relied on a single economic forecaster determined compliance with the 2% capital ratio requirement. however, this approach is not fully account for the variability on future house prices and interest rates and therefore may tend to overestimate the fund's value. ..

>> incoming its efforts to rebuild the funds capital ratio. we look forward to supporting this committee's efforts. this concludes my remarks. thank you for the opportunity to speak today. i'd be happy to take any questions you may have. >> thank you so much. dr. chaplan, your recognized for five minutes. >> [inaudible] >> if you'd turn on the green light there, yes. and pull it a little bit closer. >> okay. i'd like to thank you all for permitting me to testify regarding fha's mutual mortgage insurance fund. my message is somber and intended as a call to arms. the issue is serious and risks great. the risks are not properly

accounted for in the reports. there's a far higher probability than currently projected that a large bill will be due taxpayers that fha backed home buyers will face foreclosure and congress will be called upon to recapitalize the fund. history will judge us poorly if we bury our heads in the sand. the time is most definitely not on our side. there are two crucial steps fha can take to bettering the for -- better account for the risks is takes and safeguard the insurance funds. first is fill a profound gap in the actuary review. this makes it impossible currently to answer basic questions such as one, what proportion of recent backed borrowers have already defaulted? two, how many such borrowers remain at serious risk of default?

three, how many of those at risk are likely ultimately to default? the centrality of the questions is evident. the answers to some of the risks that fha programs pose to taxpayers in the role is guarantors, and they determine the probability that fha backed home buyers determines foreclosure and determines the probability that congress will be asked to recapitalize fha's insurance fund and determine the the likely timing and size of any such request or requests. the fact is that the actuary report does not answer these questions. rather than protecting the success and failure of fha backed borrowers, it projects the performance of fha backed mortgages. this results in downward bias loss projections. work initiated some two years ago with joe tracy, executive vice president and senior adviser to the president of the federal reserve bank of new york, suggest this bias may be

highly significant. while is sounds like a narrow technical issue, the dings of borrowed performance and projecting mortgage performance is of highest significance. in recent years, the streamlined program has been in high demand. this this program, fha backed mortgages can be refinanced to prevailing lower rates without any new underwriting. i regard this as an excellent program. the problem is not with the program, but rather with the actuary report treating each such refinance as if it extinguished fha's insurance obligation. in truth, there is no cancellation of the underlying insurance, and little, by the way, of additional fees to fha. by lumping refinancings together with prepayments on which the insurance obligation is extinguished, for example, following the successful home sale, the actuary report overestimates fha's past and

future success rates. my ongoing work with joe tracy suggests the estimation of losses is significant. in this period of falling rates, streamline refinancing appears to have been the most prevalent method of repayment. how could it be otherwise? there's been suggestions to refinance on rates of fha mortgages have tumbled. in the meantime, little opportunity for successfully selling recently purchased homes and moving. if our preliminary findings are mortgage determinations hold up to further work as we expected they will, default rates will stay at elevated levels for years after they are currently projected to decline. during our slow progress in the research, results of difficulties in gaining access to fha data, and this forced us to seek out alternative sources. fha would have been better served had we been able to

contribute to their work on risk assessment and risk mitigation, yet, fha alone has access to the data. i propose hard instruct ime to link together mortgages that are refinanced one into another. by itself asking for the model to be rerun is not enough. it produces low transparency and reduces risk. to allow to to continue invites tragedy. let's use additional sources required to outside researchers including federal reserve board of new york. risk assessment is enhanced once additional temperature teams are encouraged to participate. the improvements have a reputation of helping home buyers and safeguarding taxpayers. the eyes of history are on us. it's time to act.

