>> on paper it is pretty attractive. on the grounds, it is devastating. it causes you greater losses than you would sustain otherwise if that process were streamlined and allowed more people to participate in it. on paper it looks good bet on ground level it needs to be improved. what affect would have to make loans for recourse loans? >> there is no question they

would be substantially more expensive. in exchange for that, there would be some potential improvement in performance. it is hard to predict how difficult that would be. >> if you add any data on that, i would appreciate it. if anybody has prognosticated. i wonder if he might make the awareness, i am heard the same time many people, most recently by senator gramm and that we hear people, are upside-down on their mortgages. he compares that to somebody driving a new car off of their car lot. that does not mean it makes sense to abandon a car and buy another one. i wonder if there is a way you might initiate that in your

education program. i know there are financial advisor telling people to walk away. that does not help anybody. if people would hang in there, i think there is a negative propaganda being perpetrated to a large part of the population. no positive information to put in perspective, more reality. reckless endangerment would have been a better title. the offers -- authors of that believe the worst is ahead of us. we have been unable to get anybody from the department of treasury to tell us whether or not we have bottomed out.

i appreciate -- appreciate any insight you have. >> a would be happy to follow up. >> du have any idea how many loans have out there now? >> the total value of our portfolio? >> the number of loans. >> about 7 million. >> of those 7 million, these are first-time home buyers. >> not all of them. there is refinancing available. >> 90%? >> are estimates are of all the first-time home buyers, 56% used

and fha mortgage. it is a huge share. >> of all mortgages, people getting into the market, and know you do not know the answer but i would like for somebody to see how many of them, could they afford a 50% down payment and to carry the mortgage over five years? correct me if i am wrong, before fha, was and that a typical mortgage? 50% down? >> that was typical before fha. those are the types of terms. >> fha instituted the 30 year mortgage retake is a given. they instituted the idea of

limited downpayments. is that a fair assessment? i am not against the private market but that is what the private market did when there was no government involvement. they disallowed most people in this country, of the 7 million mortgages you have, very few of them would have been able to put to 56 -- 50% down. very few of them. that is why home ownership has gone up. i do not think anyone has the tenacity to suggest it should go to 30% before the fha. all of this discussion about doing something wrong is ridiculous if you believe, ownership and middle-class go together.

i guess i do. those who don't should turn to their own constituents and tell them to rent. the other thing i am concerned about, some of the issues relative to the capital requirements. i think it is overdue and well done to tie down payments and other requirements to fico scores. i think it is a good thing. have the repayment levels improved? >> our early payment defaults out dropped by two-thirds. >> defaults have gone down as you have increased requirements curie >> the other thing, the most serious problems we had, the worst loans were down payment loans.

those are responsible for $14 billion in losses. that was stopped by this committee in the beginning of 2009. >> is it a fair conclusion that the average home that you are allowed to -- they have a lower rate of default? >> given we have not been doing those for very long, it was raised as we went into the crisis. we do not have definitive data. those larger loans perform some better. >> i have not heard disagreement that you want to get the capital reserve drops so everyone can feel better. the fact you have raised these standards, it would be fair to

do this to say, for the next secretary, to safety levels godown that will trigger some of the things you institute. if we do that and continue on the course, not to get you out of the market but because no one wants you to default. we want you to be stable. exactly the things you have done. >> the gentleman's time has expired. >> i would be happy to follow up. the only thing we need to be careful of is the balance between recovering old loans that were the problem verses increased costs on new cars.

making sure we maintain that balance, not just focusing on new borrowers but what we are doing around enforcement is critical as well. >> we will go to congressman from arizona. the fha was created in 1934 according to my memo. >> i am glad someone had the memo. there is so many questions i would love to run through. we will do the lightning round. i think there may be an informational correction from the last exchange of testimony, fha is not restricted to first- time home buyers. correct? >> correct. >> we want to make sure it is on the record it is not that way. you're talking about the

performance of the higher end of your loan limit performing well. if we walk into this environment where regulators are doing the mortgage, isn't that going to continue into in haven't hour drive more business to fha and stymie the creation of a private label? >> to be clear, we were talking about balance loans. >> laws underperforming, if you and i were going to start our own private label, that is probably where we would go. if i have a mortgage and risk retention, how my going to compete?

