-family
business currently runs on 15 different systems, many of them
on antiquated mainframes, and some of which are more than 40
years old.
In early 2019, HUD formed a highly-qualified FHA
Modernization Project Team, started by gathering business
requirements for every element of the loan life process, from
application to origination, servicing, and through claims
processing. Working with single-family staff at headquarters
and in the field, this team has an ultimate objective of fully
digitizing the entire loan lifecycle.
HUD is very grateful that Congress appropriated an initial
$20 million specifically to modernize our single-family
technology systems earlier this year, and that both the House
and Senate Appropriations Bills for Fiscal Year 2020 would
provide an additional $20 million.
However, we have a ways to go. Ultimately, we need $80
million to $90 million in total funding to complete these
critical and long-overdue modernization projects.
Beyond our financial health and IT infrastructure,
improving FHA's operational ability to serve our customers is
also a critical priority, and this is an area where we have
made great strides. For example, we have dedicated significant
focus to improving single-family default processes. This is
making it less burdensome to service FHA loans, while ensuring
that our loss mitigation options protect taxpayers and promote
sustainable homeownership.
Additionally, our Disaster Standalone Partial Claim
implemented last year to assist homeowners impacted by 2017
disasters will now be a standard mortgage relief option
available for all people impacted by major disasters. This
allows many homeowners to resume payments without modifying
their loan or re-amortizing the loan term, avoiding both the
foreclosure process and payment increases. It also streamlines
income documentation and other requirements to expedite relief.
Looking forward, we must focus on seeking the right balance
between facilitating access to mortgage credit and better
managing our risk. Our mission is to make certain FHA remains a
stable and reliable resource to provide housing finance support
to first-time home buyers and other underserved borrowers. I
believe that is a mission that we all share.
Again, I want to thank the subcommittee for your time
today, and I look forward to your questions. Thank you.
[The prepared statement of Commissioner Montgomery can be
found on page 34 of the appendix.]
Chairman Clay. I want to thank you, Commissioner, for your
testimony today.
Also, we are in the middle of a vote series on the House
Floor, so at this time, we are going to recess, and we will
immediately reconvene after the last vote and get back over
here. Thank you for your patience with us.
We stand adjourned for votes.
[recess]
Chairman Clay. The subcommittee will return to order.
Let me thank our witness for your patience. We are now
ready to proceed under the 5-minute rule, and I will yield
myself 5 minutes to begin the question phase of the hearing.
Over the last year, HUD has taken a number of actions to
reduce the ability of FHA borrowers to utilize down payment
assistance programs from governmental entities to purchase a
home, and has indicated that it again intends to issue a
proposed rule affecting government down payment assistance in
January.
Secretary Carson testified before this committee in June
that he was not familiar with the HUD data that identifies
which government entity is providing down payment assistance.
It appears that HUD cannot determine which government programs
are providing down payment assistance on any FHA loan, which is
critical before attempting to issue new regulations for any
government down payment assistance program.
Will you commit to not moving forward on any rulemaking or
other administrative changes related to down payment assistance
provided by governmental entities until HUD is able to collect
data on individual governmental entities and has analyzed a
statistically significant amount of data on the performance and
pricing of FHA loans with down payment assistance from each
specific governmental entity? Can you expound on that,
Commissioner?
Mr. Montgomery. Yes. Thank you, Mr. Chairman.
As you know, down payment assistance (DPA) has a long
history at FHA. When I was Commissioner last time, a certain
type of down payment assistance ultimately cost FHA more than
$16.5 billion in losses, according to our independent actuarial
review.
Chairman Clay. Did you say 16 or 60?
Mr. Montgomery. Sixteen and a half billion dollars in
losses.
Chairman Clay. On down payment assistance? Tell me how that
worked.
Mr. Montgomery. Sure. This type of down payment assistance,
which is no longer permitted, actually put the down payment on
the mortgage. So while it was technically called a gift, it was
a gift you ended up paying for. As you can imagine, the default
rate on those loans was almost--
Chairman Clay. Wait, wait, wait.
Mr. Montgomery. --5 times as much.
Chairman Clay. Okay. Down payment assistance is normally
used to help first-time home buyers or those who qualify in
that manner to help them get into a home. It is not a
significant amount, but it closes the gap to get cheaper loans.
So, tell me what the problem is?
Mr. Montgomery. I just want to make sure that any down
payment assistance provider is doing so within what our rules
permit, whether it is jurisdictional, whether it is if they
financially benefit off of the transaction, which the Housing
and Economic Recovery Act (HERA) does not permit.
So, I will commit that any effort to undertake rulemaking
will be deliberate. It will be based on research and facts as
we know them.
Again, we just want to make sure that any DPA is done in
the best interest of the borrower and is not there to enrich
the people who are providing it.
Chairman Clay. No, and I agree totally with that
perspective, that the DPA should be done in the interest of the
borrower. And you and I know it goes to close the homeownership
gap, and there are other benefits to the DPA. And, so, I would
just hope we could reach some kind of accommodation that the
data would back up any decision made by the Department.
Let me ask you, one of the first actions that the Trump
Administration took upon being sworn into office was to suspend
a planned reduction in FHA's annual premiums by 25 basis
points, which would have saved the average borrower $500 in the
first year alone.
In response to calls from advocates to allow the premium
reduction to be implemented in light of the FHA's improved
financial health, Secretary Carson stated that he would keep
the rate as low as he could, consistent with the law. But since
then, the Secretary has not only maintained the suspension on
premium reduction, but he has proposed to arbitrarily increase
the capital ratio far above what is statutorily required.
Does Secretary Carson still stand by his original statement
that he will keep premiums as low as possible, consistent with
the law?
Mr. Montgomery. Thank you, Mr. Chairman.
In many ways, I run a $1.4 trillion corporation, so I have
to carefully monitor our cash inflows and obviously our cash
outlays. We consistently look at premium structure, whether--it
is hard to say this one is too much or too little.
We are looking at, do we have the right structure in terms
of how much is on the upfront or how much is on the annual?
This is something we consistently look at and will continue to
do so through this first term.
Chairman Clay. I thank you for your responses. I now yield
5 minutes to the ranking member of the subcommittee, my
colleague from Ohio, Mr. Stivers.
Mr. Stivers. Thank you, Mr. Chairman. I want to thank you
for holding this hearing. It is very important, and I think
there are a number of issues that I want to try to illuminate
and work on.
Commissioner, thank you for being here. I appreciate your
service in three Administrations--two Republican, one
Democrat--and the fact that you have worked to shore up the FHA
insurance fund to meet the 2 percent statutory capital
requirement. That is a very important--that is already not a
lot of money, but that is the minimum required, and I
appreciate you getting it there and keeping it there. That is a
great accomplishment. It is something I have been concerned
about for a long time.
I mentioned a couple of things in my opening statement, and
I would like to follow up on them if that is okay with you. The
first thing I talked about was whether you might be willing to
work with the chairman and I and stakeholders to address the
disparity in homeownership by race. Is that something that you
might be willing to work with us on?
Mr. Montgomery. Absolutely, sir. In fact, we convened an
internal working group on this several months ago to look at
minority homeownership because, as you have articulated in your
statement, it is down.
Mr. Stivers. I think the chairman mentioned the statistics
in his opening statement. Obviously, that disparity is too
great, and it leads to a disparity in wealth, as well, because
it is the biggest savings vehicle that most people have.
So, I want to again thank you for your willingness to work
with us. We very much look forward to working on that topic. It
is a very important topic because the American Dream needs to
be accessible by every American. It is something all of us
believe in. It is something that you believe in. We want to
work together to find a way to figure out what is driving the
disparity and figure out how to address that disparity. So, I
really appreciate that common-sense approach. We look forward
to working with you on that.
The second thing I mentioned was the fact that the one-
size-fits-all FHA premiums do not give a potential risk-based
discount for people who are of lower risk. Would you be willing
to work with us and potentially stakeholders and even folks in
the private sector, because, given the government's history of
mispricing risk, I think there are a lot of private sector
mortgage insurance companies and others that could help in a
partnership with you as we try to figure this out.