>> thank you so much. mr. conning -- cunningham, you're recognized for five minutes. >> thank you. we're at a cross roads today. fha has played an important counter cycle role. the agency is now providing much needed liquidity during the period marked by a prolonged retreat of private capital. it's fair to say of housing recovery, although very fragile, would not have taken place without fha. however, fha's single family programs have not been immunedded to the historic disruption that riled our markets, and that's why we're here today. the actuary report is sobering calling for a fresh look at fha's fiscal health and the role it plays in our housing finance system.

first, i want to take a few minutes to examine the steps this committee and fha put in place that have allowed the agency to better manage its risk exposure. in 2008, congress passed the housing and economic recovery ang. that legislation terminated the failed seller funded down payment assistance programs that were responsible for disproportioned level of fha's defaults. it also permitted fha to raise premiums, up until fa fha used twice in two years. fha has taken other important administrative actions designed to protect its financial stability. these include the following -- increasing down payment requirements from 3.5% to 10% for less credit worthy borrowers. eliminating fha's approval of loan correspondence, raising lender net worth requirements,

re-examining reverse mortgage policies, and finally, establishing the office of risk management. mba recommended these steps and commends hud and fha for taking these necessary measures. in order to reduce taxpayer exposure and strengthen fha for the long term, these measures are working. they are allowing fha to weather the economic downturn and putting it on track to raise its capital reserves above the 2% level mandated by the statute. the change in premiums alone has been largely credited by the actuaries for raising fha's total cash plus investments by $7.7 billion. while the steps have proven successful, fha is not out of the woods. the actuary report found nearly a 50% chance that fha's capital ratios could slip below zero

potentially requiring a capital infusion from the treasury. another recession or a drop in home prices could be a tipping point that causes greater losses for fha. what can we do to help fha emerge healthy? we can start by getting the qualified residential mortgage rule right. as it's currently proposed, the rule would require a 20% down payment to obtain while fha requires just a 3.5% down payment. the qrm definition appears to conflict directly by efforts from congress and the administration to reform the housing finance system. it would make it more difficult for priefl capital to -- private capital to reenter the market and lead to overutilization of fha's programs. another key component of putting private capital on the front lines is to revitalize a

secondary mortgage market. mba put forward a suggested frame work for a limited, but clearly defined government role in the single family and multifamily mortgage markets. our recommendations carefully balance the government's ability to ensure liquidity with the need to protect taxpayers from the credit and interest rate risk associated with mortgage finance. it's a plan that promotes the return of private capital while limiting the government's footprint and mortgage finance helping the markets function efficiently while protecting taxpayers. madam chair, mba believes that the tools fha put in place, the strong leadership at hud, and continued congressional focus on issues like the qrm and housing finance reform will help fha emerge from this downturn and allow it to continue playing its

important role in the mortgage markets. thank you for the opportunity to testify today. >> thank you so much. >> thank you, madam chairperson. i'm pleased to be here remitting the -- representing the mortgage companies of america to talk about the soundness. since they operate in similar markets, historically, mica offered insight into fha's financial condition and suggested ways to improve the operation. mike was one of the few members advocating for the 1990 reform staff that mandated a 2% capital ratio and the actuary report rare report that is the subject of today's hearings. i'd like to make two basic points. first, fha is on the brink of becoming a subsidized program, and steps must be taken immediately to put it on track to financial solemnness. second, while fha and private serve similar markets, the

balance between the government and private sector has been destabilized in recent years. they need to bolster the fha and allow private capital to serve the market in full capacity. returning the fha and private sector to norms are not mutually exclusive goals, and, in fact, can be achieved in tandem. we believe the committee should focus on two significant points made by the study. they are as follows: first, press reports focused on the mutual insurance fund is at .24%, the ratio for the traditional single family program is half that at .12%, a ratio of 841-to-1. it's boosting the ratio of the fha to 2.4%. second, according to the hud record to congress, within just

the single family program, there's only $1.2 billion of economic net worth supporting just over $1 trillion of insurance in force. this should be of concern since fha serves 100% of each loan with potential loss exposure that's the full $1 trillion. there's three reforms that turn it to actuary report rare soundness. first, fha has to build capital and therefore raise its premium immediately. it can be done so without new legislation. fha should raise the annual premium to the maximum allowed under current law. further, to assure the fha provides greater cushion for the taxpayer, they have to have premiums at the higher level until 2% and several years thereafter. by statute, the minimum down payment is 3.5% and private is at 5%. in view of the market realities