>> no question there is an important balance the needs to be struck between making sure we do not repeat the mistakes of the past and but creating a robust private market. for fha, we have a range of mechanisms, including our premium levels that have allowed us, and loan limits, which have allowed us to ensure the private and this sector can function very well. >> you have your fees and you have limits. because of the current limits, a understand you were not thrilled with. there is no private market. there are uncertainties, i have had an fha loan.

were probably sold hundreds if not thousands of them. it is not my opposition there but you are a huge portion of the market today. >> has your legal staff thrown out any concerns about the fact that you are beyond the 2%? and any sort of recourse in your capacity violating the law? >> i would say we have had discussions with the legal staff. my concern is on the business side, we need to take steps to make sure the capital reserve gets rebuilt. in terms of the opposite -- specifics, the law requires that if if a chigoes below 2%, there

be a plan put in place to ensure that the fonder quarters -- recovers as quickly as possible. those are the steps i talked about that will be in our budget. all of them are parts of what is required by the law to find it. >> i go back to previous testimony. i do not want there to be a shock to fha where some legal opinion comes and you will have to stop writing loans. i want to bounce on to something he said because there might have been an exchange error. i think he touched on what would happen if fha loans or full recourse? would that help your credit

quality? would that help us, and so i have 3% down and i am able to get a credit line or second instrument. there is no equity. in many ways you're incentivize to walk away. should that trigger recourse? >> i will allow you to respond. >> we would need clarification on the question. i'm happy to follow up afterward. >> 30 seconds? >> without objection. right now a loan is non- recourse. if i put a second loan behind that, in most places, it is still non-recourse. but i chewed up what little

equity there was there and made a more likely i will default. has there been discussion of policy on if i use with equity and have? >> i have not heard discussion of that. there has been discussion about whether to allow how to insure we do not tittie same kind of problems we have had in terms of the stacking of debt. that has been a problem. it is important we have policies so that does not happen. >> thank you for your tolerance. >> you're welcome. five minutes. >> thank you for having this

hearing. thank you for spending time with us. this is a concern for all of us on both sides of the aisle. we're dealing with constituents at home and trying to get modified mortgages. there is only one bank that has been working with us that have remodel fighting number of the mortgages we have had something i want to ask you about, with our veterans coming home from afghanistan and iraq and coming home to find their houses foreclosed, we had legislation to make sure that would not happen. what can you do to to protect these veterans? to me, whatever is the highest

you can give to these banks, it should be. >> these examples are shameful. we have found examples of that in fha. we have worked with the department justice. they brought a series of cases. i could give you a background information where they have won judgments. in addition to the foreclosure, we have many members better been hurt by underwater and the inability to relocate to another base and they're stuck in a house that is under water. there is worth the department of defense has done. they're helpful in terms of

making sure service members are not hurt by being under water or they need to move. that is another step we can take. >> if there's anything we need to do, let us know. those that are defending this country and coming home, we cannot let this one go. there are a our constituents, they had good credit rating, i live on long island. it used to be around $500,000. that is a lot of money for a young couple to get together to do that. miller fromth gary california. unless we come up with getting

this housing market going again, our economy is not going to come back to the way we want it. i hope you are looking at, i know a number of legislators have given new different pieces of legislation we have written. i was hoping we would do it sooner than later. this session is almost over. your testimony states that default rates have been relatively stable. i know you touched upon it. can you discuss the state of the housing market relative to the default rates and the rebuilding of fha for 2012? >> what is critical, we have