Is that something that you would be willing to work with
us, and maybe some outside private entities on, to figure out
if we can find a way to do something like that to make sure
that people who deserve a little bit of a break, get a little
bit of a break, even if we limit that break?
Mr. Montgomery. Absolutely, sir, and thanks for your
question.
As I mentioned, we just want to make sure we are not
intruding on private capital. As you know, there are private
mortgage insurers out there that work with the Government-
Sponsored Enterprises (GSEs).
Mr. Stivers. And I think they can be part of the solution.
They have very elaborate systems and data.
And one of the other things that I did not mention to you,
but we have talked about privately is, I am so happy that
Congress gave you $20 million, a down payment to update your IT
infrastructure.
I understand you are now using Abacus 2.0, so that is a
start. But I would really like to make you a little more modern
than that, so I know we need to work to make sure we continue
to give you the resources you need to upgrade that. The
chairman and I had a little aside where we both acknowledged
that we need to help you invest in your technology.
But, I think, I want to again acknowledge you can partner
with some outside industry that have the data and the computing
systems to help you as you do this, including our private
mortgage insurers. There is no reason you need to compete
against them when you could actually work with private industry
and make it a win-win for everybody. Is that something you
would be open to?
Mr. Montgomery. Absolutely. There are certain things we are
prohibited from doing by statute, but--
Mr. Stivers. The great thing about statutes is that we can
change them, Mr. Commissioner.
Mr. Montgomery. Absolutely. We are certainly open to that,
and we are very thankful for the down payment on our technology
upgrades. This is something I tried to get through when I was
Commissioner last time. I know the previous Administration
tried, as well, so we are very happy that Congress got us on
the good trajectory to get us to a better place in our
technology.
Mr. Stivers. Thank you. I just want to mention one other
program that sometimes gets much maligned, and let you talk
about it for a minute, because what you guys have done to make
the reverse mortgage program work--and reverse mortgages are
not for everybody. But just because they are not for everybody,
does not mean they are not for anybody.
I want to give you a second to talk about what you have
done to help make sure that those programs have the right
guardrails around them to protect senior citizens, but also are
there for people who might need cash flow and have that biggest
saving vehicle I talked about, their home.
Mr. Montgomery. The reverse mortgage program provides a
great social motion; it helps seniors age in place. You are
right. It is not for every particular senior; it depends on
their situation.
But it is, obviously, like a lot of things, impacted by the
housing collapse. It seemed to be the very top of the apathy in
terms of volume, was at the time when house prices came down,
obviously the Home Equity Conversion Mortgage (HECM) Program
was impacted by that.
The previous Administration made some headway in dealing
with this, working with Congress through the Reverse Mortgage
Stabilization Act.
We, thankfully, because of good house price appreciation
and some other changes that we made, seem to be heading in a
much better place than we were last year, and thus being able
to help seniors age in place.
Mr. Stivers. Thank you. I yield back, Mr. Chairman. Thank
you, Mr. Chairman.
Chairman Clay. Thank you.
The gentleman from Texas, Mr. Green, who is also the Chair
of our Subcommittee on Oversight and Investigations, is
recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
I thank the witness for appearing. How are you, sir? It is
good to see you again.
I am concerned about the role of expanding access to
homeownership, as well, and it is good to hear that the
chairman and the ranking member are working in this area.
One of the things that we have been looking at is
additional credit scoring. Some call it alternative credit
scoring. Have you any intelligence on this, any research that
has been done, anything that you are doing in-house that might
be of benefit?
Mr. Montgomery. Thank you for that. When I was Commissioner
last time, you may recall that we worked together with your
office and some of the affinity groups in real estate saying,
well, we are not quite sure which way to go with alternative
trade lines, alternative credit score models. It struck me at
the time, and it still does today, that if we were to do a
pilot program looking at that, that FHA, I think, would be the
appropriate place to conduct that pilot.
Technology has moved substantially since 2006, 2007, and
there are more players in the industry. And if you look at the
statistics, 25 to 35 million Americans either have low credit
scores or they have thin-file credit.
And I just think, I believe my R&Rs. I want the data to
back it up. I think there is a way to responsibly, and in the
best interest of borrowers, look at non-traditional credit in
ways that might open the aperture somewhat.
Mr. Green. For those who may not understand the term,
``non-traditional credit,'' would you kindly give some
explanation, please?
Mr. Montgomery. There are several different models out
there. There are some that look at so-called traditional
credit, credit cards, auto loans, things of that nature, and
maybe score them a little differently than others.
There are others that look at cell phone bills, utility
payments, rent payments, things of that nature, and factor your
payment history into that, as well. And there are some that do
a little of both.
So, again, I do not have all the answers to it today. I
just think a prudent approach would be to conduct a pilot and
to see where that would take us, which, as you know, sir, was
put into HERA in 2008 but for whatever reasons, the pilot was
never implemented.
Mr. Green. Yes. I think--
Mr. Montgomery. And the authorization ran out.
Mr. Green. I do recall that it was legislation that I had
the good fortune to sponsor. And you did work with me.
As you know, we have tried to maintain the traditional
model and only add additional information, additional
information about the lights, gas, water, phone, and cable
bills. And I have to continually emphasize, we do not decide
that we are going to eliminate the traditional model. All of
that stays there. But there are some people who benefit from
having a rich payment history in these other areas, and that
helps them.
I find it interesting to note that at yesterday's hearing,
we had representatives from five agencies here, including the
Fed, the FDIC--actually, it was three; the OCC was not present.
They have a joint communique where they have indicated that
this is something worthy of consideration.
So, it looks like we are moving in that direction. It is
just a question of, how long will it take us to have that pilot
program that you are talking about?
I am working with my friends on the other side to see if we
can collaborate and come to some reasonable conclusion as to
how to move forward with this.
Would you just respond to the notion of maintaining the
traditional model and simply adding additional credit? This is
why I say ``additional'' as opposed to ``alternative'', because
it causes some people to believe that we are going to forego
the traditional model, and that is not at all what we are
talking about. Your comments, please?
Mr. Montgomery. Sure. Again, sir, I think there is a way to
do it. I think we would both agree it should be done
responsibly and in the borrowers' best interests.
But remember, that will be a two-way street. So, whereas
you may have a good payment history in some of those non-
traditional trade lines, if you also begin to pay late, you are
going to feel that, as well. It's no different than if you pay
your credit card bill late or make your automobile payment
late, as well.
So, again, I just want to make sure, sir, that the
committee understands that if we were to do it, we think we
should look at it in ways that are in the best interests of the
consumer and done responsibly, and it strikes me that FHA would
be the appropriate vehicle to use to do that.
Mr. Green. Thank you.
Mr. Montgomery. And HUD, in general.
Mr. Green. And you and I have talked before. Why don't we
have an additional conversation on this? My time is up now, but
let's have my staff get with you so that we can make an
appointment and flesh this out.
Mr. Montgomery. Yes, sir.
Mr. Green. Okay.
Mr. Montgomery. I'd be happy to. Thank you.
Mr. Green. Thank you. I yield back. Thank you for the extra
seconds, Mr. Chairman.
Chairman Clay. The gentleman's time has expired.
The gentleman from Missouri, Mr. Luetkemeyer, is recognized
for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. Welcome,
Commissioner Montgomery.
I want to start off with a question with regards to the
False Claim Act. A Memorandum of Understanding (MOU) was
recently announced between HUD and the Department of Justice on
the use of the False Claim Act. I am just curious, could you
give me some details on this, what you hope it will accomplish,
and I guess from the standpoint of how big a barrier has the
False Claim Act been? And what do you hope the MOU would--how
will it affect the mortgages and make them more accessible or
whatever? Can you help us out?
Mr. Montgomery. Sure. Thank you, sir.
When I was Commissioner last time, we had a pretty good
balance between the percentage of lenders who were depositories
and non-depositories. We are kind of out of balance now. About
13 percent of our originations now come from depositories. As
recently as 2010, it was about half.
Most of them will tell you they point to the False Claim
Act as the reason they got out of the FHA program. Some of them
got out of the VA Program.