today of falling home prices, the minimum down payment requirements should be increased to 5%. third, the way fha's loan limits are calculated skews them so they are as high as possible exposing the fha to greater loss. two changes need to be implemented in this regard. currently, fha uses price data back to 2008 rather than the most currently available data. fha should use the most currently available house price data in setting limits so they are realistic in the change of housing prices overtime. current law requires the fha limit for a county is set at the median house price for the highest priced county within the entire msa. the law should be changed to fha is no longer require the to target limits to the highest priced county. finally, part of the answer to ensuring the long term viability of the fha, and providing protection to the taxpayer is to

restore the balance of the fha and private sector to its historical norms. this has been a goal expressed by the secretary. one means of accomplishing this is to eliminate fees of the gses on top of the premium. in noted to the hud report to congress, these fees made privately insured loans more expensive than comparable fha loans. if the gses believe they need more credit risk protection, they can require deeper mi coverage. it's less expensive to the borrower and safer for the taxpayers. in fact, since the crisis began, the mi's paid the gse reducing loss by 15%. in addition to restore this balance, the fha and the private mis have to work closely together complementing each other's strengths to ensure the market is served in an efficient and consistent matter. in conclusion, we believe, like 1990, fha is at a cross roads,

and there's actionable steps congress can take to put fha on the road to actuary report -- actuary soundness, provide a greater role, and help the taxpayers. thank you very much, and i'll be happy to take any questions. >> thank you very much. >> thank you, madam chair, and members of the committee, thank you for the opportunity to offer our views of the federal insurance patrol. i'm the 2012 president of the national association of role tores, but more importantly, i'm a practicing real estate professional with more than 40 years experience in a realtor and brokers owner in miami, florida. the 1 minute 1 million members represent a broad away of housing and district professionals committed to making the american dream possible. in front of you is the written text, and i wanted to chat with

you for my balance of the four minutes about fha and how important it is to the housing commute of america, not just for the financial and economic standpoint that we talk about, but more importantly, independently, how it knits the fabric of the american community together. we found and have evidence that folks who own a home, live in their home longer, their marriages stay together longer, their kids are better educated, they go on to profit from better jobs. there's a less significant time spent in front of tv. there's less teen pregnancy. i can go on and on and on. home ownership in america knits the fabric of america together. any time you do anything to diminish home ownership in america, you diminish the moral character and the promise of america to americans today. some of the things that were not talked about, but questions asked were what happens when a

home is sold? let me tell you when a home is sold in america. number one, $60,000 additional money is spent in the first 18 months from the time that home is closed with a new roof, landscaping, furniture, carpeting, and every time two homes are sold, one brand new job is create, so in america, with our prospects of about 4.5 million sales this year, we'll generate over 2.2 million jobs. when fha was first prom mull gaited in -- promulgated in 1934, it was not a matter of doing specifically for the mortgage market or insuring mortgages. what it was thought of to be was an institution available to provide money for homeowners who didn't have the money to repair homes during the great depression and afterwards, but what it was really thought to be

was a job creation bill, and that was because they figured on that time, what we're going to do is we're going to create a few bucks for the foams that didn't have the money to prepare their homes, and now we will, and that's exactly how it came about. you diminish america's opportunity in my capacity, especially today when we're just beginning to remove ourselves from one of the most horrendous housing situations that the country's ever seen, then you do that to destabilize the recovery of the american housing market. the -- we anticipate that probably in 2012, we'll see an appreciation rate of about 1.2%. after that, we see a better appreciation rate. that comes from our economists at the national association of realtors. we also anticipate, frankly, that some of the areas in the country that were overbuilt, one

of which was miami with a tremendous amount of vertical development, may, according to our chief economist, see in 2012, one of the few places in america that will appreciate in double digit figures for that year. we've seen things, in my travels across the country, to phoenix area and las las vegas area, that realtors there are telling us the markets are moving. it's not just the light at the end of the tunnel, but the diminishment of the existing inventory that exists today, and that's a great indicator, do something to create a problem with that, diminish that, kill that, worry, not just the industry, but the consumer and the prospects of america today to buy and create home ownership, and i think you diminish the economic prospectings of america itself. of the last eight recessions, six, six fully, have come out