seen a decline over about a year, year and a half. he have seen even a small increase in fha and also across the board. with a slowdown economy had in the late summer impact of that. they remain stable and substantially lower than we had seen historically. the decline of 45% in the number of people falling into foreclosure has been a combination of delinquency rates as well as the modifications that i talked about earlier. those are the key pieces. >> and now the president had mentioned -- i know the

president had mentioned people are trying to rent their homes. i hope that you are working on that. >> we instituted increased four mayors for unemployed homeowners. we went from a minimum of four months to 12 months forbearance. we did the same thing with treasury programs. we hope the market will follow us. >> thank you for being here today. in europe and britain testimony, you mentioned that over the past three years, fha has made homeownership possible for millions of first-time buyers. how many of them used the $8,000 homebuying tax credit included

as part of the 2009 stimulus bill? >> given the tax credits it is claimed after closing, we do not have precise estimates of how many families used to the credit. i cannot give you a specific cancer. >> he mentioned earlier that downpayments is a critical piece and the risk analysis. does that fha categorize this as a self funded downpayment flown? there three times as likely to default. >> we were aware of that history. we banned any use of the tax credit has a loan or something else that you would go toward

reducing the down payment. we allowed a tax credit to be used to increase the amount of down payment but we did not allow any homebuyer to monetize that credit to borrow against it or do anything else. the down payment had to come from their own fund or from family like any other long. we made sure to avoid what you're talking about. >> given that tax credit could have come after the the finalization of all the documents, you cannot follow that $8,000, where it went to -- >> a family closes. they are required to have a $10,000 down payment.

we checked to make sure that is coming from allowable funds. a family member, -- if they get a refund from their taxes at the end of the year of $8,000, all that does is replenished savings they might have. it puts the homeowner in a better position relative to paying their long. our job was to make sure that those funds were only coming from allowable funds, not by going out to a scam artist or some local lender and saying i'm going to get this credit, lend me the money. >> your answer is this credit did not go into the cellar- funded downpayment.

>> it is a completely different phenomenon. the risk with the seller down payment was you had to the seller of the home raise the price. we saw bogus appraisals. get to a zero downpayment or worse. hear, the requirement was, they have that down payment in their own cash, anything that would be allowable. we were specific about the way could be used. >> the capital reserve fund that could withstand an additional decline up to 4% and remained positive. does this mean the declines in excess of 4% will trigger a bailout? >> to be clear, the expectation was a 5% decline this year.

our estimate is that everything else equal, an additional decline could trigger the need for additional assistance. that is before any changes we might take. i lay out five things we could do in my written testimony. premium increases to add capital to the fund. help to avoid that. >> does an increase in courage private capital to get back into the market? >> it has not. the is why we've laid out ministration's position that the loan limits ought to step down. i do think it is important to point out, based on early data,

it is not put the fun at greater risk. >> mr. sherman from california. >> thank you. i want to emphasize your last comment. i know you gave a similar response. this increase is not put to the fha fund at greater risk. if anything, as i understand your data, it should help the fha and absorb some of the risk it absorbs on loans of less than 300,000. one concern people have is, are the reserves adequate? we would prefer they be higher. it is my understanding they would not be exhausted if we ended up with a 5.6% decline in

national home prices and a 4% decline next year. is this right? do you predict a decline in the home prices next year? >> i will tell you what our independent and data used for the actuarial predicted. a 5.6%, it appears we got data yesterday -- it appears that the decline will be smaller than 54%. it is now just under 4%. their prediction, moody's is for a 1.3% increase. that is the best case he actuarial is run off of it. >> of the predictions have been

more gloomy than the actuality for the last several months and if the predictions hold the fha will not need an infusion of federal funds. >> that is correct. i will note that obviously we cannot predict the future. the predictions last year, the performance has been somewhat worse than was predicted by moody's. that is why we are evaluating a series of steps that we could take and expect to be included. >> you should be planning for everything. home prices will go up next year? if they go down by 4%, fha will not need money from this congress. one thing we agree on is we want to give consumers as much choice

as possible. another saying is we want the federal government to take as little risk as possible. the private sector to take as much as possible. i would like to see fannie and freddie reyes to 729 because then you man have private mortgage insurance. as i understand the situation, if someone gets an fha loan, the government is on the hook. if that alone was insured, than the private sector is on the hook for the first losses. >> that is correct.