It is not my intent to take sides in that argument between
independent lenders and depositories. I just think, for a lot
of reasons, we need to find equilibrium there, and a lot of the
consumer advocate groups agree with me on this point. They see
it as an access-to-credit issue because a lot of families who
have banking relationships at a large depository, who are
first-time home buyers, are finding that their depository does
not offer the FHA program, which has been the nation's flagship
homebuying program since 1935. To me, that just seems a little
odd.
That is not to say that we look the other way with fraud or
people who do not follow by our rules. Quite the contrary. We
just think somewhere between an indemnification and the
equivalent of a drone strike on a lender that--in this case,
they just got out of the program. There needs to be something
in between.
The Justice Department, working with our general counsel,
and our staff--we found a good place that I think brings a
little more focus to the program. It gives FHA and HUD a bigger
voice in saying, okay, this rises to the level of the False
Claim Act, and therefore we would recommend or concur with
Justice going forward.
Mr. Luetkemeyer. You made a statement a minute ago that 13
percent are from depository institutions and the other 87 would
be from independent--
Mr. Montgomery. Yes, sir. Credit unions.
Mr. Luetkemeyer. Credit unions would fall--they are
depository institutions?
Mr. Montgomery. They would fall under the depositories.
Mr. Luetkemeyer. So, independent would be what, the Quicken
Loans of the world? Is that what you are talking about?
Mr. Montgomery. Yes, sir. Lenders like Quicken. Some are
privately-owned. Some are publically-traded.
Mr. Luetkemeyer. Offline and online lenders and offshore
and all that kind of stuff?
Mr. Montgomery. Well, you have to be approved, obviously.
Mr. Luetkemeyer. Okay.
Mr. Montgomery. We have criteria for that.
Mr. Luetkemeyer. It is an amazing statistic. It kind of
took me by surprise here. I was not prepared for that.
Mr. Montgomery. We were just happy that a lot of consumer
groups, including the Center for Responsible Lending, the
National Community Reinvestment Coalition (NCRC), and others
were on our side on this topic.
Mr. Luetkemeyer. Okay.
Mr. Montgomery. And that helped.
Mr. Luetkemeyer. Great. Thank you. I appreciate you
explaining that.
Also, with regards to the risk in your portfolio, obviously
things are going well. We are increasing the capital account.
But we have noticed that the credit scores seem to be going
backwards. There are some earlier defaults and some debt-to-
income ratios are rising. Should we, as a Congress, be
concerned about that? What are you doing to address that? Is
that just the nature of the economy? What is going on there,
because--
Mr. Montgomery. I will try to boil down an hour-long
response, sir. We conduct daily stress tests on our portfolio.
And we have been concerned about the number of loans that come
in with risk layering, which is a combination of high debt-to-
income ratio, low credit scores, and loans that came in from
about August of 2016 up until we made a change to the TOTAL
Scorecard.
We are modeled at about a 1.4 capital ratio the last loan
end. That is not where we want to be. Congress requires us to
have a minimum 2 percent. So, we made some changes to the TOTAL
Scorecard that went into effect in March of this year. They
seemed to be having their intended effect. It seems like we
stopped the 3-year slide in credit scores. They have actually
leveled off and improved one point--
Mr. Luetkemeyer. I want to ask one quick question before my
time expires.
The concern is that, even though you are very well-
capitalized right now, you apparently have more risk in your
portfolio than you would normally have. So, in order to be able
to accommodate more risk, you are going to have to have more
capital in order to be able to continue to be a solvent entity
and have enough reserves there to ride this out until you get
this portfolio back in shape, I would assume. How long do you
think it is going to take to do that?
Mr. Montgomery. Certainly, the house price appreciations
helped, and a strong economy. Again, we just want to make
sure--we call it ``turning the dial''--we have access to
credit. We want to make sure, should there be a downturn, that
we have an ample amount of reserves to weather that.
Mr. Luetkemeyer. Okay. Thank you very much.
Mr. Montgomery. It is sort of a tricky dance, but we think
we are managing it well.
Mr. Luetkemeyer. Well, we will be watching. Thank you very
much. I appreciate it.
Chairman Clay. The gentleman's time has expired.
The gentlewoman from Iowa, Mrs. Axne, is recognized for 5
minutes.
Mrs. Axne. Thank you, Mr. Chairman, and thank you,
Commissioner Montgomery, for being here. I very much appreciate
it.
We have been talking a lot today, of course, about
increasing homeownership and addressing the shortage of
affordable housing across this country. So, one of the issues I
want to take a look at is manufactured housing because, in many
cases, it can cost up to 30 percent less, and in some cases,
more, for folks to be able to afford that.
If we are going to talk about it, though, we have to make
sure it is a way to provide affordable housing and truly make
sure that it is. I do not know if you are aware of what has
occurred in Iowa over the last year or so, but I would love to
give you a brief background.
Unfortunately, a company named Havenpark Capital, which is
a fund from Utah, has bought now seven manufactured housing
communities in Iowa, and then they proceeded to raise the lot
rents for the residents there between 20 and 70 percent. So,
they came in and just raised the rate 20 to 70 percent for
these families, many of whom are on fixed incomes.
I visited one of those communities, Midwest Country Estates
in Waukee, and saw firsthand the terrible position that these
folks are really being put in. And just yesterday, I spoke to
one of those residents, Matt Chapman, who is about to be paying
70 percent of his income for housing.
We know the standard definition of severely cost-burdened
is paying 50 percent of your income on rent, and here is a
constituent who owns his home outright, has no mortgage, and
has to pay 20 percent more than the 50 percent that we think is
severely cost-burdened. So, he does not know what he is going
to do, and many of his neighbors just do not know how they are
going to make this happen. It is just simply unaffordable for
so many residents like him and others across the country.
Many of these properties were purchased with federally-
supported loans, so we need to make sure that our constituents
are not being taken advantage of because they cannot relocate.
And these are the kinds of predatory practices that,
unfortunately, are being allowed to continue.
So, Commissioner, I have been working on trying to find
solutions to prevent this from happening again. Given your
experience in housing, I just wanted to ask you, what
recommendations do you have that we should be putting in place?
Mr. Montgomery. And I would be happy, by the way, to follow
up when we have more time to discuss it.
But manufactured housing is--22 million Americans live in
manufactured housing. We regulate the construction of
manufactured housing throughout the country. Between my time as
Commissioner last time and this time, the technology, the
construction standards, and all of that have made leaps and
bounds, so much so that we are almost having a hard time
keeping up with it.
We have also been looking at the financing aspect relative
to FHA. There is Title I and Title II, not getting too in the
weeds here. Title I does not have a lot of volume in it, tends
to be more sort of what I call chattel loans, versus the
traditional FHA Title II.
We think there is a way to make it more affordable because,
you heard me reference earlier in my opening statement, the
average income of a manufactured-home owner is between $30,000
and $50,000 a year. And, again, it is part of the things we are
looking at in sort of a pro-consumer aspect, ways that we can
perhaps get some of that cost of financing down.
We have less purview, being honest with you, on sort of the
structure of communities. Again, more so the regulation of the
actual manufacturing of it, of the structure.
Mrs. Axne. Okay. I appreciate that, and I would love to see
what information you have.
At least three of these seven properties were bought with
Fannie Mae loans, so it is not as if the Federal Government is
not involved in it.
I hate to see--we believe that they actually overpaid, as
well, for the community that I was just talking with you about.
I am sure they did. And I think that we could have--if we had
had pieces in place, those owners could have pooled together
and possibly purchased it for themselves and been able to stay
in their homes.
And not just to afford it, but when we see these kinds of
predatory actions, they are asking children to literally give
up their dogs because they are too big for the homes, according
to their new rules.
They are forcing families to tear down swing sets that they
do not think are, I guess, good-looking enough. But these are
not people who can afford those $2,000 or $3,000 Rainbow sets
that some other people can.
So, any help that you can give us, these people truly have
been put in a position where they do not know what their answer
will be. Many of them will not be able to afford this and will
be forced out of their homes, including taking their children
with them and not being able to find an affordable option.
I would appreciate your follow-up on some of those things
we just talked about and any other things that you think we
could put in place.
Mr. Montgomery. Absolutely. I will look forward to
following up with you or your staff on it.