because you got a robust and a very rounded and energetic real estate economy. in conclusion, nar believes in fha mortgage and insurance program and believes fha shows tremendous leadership, strength, and vitality, during this crisis. we whole heartedly support the fha program and stand ready to work with congress to enhance the mission, service, and purpose. thanks for the opportunity. >> thanks so much. ms. rosen, you're recognized for five minutes. >> thank you, madam chair. let me start by saying it's remarkable fha has not yet required any supplemental support given that yet so many other mortgage up -- invested institutions needed help. fha has, so far, weathered the worst housing collapse arguably in history while serving primarily low income borrowers and playing a role that's

prevented a more devastating overcorrection in the housing market. without fha, one could estimate at least a million homeowners might not have had access to mortgage credit in the wake of the crisis, which would have further chilled housing demand, depressed prices, and exacerbated the downturn. the ability to play the role is a function of the government insurance model. where stronger books of business help cover losses from weaker periods. fha faces significant losses ahead from loans that are insured in the years immediately prior to the financial crisis, especially a large number of loans with seller financed assistance, but it's more recently insured loans have significant economic value. the capital reserves of the mmi fund, beyond the expected losses, are nonetheless uncomfortably low. more than anything else, fha solvency depends upon weather and the extented to which

housing prices continue to fall in the next two years. as we've heard, the actuaries say, absent further adjustments, fha's capital reserves can likely stand another drop in housing prices over the next three years, larger than most forecasts, but even if prices continue to fall and the cushion is insufficient, fha has tools to bolster reserves by further tightening underwriting or boosting premiums. i argue they focus on premiums and consider charging higher premiums on higher value loans in its unusually large market at the current time. low interest rates leave room for borrowers to absorb fees without creating an affordability barrier to access. in contrast, higher underwriting standards and higher down payment standards could make it difficult for a broader swath of homeowners to obtain home

mortgages putting pressure on demand contributing to continued weakness in housing prices and potentially creating risk to the mmi fund. other longer term policies could also strengthen fha. congress should consider structural reforms such as that proposed by the bipartisan my len yal housing commission in 2002 to make them a nimble corporation and serving markets and meeting financial targets, but with greater flexibility in project design and personnel to meet the needs. risk sharing is another way to limit risk exposure while improving operations. full insurance coverage is necessary at times to attract capital during downturns, for untested products, and to serve underserved markets. they can expand the risk by taking advantage of partners assessment and capabilities.

let me note that fha's role in the housing finance system of the future very much depends upon how policymakers act on other policy issues, particularly how they wind down the government sponsored enterprises and build a new housing finance system in their place. if you strip all government backstop from the conforming market, fha will be likely be forced to maintain or grow its current inflated market share and sustain its first loss risk. if the government maintains explicit guarantee on conforming mortgages, standing behind private capital and charges for it so that it can hold actuary actuary guarantees, fha could return to a manageable share of the market when prices stabilize. i also share the concerns shared that the proposal could unseesly drive risk to fha that could be well served by the private

sector. in closing i note, if the recent crisis taught us anything, it's the imperative to closely monitor the business practices and actuary health of our financial institutions as this committee has appropriately chosen to do today. congress and fha officials together have the tools available to ensure that fha continues to play its essential role while protecting the taxpayers, thank you. >> thank you so much. you're all well-seasoned witnesses because you all held right to the five minutes, and we really appreciate it this afternoon. i would ask unanimous consent to enter into the record the following written testimony from potamic partners llc. without objection, so ordered. we'll turn to questions from the members. we'll adhere to the five minutes, and i'll recognize myself for five minutes.

mr. caplin, you have concerns that fha is understating their losses. can you explain your concerns and to what extent fha is understating their losses. >> [inaudible] >> turn on your mic. >> [inaudible] >> pull it closer. >> yes, i'm concerned they are gurnet stating it. -- understating. it's incredibly important today. they are measuring losses on mortgages, so when you hear about the 2009 book of business, that means the mortgages that have been refinanced into 2009, that does not mean the people who first bought a home in 2009. when you hear there's a better book of business in 2009, that mixes together people who are