>> if we can give consumers in high-cost areas like los angeles a chance to use fannie and freddie, that opens additional doors to them. that would involve less of the risk being involved by the government. >> i'm not sure if you're here earlier. i talked about the fact that we have never had a situation where a loan limits for higher. >> i remember when they were lower. >> overall, we think we need to bring those loan limits down to more historical levels. >> while increasing them. the one way you could get a double dip recession is to see a decline in values of homes in

the 10 high-cost areas of the country. >> at this time the chair recognizes himself. i want to say thank you to my colleagues before a half to take off. my background is a real-estate. when i was in real estate, fha loans were difficult to get. they were unusual. there were a last resort because they did go to those that were underserved. i am glad to hear your position. i hope it is clear. i hope you've shared it with the senate to was pushed to this increase. i encourage you to continue to do that and talked with them. have a question on page 3 of the

report, talking about the underserved borrowers, there is a note that a 56% of home buyers in 2010 were fha buyers. it is mine reading correct >> that his estimate. >> to you believe that home buyers are underserved? >> i would say that we have a dual mission as far as i understand the creation of fha. in the normal times, to serve the borrowers, in times of crisis where there is a lack of private capital for fha to act as a countercyclical force and be able to serve a broader group, that is what has happened during a crisis. the fact is a lack of private

capital. i would expect and hope that number would go down and return to a more normal level. that is not a level i believe is their right level over the long term. >> i would hope so as well. the counter cyclical element, it leads to the next question, should all of these home buyers, these saba 700 credit score buyers, 580 was the score out there, should they be buying homes? >> i would be happy to show you the performance data. i think the question is if they are buying a home they can afford with a product of that is going to be safe and sustainable, and they demonstrate they can be

successful, and that is what we are looking at. the performance tells us that they can be successful. >> that is the fear a lot of us have with the job situation that it may be more risky which goes to questions about requirements for reserves. you had been asked about the bailout for fha. you said we do not need one and thus far. page 13, you are making the claim that premium structures have created a sound basis for growing capital at a rapid rate. it sounds like it is going to be an easy pledge to say there will not be an fha bailout.

i do not know how sure you are but i'm looking for reassurance that the fha is not going to need that assistance because that is what a lot of the concern is. >> it is my concern as well. we have been working to do everything we can to make sure we protect the taxpayer. the new loans we're making, even under the most severe economic scenarios, and they would remain profitable. what we're talking about is a risk. if the economy performs worse than expected, that is the risk that could push the capital reserves. i cannot tell you it is a zero. >> is an act counter to your argument that it is needed for countercyclical?

why is and the private sector stepping in tax we suspect regulators may have been clamping down on loans and those types of things. you're seeing that to push me, pull you aspect to some of my concerns. my time has expired. >> i think we agree we need to encourage private capital to come back. that our market share is shrinking is evidence that the steps we're taking on premiums are moving in that direction. >> with that, miss waters from california. the chairman had also made a commitment to you because you miss your opening statement there would be additional time. with 5 minutes. >> thank you very much.

i am appreciative for the time that the secretary has put in on this important report. i would like to remind the committee that we saw this coming last year when a level fell to 5.3%. i worked with the ranking members of the fha and reform act. although the bill was not signed into law, parts of it, the provisions that allowed fha to raise their premiums or and acted separately. these were the most important pieces for my bill because they were designed to give fha the resources to raise their capital reserve levels. the provisions have been able to -- i am disappointed that the

senate did not take up my bill. however, secretary donovan has taken advantage of the flexibility we were able to get signed into law. the average fico score has risen to 700. in addition to more creditworthy borrowers, the loan limits will help fha strengthen this reserved. there has been a lot of speculation about whether fha needs a bailout. i am certain you may have gotten questions to that effect on both sides of the aisle. it is the only source of mortgage credit for most americans today. they're reluctant to enter after being burned by misrepresentation during the