Mrs. Axne. Thank you.
Mr. Montgomery. Thank you.
Chairman Clay. The gentlewoman yields back, and the
gentleman from Colorado, Mr. Tipton, is recognized for 5
minutes.
Mr. Tipton. Thank you, Mr. Chairman. Commissioner, welcome.
The FHA's recent report to Congress showed that the FHA's
financial health is in just about the best shape it has been in
since the financial crisis, and I appreciate your stewardship
on that.
But I did want to follow up on maybe some potential areas
that could impact that, and I would like to talk about the
Property Assessed Clean Energy (PACE) loans. These loans have
been used in some cases to trick some seniors and other
vulnerable citizens into taking out high-interest energy loans
for green energy appliances and using their homes as
collateral. In some of these cases, it has actually squeezed
these Americans to the point of foreclosure.
Do you believe that the use of these PACE encumbrances on
FHA-insured loans poses a risk to the health of the MMIF and
the FHA's current policy on PACE-encumbered loans?
Mr. Montgomery. Thank you for your question. What makes us
overly concerned about that is we do not know how many. As you
know, we do not allow it on new FHA loans and have not for
several years. But it is unknown, if you are an existing FHA
borrower, how many try to take out PACE loans.
We think solar power and all of that is fine. Our concern
is that those loans prime ours. They step in front of the
National Housing Act, which I think we would all agree is
probably not a good thing. Again, working with the Federal
Housing Finance Agency (FHFA), as well, because they are
equally concerned about how can we work together to make sure
that does not happen.
Mr. Tipton. And I think there is across-the-board
agreement, as you note, to be able to have good, sensible
energy use to benefit our people.
But would there be some benefit in being able to have some
national clarity on PACE loans? Because we do have some States
where they have authorized programs that have been enacted on
ability to repay, laws and licensing requirements for the PACE
lenders, and other States have not. So, would that national
clarity be of some use?
Mr. Montgomery. Again, we are infinitely concerned because
of it priming our loan, which is sacred in our world, that we
have to be in a first-loss position. So, we are concerned about
it, but it's something, again, that we continue to work on with
FHFA, and we certainly welcome the opportunity to work with
you, as well, sir.
Mr. Tipton. We appreciate that. I think, again, we all
support all of the above energy policy, but we do not want it
putting people into a position where they actually lose their
homes.
On another topic here, due to the lower FHA premiums, plus
a more expansive qualified mortgage (QM) definition, currently,
approximately 55 percent of the FHA purchase loans exceed a 43
percent debt-to-income (DTI) ratio.
And artificially high fees, such as Loan-Level Price
Adjustments (LLPAs) charged by the GSEs of many of the
borrowers, drive the FHA to secure mortgage financing for no
other reason than the FHA loan is cheaper, at least initially.
The combination of these policies does create an un-level
playing field and advantages the 100-percent backed FHA program
and gives the consumers ultimately fewer choices.
Would you agree that these inconsistent and sometimes
arbitrary differences are driving borrowers into the markets?
Mr. Montgomery. We certainly look at risk characteristics,
including the use of risk layering. DTI by itself, just like
credit scores by itself, is not necessarily the prime decision
tool, if you will. We look at them in the aggregate.
As you know, touching this issue is the QM Patch, which is
slated to go away in January of 2021, which would essentially
push a lot more of those higher DTI loans toward us.
So, without going down that path in the limited time, I
will just say DTI is something we look very carefully at,
knowing that by itself, it is not the end-all, be-all in terms
of credit risk. But it certainly accounts for something.
Whether or not we would need to put some sort of residual
income test in like the Veterans Administration does, again,
are all things we are looking at in a total access to credit
review of the portfolio.
Mr. Tipton. Thank you for that. And, I guess, finally, what
I would like to know is--I come from a rural part of America,
and a lot of our focus in these committee hearings is on urban
America and on housing issues that are there. What actions is
FHA taking to help rural communities across the country?
Mr. Montgomery. Certainly, in terms of loan limits, looking
carefully at what the loan limits are in those communities.
And we mentioned manufactured housing as a viable
opportunity. In multi-family, the GSEs tend to concentrate in
urban areas, and FHA and USDA tend to focus more in rural
communities in terms of developing multi-family properties.
Mr. Tipton. Thank you, and I yield back, Mr. Chairman.
Chairman Clay. The gentleman yields back.
The gentleman from Florida, Mr. Lawson, is recognized for 5
minutes.
Mr. Lawson. Thank you, Mr. Chairman, and welcome to the
committee, Commissioner Montgomery.
So I can get a clear understanding, what is the average
homeowner's loan that FHA insures for a family of two that is
applying for a loan?
Mr. Montgomery. Looking at the data from Fiscal Year 2019,
our average borrower made about $62,000 a year, bought a
$183,000 home, and more than likely, used about $8,000--or
about half of them used down payment assistance, and that
average was about $8,000.
Mr. Lawson. Okay. And does that require that the--I think
the down payment used to be, what, 10 percent, or less?
Mr. Montgomery. For us, sir, it is 3.5 percent. We call it
the minimum cash investment. But it is 3.5 percent.
Mr. Lawson. Are those fixed loans?
Mr. Montgomery. We do have an ARM product. Most people do a
fixed product.
Mr. Lawson. Okay. Now, in areas like where I am from, where
there has been a lot of disaster from hurricanes and people's
inability to recover right away, what programs have you
implemented in order to try to help those homeowners so they
will be able to maintain their property until they can get back
on their feet?
Mr. Montgomery. The primary thing that we want to do is--
FHA assistance typically comes in later, after FEMA, after SBA,
after whatever insurance they have on the home.
We have any number of products. As I mentioned in my
opening statement, a product that we originally used in
Hurricane Katrina, we used in Puerto Rico, the Standalone
Partial Claim, which allows us to immediately go and assess a
home buyer's situation and take any arrearages they have and
put them as a soft second lien on that mortgage and not change
the amortization, not change the term of the mortgage or
anything.
We had some pretty good success using that in New Orleans
and also in Puerto Rico. We have now made that standard as of a
couple of months ago, going forward, to use in other disasters.
We also have a product that, if your home is completely
destroyed, there is an FHA product, the 203(H), I believe, that
allows you to get 100 percent financing if your apartment or
whatever has been destroyed as a result of a hurricane.
Mr. Lawson. My next question is centered around two
individuals. Can two individuals who are not married apply for
an FHA loan? And how would you handle that if they do?
Mr. Montgomery. They have to either be married, either
common law married--you could not as just roommates, your best
friend or whatever, apply together. I think that is more of a
bank requirement than ours.
Mr. Lawson. Okay. Would FHA's Housing Financial
Administration's Risk Sharing Program expand Ginnie Mae's
authority and involvement in affordable housing at increased
risk to the Federal Government?
Mr. Montgomery. The multi-family risk share program, I
think, is a perfect model of the Federal Government working
together with developers and State HFAs. That program still
exists.
There was another part of it, the Federal Financing Bank,
if that is where you were headed, that that is no longer
permitted. But, the ideal solution would be for Ginnie Mae to
sort of securitize those loans that are done using the FHA Risk
Share Program, which has an extremely low default rate.
Mr. Lawson. Okay. How do you go about calculating the debt
to savings ratio for those who apply?
Mr. Montgomery. We have what are called front-end ratios
and back-end ratios, you know, looking at your bills with and
without your mortgage payment. Front-end is 31; back-end is 43.
With compensating factors, you can go as high as 57, 58
percent.
Mr. Lawson. Okay. With that, Mr. Chairman, I yield back.
Chairman Clay. The gentleman yields back.
The gentleman from Tennessee, Mr. Rose, is recognized for 5
minutes.
Mr. Rose. Thank you, Mr. Chairman.
Commissioner Montgomery, thank you for being here with us
today.
First, I would like to commend you and Secretary Carson for
your work to restore the financial health of the FHA. I believe
we should all be pleased that the Mutual Mortgage Insurance
Fund's capital ratio increased to 4.84 percent last year, which
is, of course, well above the statutorily required 2 percent
minimum, and the highest it has been since Fiscal Year 2007.