purchasing new in 2009 and those who refinanced into 2009. it's not surprising that those who couldn't refinance are doing worse because there's a qualification criteria in order to refinance which is that you have to be current. the big deal is that many terminations of mortgages that, in fact, do not cause cancellation of the fha mortgage obligation are treated exactly the same as if they gave rise to a cancellation of that obligation. that means that there is an absolutely incorrect assessment of the risk of future default. it simply is flat wrong. it's understated because every time anybody refinances streamline, they are determined as a mortgage termination that

ends fha's insurance obligation. it does not. >> thank you so much for that. i appreciate it. mr. cunningham, do you think that the qrm definition adheres to the administration's gse white paper? i think the qrm as proposed requires -- i don't think the white paper anticipated or didn't indicate any particular down payment requirements. i think that white paper didn't anticipate that. i think the rule is as proposed has gone beyond that. >> so it really just popped up after the white came out?

>> collectively, they proposed the rule that you see before you today. >> the mortgage bankers association concerned about the qrm? >> we are concerned about the qrm, and equally concerned about the qm. we think that both of those should be considered together. we actually think the qm is a better starting place, you know, the concept of a borrower qualifying for mortgage is certainly a way to promote sustainable home ownership, so i think that it's important to have a bright line test for qualifying a borrowers. if you don't have a bright line test, you're going to have lenders that are more conservative to denying home ownership for a lot of potential home buyers. >> thank you. >> mr. sphinx, is it your belief

that private capital stands ready to take -- get into the market space when the government vacates? >> yes -- [inaudible] >> could you pull your microphone a little closer or turn it on? >> yes, we do. we believe we have the capacity to fulfill the space that would be left by the fha. there's plenty of capital in the industry today, and we also know that there's a lot of discussion about new entrance coming into the industry, and there's greater certainty around the resolution of qrm and the resolution of the future of the gses, then we'll most definitely see capital come back and therefore we'll have capacity. >> thank you. are there private sector alternatives to the fha insurance for home buyers? particularly at the higher end

of the market. do we have the alternatives now? or are there alternatives that should be? >> yeah, we have not really done the work to take a look at what that part of the market looks like, so i really can't answer that question. i'd be glad to look into it though for you. >> okay. thank you. then ms. rosen. fannie and freddie, you know, have been bailed out by the taxpayer to the tune of $180 million to date. what potential exposure to taxpayers have to have to bailout fha? >> as i mentioned in my testimony early united states of

-- earlier, there's steps the fha could take to prevent exposure, and if there's short term exposure, much of that has the ability to be repaid from revenue that could be earned overtime from these very strong books of business that fha has, so it is not, as secretary donovan said, nobody should be comfortable given the cushion. >> thank you. i'm going to have to yield here. i'm over my time. thank you. gentleman the texas. >> thank you. i thank the witnesses for appearing. not allowing your testimony to be misconstrued later in history, is it correct to say not one of you concluded that fha should be eliminated? if you are in agreement with me, kindly extend a hand into the air. i know it's not what you

normally do at a hear, but we do this at court with something called voir dire. if you think fha has a meaningful role in the housing market, kindly raise a hand. for the record, please, let it reflect all the witnesses concluded that fha has a meaningful place in the housing market. if you think that fha has been a benefit in stabilizing with the recovery that has not been completed, i understand we're not there. do you agree fha has been a benefit in helping us get through 24 -- this downturn in the market and it acted as a force? if you agree, extend a hand into the air. let the record reflect show all the parties show they agree it's been a force helping with the recovery.

friends, later on, there will probably later on be talk of fha going away. i don't think that this is what you're testimony was intended to convey. as a matter of fact, testimony shows the importance of fha, which is what i attempted to do earlier as well. also, it indicates the multiplier impact on jobs. great number of jobs created, not by fha itself, but when houses are sold, you go beyond just the buyer and seller to all 69 various other industries that -- all of the various other industries that are associated with the selling of a home. finally, let me ask this. the qrm, important. the qm, important. do you have a number that you have given considerable thought

to that you would like to share today? don't want to put you on the spot, mr. cunningham, but this appears to be an area where you have some degree of expertise. where are you on the qrm? >> i'm not sure i understand your question. >> well, what percentage would you conclude would be a good number? >> well, as i indicated, i think honestly the qm, the qualified mortgage, is a better place to start. focus not only hard guidelines that might be mandated or legislated that could necessitate change in the future, but rather focus on a borrowers, qualifying a borrowers for the mortgage they are applying for. >> i'm available to hear other comments because i may not have the opportunity -- yes? >> i want to make sure that we understand that the downturn in the real estate, at least i