run-up to the financial crisis. problems continue to plague market services. in the wake of these problems, fha has taken on a larger market role which has kept the middle- class who would not be able to buy a home or refinance. fha is holding up our mortgage markets. i must reiterate i support it. i oppose any attempt to use the challenges facing nhk -- fha to destabilize its housing program. now is the time to strengthen fha. i'm willing to work with my friends on both sides of the aisle to find ways to make fha

stronger than provide home ownership opportunities. if i may continue, i would like to ask a few questions of the secretary. fha has made changes to the requirements 579 and lower. it prohibits loans for borrowers were scores below 500. did this help contribute to the strong value of the current book of business? is it better line with market conditions? >> first of all, thank you for your work with us on the fha bill you talked about. we believe that many of those provisions that were not passed are critical to allow us to an

increase enforcement and other steps. we look forward to continuing to partner with you. on your question, the answer is yes. we have seen a two-thirds reduction in early payment defaults. that is a result of the underwriting changes we talked about. >> it would improve access and have credit-quality standards. can you comment on this? >> what we see is between the last two years, it predicts about an $18 billion net worth for these books of business. $18 billion of benefit from us.

i would also say the work we have done to look at what would happen if we remove to the option for a lower risk are workers to get higher loans, we think we could lose about 10% of all of the umpires last year. that is the concern in terms of risk to the housing recovery, if we restricted credit too much. it might hurt the taxpayer by increasing losses we would to see on loans made in 2008. >> can i have another minute and a half? >> thank you. could you comment on the steps to increase enforcement of fha lender policies for loan

correspondence and increased requirements for lenders wanting to underwrite fha loans? >> absolutely. one of the first steps we took was to create a strong risk- management team and culture, the first-ever chief risk officer position. we also increased net worth requirements of lenders that had not been increased in some time. we stepped up the investigations we were doing, and the share of loans, and we have seen four times uitlanders removed from fha during its administration than in the eight years of the prior administration. and we worked with our partners

at the department justice to bring cases against the worst offenders. we have been successful in a number of those as well. >> i think you have done a great job. i appreciate all of the attention we pay to fha and the way you proceeded even without all of the legislation. >> the chair recognizes -- for five minutes. >> mr. secretary, in the 2011 actuarial study, if i read it correctly, we have 1.2 billion in value supporting insurance of about 1.9 trillion on the single-family. the

>> there is $33 billion in reserve some that are held against the book. that is the highest levels in the history of fha. contrary to what was predicted last year, -- >> i was talking about the single family. >> this is single-family. you are focused on the reserve accounts. the financing account is the piece you are focused on. that is only excess reserves -- excess reserves that are held above and beyond expected losses. this is important. the total cash reserves we are holding is $33 billion. >> but the insurance is one

trillion? >> it is over one trillion dollars. >> in that report, i think, being close to zero under the forecast, the chance that future net losses could exceed capital resources as close to 50%. i am under the impression that the study was based upon june and july data. is that correct? >> it was based on predictions for house prices and the latest data as of june. >> this serious delinquency rate has increased from june into september. my data shows we have a 50,000 more delinquent loans as compared to june.

>> as the portfolio grows, the number increases. as with all types of loans, there was an increase in the delinquency rate at the end of this summer. home prices have performed better than expected given that home prices are the single most important factor on predicting the value of the fund. it is likely that the actuarial understates the capital reserves relative to do 30. >> you are more optimistic than the statement included? >> optimism is not something i think is relevant given the scale of capital reserves. this is a serious issue.