Just yesterday, I met with the Tennessee Housing
Development Agency, the THDA, to discuss a number of housing
issues facing Tennessee. THDA helps ensure housing is available
and affordable to people in every county, including many of the
rural and often underserved counties in Tennessee's Sixth
District.
Providing down payment assistance is an important aspect of
what State housing finance agencies do. HUD has legitimately
raised concerns about the performance of FHA mortgages with
down payment assistance, but I believe that down payment
programs managed through State HFAs do considerably better than
in those managed by some others. I know in Tennessee, THDA has
been providing down payment assistance responsibly for over 4
decades.
Commissioner, as HUD contemplates new rules around down
payment assistance programs, do you plan to take into
consideration these kinds of distinctions rather than trying to
implement a more sweeping approach?
Mr. Montgomery. Thank you, Congressman, for that question.
When George W. Bush was Governor, I worked at the State of
Texas Housing Finance Agency, and we were probably the largest
at the time. I have met with the National Council of State
Housing Agencies (NCSHA). I have met with State HFAs. As a
matter of fact, I am meeting with NCSHA on Monday while they
are in town.
As I have told them, as we look at DPA at large, the type
of DPA provided by State and local HFAs is not my worry, not my
concern. As I referenced earlier, when I had a similar
question, I just want to make sure any DPA that is provided by
other entities works within our program guidelines from a
financial benefit perspective, which is not allowed, and from a
jurisdictional requirement. And that is what we are carefully
looking at. We all do this just to help ensure that it is done
with the best interests of the borrower, not enriching someone
providing down payment assistance.
Mr. Rose. Thank you. As I have said before in previous
committee proceedings, manufactured housing is incredibly
important to my district. Manufactured homes account for 13.1
percent of occupied housing units in my district, compared to
7.1 percent in the greater United States.
HUD's Housing Reform Plan recognizes that there is a need
to update FHA's guidelines for its manufactured housing
programs, but such changes have also been pending for a number
of years. I want to echo Ms. Axne's concerns about the changes.
And for you, what will you do to implement the necessary
changes as soon as possible?
Mr. Montgomery. One thing I think is long overdue, is we
need to elevate the status of that office, and we would like to
work with you on that to make it run by a Deputy Assistant
Secretary, which it is not. We want to separate it out.
As I mentioned before, when I toured a plant when I was
Commissioner last time, and I toured one earlier this year, the
technology upgrades have been tremendous in that industry.
My affection for that industry was born--again, back to my
State of Texas HFA days, where at some point, there were more
new manufactured homes sold in Texas than there were stick and
bricks homes, which is kind of hard to believe. But there was a
point in time where that happened. I firmly believe it is a
viable option and a darn good one to help families, mostly in
rural communities.
Mr. Rose. One thing that continues to concern me is that
the volume of manufactured home loans being supported by FHA
continues to decline. As you mentioned, Title I program loans
are almost nonexistent. Although the vast majority of
manufactured homes are financed as chattel, FHA financed only
526 chattel homes last year. Without access to FHA financing,
many families are unable to attain the dream of homeownership
through manufactured housing.
Commissioner, where are updates to the FHA's financing
programs for manufactured housing on HUD's overall priority
list?
Mr. Montgomery. Part of our look at the FHA program in its
entirety includes spending more time on Title I and on Title II
as it relates to manufactured housing, which, you know, to be
on a foundation.
So, it is too early to give you any sort of direction which
way we are going. We know the numbers are low. But again, we
just want to make sure any changes we made are done with the
consumers' best interests at heart.
By the way, to get back to your previous question, we have
picked up the pace in looking at these new sets of standards
that have come out of the Manufactured Housing Consensus
Committee regarding stairs, garages, carports, even second
floors. I think we are getting caught up. But the committee is
moving quickly. We are just trying to catch up with them.
Mr. Rose. Thank you, and I yield back.
Mr. Lawson. [presiding]. Okay. Thank you.
The gentleman from Missouri, Mr. Cleaver, who is also the
Chair of our Subcommittee on National Security, International
Development and Monetary Policy, is recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Commissioner, thank
you for being here today.
On Tuesday evening, Congresswoman Joyce Beatty from this
committee, and Congressman William Lacy Clay from Missouri, who
chairs this committee, and I had a Midwest summit. We brought
people in here for a dinner summit meeting from all over the
Midwest, the upper Midwest and lower Midwest, and we talked
with them about a number of issues.
Then, we listened to what they thought, and they did not
surprise us in the fact that they believe that affordable
housing, or the lack thereof, is in a crisis. I do not think
that there is a need for much imagination to see that that is
in fact the truth.
And, so, in terms of all of the things that we need to be
doing to correct that problem, I am a little concerned about
HUD's Finance Reform Program. Even if you work with the GSEs, I
am concerned that if you are trying to reduce the HUD
footprint, the crisis will become even more critical.
My belief is that this is the time for us to be more
creative. We need to become more of a thrift--an agency that is
only concerned about giving everybody money for them to buy
homes, that is not what I am saying. We do not want you to be a
spendthrift agency.
But I would feel comfortable--and I think what I am saying
is, millions of other people would, as well. If we had
programs, as you are looking at reform, that are trimmed, but
also sufficient enough to make a difference. And right now, we
are going in the opposite direction.
It is difficult to get developers to do something unless
they--if you are going to do affordable housing in the urban
core, you are going to have to have some kind of subsidy.
Municipal subsidy, low-income tax credits. You are going to
have to have something or it just won't work. The numbers do
not work.
So, can you assure me that we are not going to start
eliminating Section 202 programs? We are not going to start--
well, you do not have any control over the CDBG, but many of
the communities need CDBG in order to help developers get
started, if only with infrastructure.
So, can you fill me in on the reform program and what you
think ultimately will happen?
Mr. Montgomery. Certainly. Thank you, Congressman.
In terms of multi-family housing, obviously 202 and 811.
The RAD Program, which is helping renovate hundreds of
thousands of units around the country.
We have now launched a program for new construction for FHA
with tax credits.
We also are now permitting the RAD Program to be used with
the 202 program. These have all happened in the last year.
On the single-family side, there is not a lot we can do to
help build supply. Although, through this affordability council
that was started up a few months ago, we want to help kind of
pull back the curtain on a lot of the local decision-making,
whether it is zoning or set-asides. It is driving up the cost
of housing in many communities to where they are building very
little entry-level housing. And the cost to manufacture a
mortgage, for example, has gone up almost twice from what it
was 10 years ago.
So, there are a lot of factors present out there that do
give us concern, but many of them are born of decisions made at
a State or local level that we have less control over.
Mr. Cleaver. I agree. But I have towns in my district, like
Higginsville, like Marshall, like Sweet Springs, like Orrick,
like Mayview, where they have not had a new house built in
decades, or certainly over a decade, and they need help.
There used to be a program called Urban Development Action
Grants (UDAG), that did not come out of your shop, but out of
HUD, and those programs allowed for municipalities to help a
developer get started, and programs. So, I think the HUD side
is going to have to become more active, and maybe your request
for them to become more active would result in more affordable
housing.
I appreciate the time. I wish that we had more.
Mr. Montgomery. I would just add the Opportunity Zones.
They are now seen as an excellent way to help expand housing
and have made some adjustments, as I articulated in my opening
statement, that I think will help create more supply and more
investment in those Opportunity Zones.
Mr. Lawson. Thank you.
The gentleman from New York, Mr. Zeldin, is recognized now
for 5 minutes.
Mr. Zeldin. Thank you to Commissioner Montgomery for being
here today, and thank you to Chairman Clay and Ranking Member
Stivers for holding this hearing.
FHA loans are essential products for Long Island families
looking to purchase a new home that will help them build their
own version of the American Dream, and most importantly, help
them stay on Long Island.
Oftentimes, these loans are made to first-time home buyers,
the constituency that often has the means to make the monthly
mortgage payments, but also often has the most difficulty
having enough capital for a large down payment. These are
middle-class people with good jobs and good credit scores, but
maybe they are not liquid enough to put up a large down payment
in a region with some of the highest real estate values in the
nation.