understand, the downturn in the real estate morning was not because we produced a bad product or there were bad people buying, but there was horrible underwriting standards and significantly little oversight. you could take a look at the va mortgage today with the lowest foreclosure rate across the board, and they require 0 down. look. the realize is if you have -- the reality is if you have an individual committed to making the payment, and they are reasonably invested in that, that's exactly where you go. that's where you go. >> as a matter of fact, there's some persons who cannot afford a down payment, but are paying rent that exceeds what a mortgage would be, and they would be a good risk, but the question is how do you get to them in a systematic way such as that you don't find yourself underwriting loans that may cost taxpayers money in the future?

yes, ms. rosen? >> may i comment on the qrm1234 the statute listed a number of factors as relevant to the characters of urm exception, and it did not list down payment. there's a deep concern that by setting a particular down payment threshold, you by fer kate the market and create less liquidity in one market raising the prices and essentially diminishing responsibility for the bow -- borrowers with amounts to drive business, and i argue that almost regardless of the threshold, you'll have that market effect. >> well, i thank you, all. my time expired. i am one of those who is of the opinion that we can mend fha, that it has a meaningful role. there's no need to move to a far extreme such that it will no longer be effective, and, in fact, not exist. >> gentleman's time expired.

>> i thank you for being here today with us. >> the gentleman from florida, mr. posey, is recognized for five minutes. >> thank you, madam chair. i thank everyone on the panel. you're informative bringing us good information. there's not any of you that didn't enlighten me significantly. did i understand you to say that you think there are currently existing a market sufficient to replace fha, if fha was to vaporize tomorrow? >> well, we're not advocating that the fha vaporize, but we do believe they have a role, and if they return to their historical norm in terms of that role, there is enough private capital in the private mi industry to support the market. >> has it always been there? >> certainly in recent times it has, yes. >> then why do they go to fha if there were private alternatives available? >> well, i think it's a combination of factors.

back in 2007 and 2008, the private industry, lenders and mortgagers, and insurers tightened up the underwriting guide lines, and fha moved in to fill a role. as time moved on, what we experience now, as i mngsed in my -- mentioned in my testimony, on the convention conventional loan side, there's price adjustments in the pricing, and as a result of that, the fha is a better execution, so more lenders or more consumers are going to fha. in addition, the down payment requirements is a difference of #.5% at the fha versus 5% with the mi's. >> okay, the down payment makes the difference then? >> yes, sir. >> it doesn't sound like really, truly, we have a market that's willing to step in and pick up at the more reasonable down payment levels than actually --

>> that's correct. >> okay. i thought i heard you say that right, and what you said apparently is not exactly what you meant, but thank you. if the fha, more minimal down payment program was eliminated, what do you think would happen to the market? we have people that are suggesting we raise fha down payments to 20% to 30% in an effort to make the loans more secure when, as you just mentioned, and, for example, i often used va with a 2.5% loss ratio, the lowest of anybody i know of, is 0% down payment, but should the fha low down program go away, what do you think the impact would be on the market? >> [inaudible] sorry. if we're talking the 20% down, we've done some statistical analysis and figure probably it

would take the normal homeowner, the new first time home buyer between 9-14 years to save enough money to make that 20% down payment. at a fragile recovery period that we're in today, you would literally devastate the real estate market by doing something like that. fha has done an enormous amount of good for not just the real estate market today, but for the first time home buyer in the last four or five years. about 75% of all first time home buyers last year made that purchase through fha. i can tell you because i do this every day, and i travel the country and speak to our people every day at trying to extract a loan from the conventional bank is like trying to beat up a rock and get blood out of a turnip.