there are risks to the fund. we need to take steps to protect the taxpayer. we will do that. >> you have discretion and i appreciate the comments you have made respecting the loan limits, fha and mission creep. i understand you have discretion to increase premiums. i know it has been done. i think the annual premium for a 30-year loan is 1.15. you have the authority to increase that to 1.5. given the precarious state of the mmif, why have you chosen

not to do that? >> that is something we are looking at. given we've just got this review, we are evaluating that. we expect in our proposal to propose additional steps. i would say, understand the balance is we're charging the highest premiums in the history of fha. under any scenario, even the most dire, in new loans will be profitable. while increasing fees is an option, it is important to maximize recoveries on old loans. that is what is driving the losses. 2008 in prayer books of business.

we must balance the changes with focusing on enforcement and recovering on the loans that are causing the problem. we cannot go back and on make those loans -- unmake those loans. that is where we need the help of the committee. >> i want to thank the secretary for your patience and the willingness to help the committee. the question for me is not whether fha is needed. of course it is needed. it is whether or not fha is operating in a way that will be sustainable without a taxpayer bailout. that is what i worry about. i have a report here by the director of financial markets.

he will be on the second panel sometime this evening. he does a good job and this. according to the gao analysis, the capital reserve account, you say it is 33 billion. actually it is combined between -- >> the one used in this committee, when your predecessors came up was always the capital reserve account. based on earlier testimony, we have gone by this account. now you're saying we're combining it ? >> it is two different things. >> if we could deplete a $33

billion account and you are not willing to say we will not deplete the $33 billion account, we have a problem. you are saying we will not co-on this account. -- got negative on this account. >> the total cash reserves is what i was talking about. we are holding a against expected losses those reserves. i did not want to leave the impression we were only holding potential losses. >> let's talk about the ratio reserves. it is supposed to be 2%. is that correct? >> that is correct. here is the problem. when they get less than number

of homes under water, default, in foreclosure, they tell us a different story than the actuary is telling us. the actuary told us in this committee in 2008 not to worry. things will be ok. we watched that go from $22 billion to four 0.7 billion end of 2010. i know you are working to do the right thing. no question about that. congress hates surprises. we he surprises. when someone tells as things are going to be okay and then your report and we get terrible news that things are not all right, year after year it is getting

worse and worse. that creates tension between what we are expected to do and what is happening with fha. you are required to report this review to publish it once a year. my problem is that in this market, it is too long. we are going to get surprised. it may be a pleasant surprise and it may sustain what he actuary is saying. when i filed in 2009, i asked fha to conduct their review every six months. rather than waiting a full year and we do not have time to react and we get terrible news. that puts us at a disadvantage.

i can understand when we had a $22 billion we did not need a review every year. now we are at 0.2% on that capital reserve ratio. it might be the european debt crisis. it might tip this economy the wrong way. would you support an enhanced fha oversight act? hashe gentleman's time expired. >> we are looking for data twice a year. >> let me say, i do not think you have heard me you do not need to worry. i have said consistently that we need to be vigilant because none of us can predict where home prices are going to go.

>> i am saying if we got the information every six months. >> it is up to the committee to decide what the legal requirements are. we are running these numbers far more than annually. >> you continue your questions in writing. i thank the secretary for having remained with us. the chair recognizes ohio for five minutes. >> i am always worried by the time my question new, we know you have been here a long time. i appreciate your candor today. we are all concerned about the report. i would like to ask you about fha and your five recommendations. you referred to your chief risk officer. that is a position congress

allowed you to fill. has that position been killed? -- filled? >> our chief first officer has been promoted to a senior adviser. we just brought on another senior adviser. we have 15 positions we have filled. we are strongly working to complete that. >> the secretary will remain to answer further questions. >> have you read the report on a risk mitigation? it says there is no comprehensive strategy on a risk mitigation and it calls for three actions to be taken. it says that that important parts of the agency, this thing go family housing, the office of

risk-management is separate as a of the date of this report. has that changed? >> i have read the report and i have commented on the report. we think they did a good assessment of the progress we have been making integrating morisco office into the overall fha operation. we are working on a number of the recommendations they had. some of them were in progress. >> are you would say that to some kind of risk mitigation strategy is important. i would ask you to relate to the director that is important and you need to makat