Over the past several years, we have seen traditional
lenders, like banks, flee the FHA market due to overzealous
enforcement of the False Claim Act by the previous
Administration. This law was intended to prevent fraud against
the U.S. Government, not for immaterial mistakes, like a
misplaced comma on a mortgage application.
I, along with my friend, Representative Gottheimer,
introduced legislation last Congress to bring a fix to this
frivolous liability. In May, I had a great conversation with
Secretary Carson regarding that issue in this committee. Since
then, HUD and DOJ have entered into an MOU on how to evaluate
False Claim Act cases.
Commissioner Montgomery, with HUD's recent announcement
regarding entering into an MOU with DOJ on the use of the False
Claim Act, do you expect to see an increase in the availability
of affordable FHA loans?
Mr. Montgomery. I would think that as more and larger
traditional depositories re-enter the program, I would think
that is good for consumers, especially those who already enjoy
a relationship with that depository institution. I think some
of them are concerned about the durability of our MOU with
Justice.
And, by the way, with our certifications, which we updated,
as well, meaning what happens with the next Administration--I
think that what we have done with the MOU and with our revised
certifications, I think we are addressing that durability issue
by giving HUD a voice in this process, or the Mortgagee Review
Board, which has been around by statute for 20, 30 years or so,
to help them win justice; or when we believe a particular
circumstance rises to the level of the False Claim Act, that we
make that determination together, not unilaterally, which I
understand might have been happening previously.
Mr. Zeldin. I think you are bringing some very interesting
and important points up. To that point, are there any
legislative reforms needed to complement this administrative
action?
Mr. Montgomery. Again, I want to make sure I am drawing a
bright line that we are not going soft on people who violate
our rules. It is this False Claim Act with its treble damages,
its civil money penalties, that drove some of the largest banks
away from our program that has been around since the Great
Depression.
Just in the interest of access to credit and fairness--
again, not trying to take sides between depositories and
independents--I just think it is better for consumers, and
certainly better for us, to have depositories back offering our
program. And, to their credit, some have signaled a willingness
to get back in, while others have not, which disappoints me.
But we are not going to give up.
Mr. Zeldin. An important part of a modern FHA is the FHA
Information Technology Fund. Can you elaborate on how vital
funding the FHA Information Technology Fund is?
Mr. Montgomery. This is something that, when I was
Commissioner last time, we tried to get funding for. I know the
last Administration did, as well, so we were very ecstatic that
we got a down payment of $20 million, and hopefully we will get
the remainder. We need about $80 million altogether.
We are going to completely change the way we conduct
business now, which is hard-coded mainframes, heavy reliance on
paper, and to move in the area of data-centric architecture,
moving away from paper to fully electronic, single point-of-
entry, and on par hopefully with what Fannie Mae and Freddie
Mac have done. In fact, they have been helpful, as has FHA, in
this effort.
We think we will realize some economies to scale, not just
the ease of it and the streamline of it, but being able to
better mind the data analytics behind the numbers. So, we are
ecstatic to get the funding and will remain optimistic we will
ultimately get everything we need.
Mr. Zeldin. You certainly have been advocating for FHA
modernization since you were first Commissioner under President
George W. Bush, and it is important that you are continuing
that effort. I thank you, Commissioner. Both the housing market
and the taxpayers are in good hands with someone of your
expertise and knowledge at the helm of the FHA.
I yield back.
Mr. Montgomery. Thank you, sir.
Mr. Lawson. Thank you.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman, and thank you,
Commissioner, for testifying today.
We know that HUD released the annual report on the
financial health of the Mutual Mortgage Insurance Fund. In the
section detailing the emerging risk within the MMI Fund, the
report does note that the projected lifetime claim rates for
recent originations are at their highest levels in almost 10
years. Well, going back to 2009.
The report also highlights that this is due in part to
early payment default rates increasing and that the average
debt-to-income ratio increased for the sixth straight year.
Commissioner, if you could, what are some of the other
drivers that you think are behind the increase in the higher
risk credit characteristics in recent originations?
Mr. Montgomery. You will recall, the Qualified Mortgage--
the Dodd-Frank Act set the maximum DTI at 43 percent for
reasons I am sure we all recall. The GSEs and us were given
basically what they call the ``patch'' to go above that.
I just want to make sure it is clear that high DTI, in and
of itself, is not a key predictor of how a loan is going to
perform. To answer your question, when it has been combined
with other high-risk characteristics, including low credit
scores, that risk layering is what has given us some pause and
what led us to make some changes to our TOTAL Scorecard earlier
this year, which seem to be working. We seem to have slowed
down the drop in credit scores, and that had been going on for
about 3 years. They actually went up a point for the first time
in a while.
Mr. Kustoff. You are saying the credit scores went up about
a point?
Mr. Montgomery. They were slow declines, or sort of steady
state, for almost 3 years. And the changes that we put in place
appear to, at least for the last 2 months, have stopped that.
Mr. Kustoff. I heard what you just said about the DTI
ratios. That, combined with early defaults, combined with where
credit scores are now, should those three factors and others
concern Congress?
Mr. Montgomery. They concerned us, which is why we made
those changes to the TOTAL Scorecard in February, to manually
refer those loans that have those risky characteristics, which
essentially means that the lender now has to lift open the hood
and look much deeper into the finances before they will approve
the loan.
Mr. Kustoff. Kind of along a different line, how large of a
role do cash-out refinancings play in FHA's endorsement
portfolio?
Mr. Montgomery. We are not anti-cash-out refinance. We were
just concerned that we were becoming the government's ATM when
a lot of Fannie and Freddie borrowers who were looking to
refinance moved to refinance with FHA because the terms were
better. So after, again, pouring over the data for several
months, we recently made the change just to accept the policy
that the GSEs currently use, which is 80 percent versus the 85
percent. So now, all three of us are aligned.
Mr. Kustoff. Very good. Can you give your opinion about how
FHA can strike a better balance in doing business with both
depository and non-depository lenders?
Mr. Montgomery. Again, I think getting back to the previous
question and others, making sure that the durability, that
there is some longevity to this process with the Justice
Department, which, again, using our existing Mortgagee Review
Board, I think provides an elegant way to provide that
durability to make sure that it is there to last.
When new Administrations come in, MOUs tend to not have
much of a shelf life. But what we built into the
certifications, which I do not want to get too granular here,
we think helps provide a more rigorous durability to what we
are trying to accomplish. Again, not to let people walk away
when they run afoul of our rules, but to make sure that the
penalty fits the transgression, if you will.
Mr. Kustoff. Thank you, Commissioner. We appreciate your
service, and I yield back the balance of my time.
Mr. Montgomery. Thank you, sir.
Mr. Lawson. Thank you.
The gentleman from California, Mr. Sherman, is now
recognized for 5 minutes.
Mr. Sherman. Thank you.
I want to focus on PACE loans. These are loans in every
sense of the word practically, but technically, they are an
increase in your property tax bill. They are used to help
finance energy-efficient upgrades, often air conditioning
systems.
As of January 2017, FHA no longer insures residential
mortgages that have PACE loans attached to the property in a
first position, as makes sense. You are in the business of
being the first mortgage, and only with great creativity do we
have a system where ``first'' can mean ``second,'' because the
PACE is first, and then the first is second.
I have a discussion draft I am circulating to say that for
a PACE loan to be adopted, it needs the consent of the
underlying mortgage holder. That seems only fair, if you
bargain for first position, that you get to keep that first
position.
What do you think should be done with regard to PACE loans,
both to protect the mortgagor and to protect the homeowner?
Mr. Montgomery. Thanks for bringing up the mortgagor, as
well. There is not much I can do relative to the terms of how
they are able to get the, say in this case, solar equipment, if
you will.
Mr. Sherman. Yes. I know the CFPB is in the process of
writing a rule, but I think we do an awful lot.
Mr. Montgomery. Absolutely. And you are right. We permitted
that on new FHA mortgages. It is the millions of existing ones
that we are concerned about. And if you have some language in a
bill or something, we would be happy to help you in that
respect.