it's just not happening. unless there's another alternative way if we beat this to death, especially during the difficult times, you'll see the real estate recovery especially stagnate, and that's important to understand, do that, and you really drench out the recovery, and probably the economic recovery of this country. >> i thank you. that's a good world perspective on it, actually. mr. cunningham, your thoughts on the same thing. >> i agree with those comments exactly. i think that, you know, fha's played an important part in our fragile housing recovery. i think, you know, it provides state in the housing market, liquidity in the housing market. i think the proposals for qrm, you know, if we could eliminate the debt to income requirements and loan to value and focus on qm, i think that would be a significant move in the right

direction. i think that it's -- it's very important for us to provide a government role in housing to provide liquidity in the market place. >> generally, the consensus is, i think, we don't agree with the concept, but the best way to eliminate a large inventory of housing is to make it more difficult to buy them? thank you. thank you, madam chair. >> thank you. the gentleman from north carolina is recognized. >> i thank you. i just wanted to ask broadly to my colleagues on the other side of the aisle, ask a few broad questions of the panel. i want to start by saying by asking whether or not -- whether anyone on the panel would say that fha having as large a role in the mortgage marketplace is a healthy thing?

would any of you volunteer to say that? okay. all right. so we're not talking about -- there's not a discussion on the committee about eliminating fha, but there's a discussion about fixing it, and, you know, some of us look at fha and say, well, when fha is playing such a large role in the mortgage marketplace, perhaps there is something severely wrong with the mortgage marketplace; right? which everybody on the panel would think, well, obviously; right? i mean, it's sort of a reality here. you know, to -- you know, with the temporary conforming loan limits being raised, then october 1st, they went back down under law, and then this congress acted. i voted against this measure on the house floor. i think it was a bad policy, to raise the loan limits back up, so we saw a month of activity

when the loan limits went back down. did you see activity? did you see the private sector filling in where fha could no longer serve? >> yes. >> okay. that's very elaborate answer. [laughter] >> well -- >> fantastic. it's a wonderful answer. i love that, but -- >> in fact, the announcement if i may, the announcement that the loan levels are going to drop, typically what happens in the lending community is they start making adjustments prior to the effective date, and even though it was august 1, we saw lenders in august and september making those changes, so it's a deaf fintive yes. >> you saw the private capital filling in; right? >> yes. >> and was that -- was that a healthy thing? do you think that was a positive? >> yes, we believe that was positive. >> okay. now, i asked this, and i know it's a simple and basic question, but there's a lot of debate here. now, we heard from secretary

donovan, we've heard from the administration, they said it was a healthy thing that the loan limits went back down. you know, let me just ask broadly with the panel, is that a good ning that the loan limits go back down for fha? >> i would contend it's not, and i'll use north carolina as an example. i have offices scattered across north carolina. i've got, and i have a loan officer in charlotte that has been anxious about the fha increase back to the old limit, and in charlotte that means in connection in connection new yorking to 70 -- increasing to 703,000. a potential three borrowers waiting in the wings of the mortgage letter proposing to buy

a house that otherwise could not buy a house, so -- >> why? why couldn't they buy them? >> down payment. >> how much down payment do they have? >> how much down payment? i don't know exactly how much they have, but they -- >> okay. so is it -- this is less about fha, your example, than about the failure of the rest of the mortgage market. >> it's actually, you know, -- >> my time is limited, sir. i'll go across the panel. the loan limits going back down, is that a better thing or a worse thing in your opinion? just go briefly. i got one minute. >> i think it's an important thing for the congress to weigh in on this as to what is the market segment in which it expects fha to operate. >> okay. >> the risk assessment is not at an adequate level to provide an answer. >> anything that would impact down payment in condense the

amount of perspective purchasers or the ability for them to get mortgaging would devastate the real estate market, especially now. >> okay. >> when there's not only availability of mortgage insurance, but funding and capital for access that provided to the secondary market, then fha's market share should be significantly smaller. >> yes. okay. well, i appreciate you, your testimony, and answers on this. i think that the key thing to understand was that fha and our federal housing programs were intended for the least among us, not the greatest among us, and when fha's stepping in in very high home value areas, and subsidizing very high net worth individuals, we're simply giving a subsidy to folks who could otherwise get lending elsewhere, not those at the margin