Mr. Sherman. So, a new FHA mortgage not only cannot be
issued or underwritten if there is already a PACE loan, but you
actually have language that prevents some new PACE loan from
being--
Mr. Montgomery. For a new FHA mortgage, that is--
Mr. Sherman. So if somebody signs up for an FHA mortgage
today, or 6 months from now, they cannot do a PACE loan without
the approval of the mortgage holder?
Mr. Montgomery. Well, there is a seasoning requirement.
Mr. Sherman. Okay.
Mr. Montgomery. I can't remember exactly what it is. But
our concern, again, is on existing FHA loans that take out PACE
loans that we are unaware of. And then, if something happens,
we find ourselves now not in the first position anymore.
Mr. Sherman. Now, you guarantee mortgages. Others in the
mortgage guarantee business stop charging a premium when you
hit that 78 percent level. It is my understanding that you
still charge, even if the homeowner has an awful lot of equity
in the house and they don't really need mortgage insurance. Are
you planning to change that?
Mr. Montgomery. Sir, I appreciate your question, but I do
not know of a mortgage insurance entity around that continues
100 percent coverage, unless you quit paying premiums, which
would be the case if that were to happen.
FHA loans are also fully assumable, which is a great
feature. But let's just say that it is beyond the 78 percent
threshold. Someone could assume an FHA mortgage, get 100
percent coverage, yet not be paying a premium.
Mr. Sherman. Could you develop a system to reduce the
amount the homeowner has to pay when the homeowner has a whole
lot of equity in the property?
Mr. Montgomery. That is a good question. And we have been
looking at, as I referenced earlier, sort of premiums at large.
Is it based on however long the average FHA mortgage is? Is
there a way to find a little more balance? I would maintain,
though, even though in the GSE space when private mortgage
insurance goes away, there is a guarantee fee (g-fee) in place
for the life of the loan.
Mr. Sherman. Yes, but we are talking about a much lower
rate when you have a lot more equity.
I want to move on to one other thing. In the aftermath of a
disaster, servicers frequently place loans in forbearance,
providing time for the consumers to assess damages and recover.
If the forbearance exceeds beyond 60 days, the loan is then
reported as being in default and is recorded against the
originating lender on the FHA neighborhood watch database,
regardless of whether the home is in a disaster area.
Particularly for the small lenders, even a handful of mortgages
can lead to a significant impact on their default rate.
How can FHA ensure that lenders are not penalized for
providing appropriate forbearance for borrowers struggling to
make payment in a disaster?
Mr. Montgomery. Thank you, sir. We have been careful to
strike that balance between what we believe was an industry-
leading loss mitigation program that worked well during the
housing crisis. But translating that over into disasters, it is
again something we are looking long and hard at, especially as
it relates to disasters, which is why we made a recent
announcement on the Standalone Partial Claim.
Mr. Sherman. Perhaps you could expand on the answer in the
record. Thank you very much.
Mr. Montgomery. I would be happy to, sir. Thank you.
Mr. Lawson. Thank you.
The gentleman from Wisconsin, Mr. Steil, is now recognized
for 5 minutes.
Mr. Steil. Thank you, Mr. Chairman.
Mr. Commissioner, I want to start by commending you for
leading FHA's Mutual Mortgage Insurance Fund to its best
position in recent years.
FHA insurance is different from private mortgage insurance
in that it remains for the life of the loan, whereas private
insurance falls off as the borrower reaches a certain amount of
equity in their home: 78 percent.
Do you agree that the ongoing nature of the risk of default
demands life-of-the-loan premiums for FHA products?
Mr. Montgomery. I believe so. And as I referenced in the
previous question, if we are going to maintain 100 percent
coverage, then we have to keep taking premiums on--
Mr. Steil. So is a reduction of life-of-the-loan coverage
essentially the same as a premium reduction in your eyes?
Mr. Montgomery. Again, if I understand your question
correctly, the private mortgage insurance may go away at 78
percent, but there is a g-fee included in that that is less
talked about. So, there is still coverage, but it is
something--it is done through what is called a g-fee with the
GSEs.
Mr. Steil. As I understand it, the FHA is supposed to help
people obtain sustainable home mortgages by filling a gap in
the market for mortgage insurance. As you know, there are
several private insurances competing in this marketplace, which
we have been discussing.
Can you just kind of elaborate as to how the FHA's premium
pricing currently compares to private mortgage insurance and
how that competition is playing out, in your eyes?
Mr. Montgomery. Sure. Thank you, Congressman.
It is really almost two different types of coverages you
referenced. When theirs falls off, ours stays in place for the
life of the loan, provided, obviously, that you are paying the
premiums. Theirs is partial coverage and ours is 100 percent.
But I have cautioned that, when making sure that we are
available in good times and bad, it is not our goal to supplant
private capital and what private mortgage insurers are doing. I
think we both perform necessary functions of the mortgage
marketplace. I just want to signal that we are not there to
compete with them, if you will. But, that said, we want to make
sure the borrowers are ready to be borrowers, we have a
circumstance that fits our profile, that we are there to help
them.
Mr. Steil. Thank you. I am going to shift gears slightly.
How do you respond to calls to cut premiums or change
policies in such a way that would increase the riskiness of
FHA's portfolio?
Mr. Montgomery. Do you have a specific example?
Mr. Steil. Broadly speaking, where these things play out.
Mr. Montgomery. That is part of my comment earlier about,
we are a $1.4 trillion corporation, if you will, with a social
mission and requirements set forth for us from Congress. That
said, we want to make sure that we can help borrowers that need
the program.
So, this is something that we look at and deal with every
day, what is a delicate balance between risk, defined many
different ways; between the right premium structure; between
market dynamics, which there is not a lot I can do in that
respect. But making sure that we are there when borrowers need
us.
I will say this: The technology will help us get to a much
better place in terms of looking at data more robustly and
faster than we are able to do today.
Mr. Steil. Thank you very much. I appreciate you being here
today, and I yield back the balance of my time.
Mr. Montgomery. Thank you.
Mr. Lawson. Thank you.
The gentleman from Texas, Mr. Gooden, is now recognized for
5 minutes.
Mr. Gooden. Thank you. I yield my time to Mr. Stivers of
Ohio.
Mr. Stivers. I thank the gentleman for yielding.
Commissioner, again, thank you so much for being here. I
don't think you have gotten a lot of questions about Housing
Finance Reform proposals, have you? Did I miss a few questions?
Maybe there was one, but there has not been a ton.
I wanted to just tell you I was pleased that HUD had some
Housing Finance Reform proposals that you issued earlier this
year. They focused their attention on how FHA would continue
its mission, although a reformed mission. It did talk about FHA
continuing to effectively serve creditworthy, first-time, low-
income home buyers, is that correct?
Mr. Montgomery. Yes, sir.
Mr. Stivers. So, one of the recommendations listed in the
report included restructuring FHA as an autonomous government
corporation within HUD. Would you be able to expand on talking
about how this restructuring would allow FHA to better either
address personnel, technology, or contracting issues, which
would allow you to continue that mission?
Mr. Montgomery. Thank you very much for the question. Just
to be clear, FHA would still be part of HUD and would still
report to the HUD Secretary.
Mr. Stivers. Right, but it would have a little more
autonomy.
Mr. Montgomery. It would be a wholly-owned corporation,
similar to what Ginnie Mae is. We think the ability to have
more--
Mr. Stivers. Tell us what that would let you do. Help us,
help everybody understand the benefits of that.
Mr. Montgomery. I think we would have a little more
flexibility in terms of procurement and hiring. We are the
largest mortgage insurance entity ever, and we are looking at
critical pay, the ability to pay some of our staff more, as
well. So, beyond procurement, personnel, we just think having a
little more flexibility would be very helpful.
One area that would also be very helpful is to make sure we
don't find ourselves in the predicament that we have today in
terms of our technology. Obviously, the receipts would still be
controlled by this body. But helping ensure that we have some
consistent level of funding for our systems would go a long way
to help and ensure that we do not have a similar problem to
what we are encountering today that we are, of course,
desperately trying to fix.
Mr. Stivers. Thank you for that. I think that would be a
helpful way to give you a little more authority and autonomy to
do some things, including keeping your technology modern, which
we have already talked about. The $20 million down payment on a
$100 million problem. I wanted to give you a chance to expand
on that a little bit.
Commissioner, I don't know if you have had a chance to
review Maxine Waters' Principles for Housing Finance Reform.
Have you seen them?
Mr. Montgomery. I have seen parts of them.
Mr. Stivers. I will lay a few of them out, just so we are
all on the same page.
One of her principles is maintaining the the 30-year fixed-
rate mortgage option. Is that something you support as a
principle?
Mr. Montgomery. Maintaining the 30-year fixed-rate mortgage
in the TBA market, yes, absolutely.
Mr. Stivers. Great. A second one is ensuring there is
private capital in place to protect taxpayers. Do you think
that is a good idea?
Mr. Montgomery. Yes.
Mr. Stivers. Another one is providing stability and
liquidity so that we can withstand a future financial crisis.
Do you think that is a good idea?
Mr. Montgomery. That is something we work on every day.
Mr. Stivers. Great. And another one is maintaining access
for all qualified borrowers so that they can achieve
homeownership, the dream of homeownership. Is that something
that you agree with?
Mr. Montgomery. Absolutely. We want to make sure that
borrowers are ready for homeownership and get the type of
mortgage that is appropriate for their circumstance.
Mr. Stivers. I ask you these questions because I asked them
of Mr. Calabria and Secretary Mnuchin and Secretary Carson.
They all also agreed with those principles.
The point of bringing this up is that, even though we have
not made any progress on housing finance reform since the
financial crisis, which was now 11 years ago, there is a lot we
all agree on. Chairwoman Waters, you, me, the three principals
I spoke about, all agree on those principles.
I think it is time to roll up our sleeves and pursue
bipartisan housing finance reform, and I would like to work
with you on that. That is the third thing I brought up today I
want to work with you on, so I hope we can work together on
that. Is that something you would be willing to work with us
on?
Mr. Montgomery. Absolutely. And I have never admitted this
publically, but I will say it today. That is one of the reasons
why I came back.
Mr. Stivers. Great. I am glad you are here. Thank you for
everything you have already done. I am very much looking
forward to working with you on many things, including trying to
do some real housing finance reform.
Thank you. I yield back.
Mr. Montgomery. Thank you.
Chairman Clay. I thank the gentleman from Ohio.
I look forward to working with you and the Commissioner on
how we get to a place in this country where people can share in
the American Dream of homeownership.
At this time, I recognize the gentleman from Arkansas, Mr.
Hill, for 5 minutes.
Mr. Hill. I thank the chairman and the ranking member for
allowing an interloper into the subcommittee's business today.
Thank you for that.
Mr. Montgomery, thank you for coming back from FHA. I thank
you and Dr. Carson for doing a terrific job representing the
taxpayers at HUD.
There has been a lot of talk today about the MMIF fund and
its health being well in excess of 2 percent, now over 4
percent. So, congratulations on that.
Philosophically, I hope you will let that capital continue
to grow. I remember vividly in the early 2000s in the Bush
Administration when the FDIC began to rebate and no longer take
deposit insurance premiums, saying that Congress had already
capped it. We know how that ended, and we were all asked to pay
3 years of deposit insurance premiums in 2008 in one quarter
because of that imprudent decision, alleging the statute only
required blank. So, I like seeing a bigger number.
I wanted to start out by asking you, how do you stress test
that capital and adequacy number?
Mr. Montgomery. We have a contractor, an actuarial
contractor--actually, two of them, and then we have an
independent actuarialist who looks at their work, as well. We
also have a risk team that works with them. We put them through
any number of stress tests.
Mr. Hill. That includes falling housing prices or no
appreciation?
Mr. Montgomery. Absolutely. Looking at extreme economic
situations.
Mr. Hill. And that includes a discount rate on the net
present value of counting future cash flows, which normal
people do not do in capital, but you do?
Mr. Montgomery. And that can work both ways as we--
Mr. Hill. Yes, of course it does.
Mr. Montgomery. So, yes, sir. We put it through dozens of
different stress tests.
Mr. Hill. Good.
Mr. Montgomery. And those are all available in our annual
report.
Mr. Hill. I look forward to studying them in more detail.
Is that done annually by the contractor?
Mr. Montgomery. It is, and what we--
Mr. Hill. Is it ongoing, almost quarterly?
Mr. Montgomery. It is ongoing. As we know, the economy
changes.
Mr. Hill. Right.
Mr. Montgomery. And we always try to stay ahead of that.
Mr. Hill. Good.
Mr. Montgomery. There is a lot of data out there that helps
us, as well.
Mr. Hill. There has been a lot of conversation today about
non-bank originators. Now, shockingly, according to Chairman
Luetkemeyer, over 80 percent of your originations now--and you
talked a lot about false claims today and explained that in
detail. I am interested in a different point of view about it,
which is the quality of the underwriting between a depository
that initiates an FHA loan versus a non-depository. Is there a
big difference in the underwriting there?
Mr. Montgomery. I would speak for our criteria, obviously.
Mr. Hill. I understand.
Mr. Montgomery. Ours stays the same. I don't want to speak
for depositories or non-depositories as I think they strive to
follow our guidelines and stay within the bounds that we
require.
Mr. Hill. When you look at your underwriting, which you
have up there on the board in front of you, it has been talked
about today, but you have seen, as you have said, an increase
in a reduction in credit scores and--let's go to the next
slide--an increase in debt-to-income ratios pretty
substantially.
You referenced a few minutes ago that FHA had looked at
residual income tests like the VA has. Is that something you
are actively considering?
Mr. Montgomery. It is something we are looking at. I think
it has been very helpful for the Veterans Administration,
especially the fact that it varies based on region in the
country. And, so, it is something that we are looking at.
Again, I just want to stress that DTI, by itself, is not
the true indicator, but when coupled with other factors, such
as risk layering.
Mr. Hill. When you see them all going up, it causes me some
concern. I was glad to see your capital where it was. And I
know you have made changes only recently in Fiscal Year 2019,
so I understand that. But when I saw all the major indicators
of underwriting deteriorating, it certainly got my attention.
But I feel like you have covered that today pretty well.
Mr. Montgomery. Yes, sir, and we have a fantastic risk
team. We now have brought a retiree over from one of the GSEs,
who was a chief risk officer there.
Mr. Hill. Let me shift to one final point, and that is the
issue of the Distressed Asset Stabilization Program. Selling
assets boosts the MMIF, doesn't it?
Mr. Montgomery. It depends on where they are sold in the
process.
Mr. Hill. If you have taken a property back and you are
selling it, it is a net contribution?
Mr. Montgomery. Yes. If it goes to real estate owned (REO).
Mr. Hill. Right.
Mr. Montgomery. Note sales, yes, but note sales are a
little different than REO sales.
Mr. Hill. But you would not want anything to encumber your
ability from distressed sales to build capital, would you?
Mr. Montgomery. I think one thing the previous
Administration did and that we have continued to do is to find
other alternatives to REO because the carrying costs of those
are borne by us. The time that they will sit there is also
borne by us. We have contractors we have to pay, certainly. So
the ability to use claims without conveyance of title and note
sales has been very helpful.
Mr. Hill. It will be interesting. I will follow up with
you.
Mr. Chairman, thank you for your indulgence on the time.
Thank you.
Chairman Clay. Thank you. The gentleman yields back.
I would like to thank our witness for his testimony today,
and we appreciate you sharing with this subcommittee your
thoughts on the future of where we go with the housing policy
of this nation.
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.
And now, I will take a point of personal privilege to
say congratulations to Mr. Gooden of Texas, or to you and
your wife on the addition of a new family member, your daughter.
So, congratu- lations to you.
Mr. GOODEN. Thank you, Mr.Chairman. I appreciate it very
much, and I look forward to bringing her here someday
soon to meet you all.
Chairman CLAY. Very good. What is her name?
Mr. GOODEN. Milla Michelle Gooden.
Chairman CLAY. Very good. Mr. GOODEN. She was born last week.
Chairman CLAY. Congratulations, again. Mr. GOODEN. Thank you.
Chairman CLAY. This hearing is now adjourned.
[Whereupon, at 4:39 p.m., the hearing was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]