struggling to get into a $100 thorks or $200,000 house. >> the time expired. the gentleman from california, mr. sherman. we're approaching a vote and also another committee coming into this, so this will be our last question. >> thank you. in reference to the gentleman from north carolina coming from a state without a high cost area in the state, and so it's very easy for him to vote against the bill that would prevent a major recession from hitting los angeles, but i assure him that if a recession starts in los angeles, it will reach to north carolina. >> would the gentleman yield? >> tent seconds. >> sure. i appreciate that. i understand your perspective on it, but when we talk about federal policy, subsidizing a half million dollar house is very different than helping somebody's who's trying to -- >> you've never seen a half million dollar house in the san

fernando valley. it's small e and the people living in it are more working class than the quarter million houses of north carolina, and that is why having a law that distinguishes between your state and mine is necessary, and if you want to see every home in los angeles drop by $100,000 and think it won't hit north carolina, we are in an interconnected economy. i'll also point out that this increase, temporary as it is, affecting only roughly ten markets around the country, is not subsidizing the borrowers over 625. before this panel came in, we heard from the secretary of hud who testified that the loans and the malice between 625 and 729 out perform the other loans. they subsidize the fha's other

work, so the people in my district are happy not to see a collapse in home prices and happy to pay insurance premiums that help subsidize what goes on in north carolina. mr. vesii, i think it's on the record, but if we require a 20% down payment, what happens to home prices in this case wide? >> we've got statistical evidence showing that you could affect home prices across the board as much as 15% downturn. i just -- i just want to comment just a second. >> yeah? >> real estate is local in nature. it's not across the board. you made great mention of the fact prices in california are not the same as north tennessee or houston, texas or even miami,

florida, and you've got to be sensitive to the fact that real estate is ewe -- uniquely different in location from place to place. >> that would be low -- location, location, and location being relevant to real estate. [laughter] and i also add to your 15% comment, we heard from the earlier panel that if we saw anything over a 4% or 5% or 6% decline in home values in the country, that would cost -- fha uses up its reserves, and god knows what it does to fannie and freddie, but a 15% decline in home values nationwide is -- would do more to increase the federal deficit than anything i can think of, and i'd been called a liberal democrat, so i can think of a lot of things.

the other comment i'd make is, and i'd like a response is if we could increase in the high cost areas with fannie and freddie, doesn't that open the door to some private insurances taking some risk, reducing risk, reducing fha's role, all the things that some of our colleagues are talking about? >> not that i'm not grateful for the fha, but if we could do fannie and freddie. >> i think any time you give private money, real comfort in knowing that there exists parameters, you'll have them come back into the market place wholesale and be competitive on that level, and then fha, we'll take a much smaller portion of the marketplace. i think that's going without saying.

plus, what you heard from the testimony this morning was the highest cost loans have a lesser amount of foreclosure than those even at a smaller base. >> we may have expensive homes, but we do pay our mortgages. >> there you go. >> the final thing i want to point out is this idea that there's no harm, no foul -- people prepared for this in high cost areas like i represent and the gentleman from north carolina does not, and completed their transactions and their sales in the summer. they were ready to go for a few months, but if we had not gotten that higher fha, you would have seen a spiraling down in prices, and for the record, he's nodding, and i yield back. >> thank you. just for the record, mr. sheray, are there controls on how much money fha can draw down from the treasury?

>> so if fha were to use up the amounts that are in the capital reserve account, they would consultation with omb, draw on permanent and definite authority to make up whatever difference would be required to replenish that that's needed for the financing account through the capital reserve account, so there is this permanent definite authority providing whatever appropriated dollars might be needed in order to make the capital reserve account whole. >> so there's no limits? >> no. >> thank you. the chair notes some members may have additional questions for the panel they wish to submit in writing, without objection. the hearing record is open for 30 days for members to enter in questions and place responses into the recordment again, thank you for your patience, and thank you for being here, and you've been very helpful, i think, in bringing your testimony to us,

and we thank you so much, and with that, this hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] >> i look at why a country does well or why it doesn't, i think it's fundamentally a values thing. it's not natural resources. it's do you have -- these are two crucial values -- do you believe the future can be different than the present, and do you believe you can control the future? these are not universal. some places they have it, other places they don't. in the u.s., we have an exaggerated sense of how much

control we have. [laughter] but that's good for us to have. ..