to be looking at and perhaps adjusting on the fico side as well. >> generally for what it's worth, i appreciate your testimony today. i know we have had discussions about that sometimes in the past. and i do realize you had a lot of bad loans on the books that you inherited. i do think there are things you can do now to really cause the fund to be more -- far more sound. i do think you all are being slow in moving that way. a second one i would move to is reverse mortgages. you are losing your shirt on reverse mortgages. losing your shirt. it's a small part of what you're doing, and yet you've got mortgage brokers out there that are making an absolute fortune right now, a fortune. some of them are good operators. a lot of them are sloppy operators. i don't understand why you don't shut the program down for 24 months as i know has been suggested to you? why don't you do that? >> once again, senator, you have hit on an issue that is an

important one and that we do believe we need to make changes. >> why don't you just do it? >> frankly, we did make changes. we introduced a much safer, better, we thought, alternative through our safer -- saver program. we could effectively do what you said, which is to just create a moratorium on the other program. what we are concerned about is particularly given the economic crisis that seniors have gone through, that we would be eliminating an option that works for some seniors, if it's done safely, in order to eliminate also the bad loans being made. our preference, if we could get authority from you to change the structure of the program to make it much more effective and safe, that would be a better way to go. if we can't get that authority quickly, we'll have -- >> i would think -- why can't we do a unanimous consent, it seems to me most people would

be willing to do that? >> let's talk about that today. i would love to -- >> i know you've got a partial situation that has been very healthy. it seems to me if you're worried about seniors, you could keep the ability to draw down a partial amount which is very safe, and you would eliminate -- you could do that all by yourself. and we could worry about the legislation whenever it's time. i'm willing to look at it now. just for what it's worth it does feel like there's a lot you could do to make f.h.a. healthy today that is not being done. let's talk further, ok. loan limits. seems like right now, fannie and freddie are down at 625. are you still up at 729. wouldn't it make sense to go ahead now and make some changes that need to be made? you can do that yourself. why don't we do that? >> as i think you know, we supported our loan limits coming down.

and they were supposed to expire last year. congress made the decision to allow -- lower the g.s.e.'s loan limits but kept f.h.a.'s -- >> can you self-implement that? you cannot do that? >> i do not believe that given that congress explicitly extended those higher limits, that we can take that step. >> would you like for us to help you do that? >> we have supported before and i will state again today that going back to the limits makes real sense. i will go further than that, that we should lay out a path to go back to even lower limits that existed before the crisis in a way that is done consistent with how we do housing finance reform. that is a larger question. but the immediate step of going back to the pre-era limits is one we would support. >> are you developing a fan. and i hope we could look at

some of those things. home mortgage insurance. the way i understand that it works is private mortgage insurers when you get down to a certain loan to value ratio, the insurance -- the premium is dropped, but also the insurance is dropped. and yet you have a trillion dollars in loans on your books where the loan to value has dropped. they are no longer paying premiums, but you are keeping the guarantee in place. that doesn't make any sense to me. and why don't you continue to make the homeowner, who has that guarantee, continue to make the premium payments? that would be something that seems to me would be extremely helpful to you during this difficult time. >> once again, an excellent suggestion. we announced with our report to congress that we were -- we are doing that for new loans.

>> why not the ones on the books? >> we cannot go back and modify a contract. when the homeowner took that long, they signed a deal with that a.j. saying that is how it would work. we fully analyzed it. we cannot break those contracts, unfortunately. that is something we need to implement. i will say, however, that the value of doing it now in a low interest rate environment is substantially larger on these new loans for two reasons. the lower the interest rate, the faster the amortization of the principal and therefore this will be a more valuable change. second because these loans are so low interest rate, they will be on our books far larger. frankly, not many loans in the past have hit that limit.

so even though it's $1 trillion portfolio, the value of that change is quite small for the old loans. it's really going to be quite valuable for these newer very low interest rate loans. >> i'll be briefly two more questions. i see that f.h.a. is now making loans to people who three years ago were foreclosed upon. and that's a very different standard than even exists at fannie and freddie. i don't understand. why are you doing that? >> this is another area where we are working on changes. here's the issue. we have a significant number of homeowners that were responsible homeowners, had good credit scores that lost their jobs in the biggest economic crisis this country has faced since the depression.

and we believe if somebody can show that they are back at the work and responsible borrower again, that that's somebody that we ought to work with. i would agree that our standards are not clear enough in dividing those. so what we believe we need to do is clarify those standards but not necessarily eliminate the possibility that somebody who has done the right thing and through no fault of their own lost a job but can be a responsible homeowner again, has the chance. my view would be it's not just the three-year limit that's important, it's what are the criteria that we set for how somebody re-establishes their credit and being a responsible homeowner? >> my last question, thank you

for your patience. first of all it sounds like there is a lot of things -- there are a lot of things that could be done right now to solve a lot of problems. and i hope that we as a committee will figure out a way to work with you on those things. we need to work with you. but you can do the things you can do now. you and i had a pretty long conversation several months ago when carol gallante had the opportunity, candidly, to assume her post on a permanent basis. and we could not get the administration to agree to not airdrop something and bypass the committee. it's an unfortunate circumstance. but i guess as i look at it, i would just ask you the question, did we dodge a bullet in appointing her full-time with all the issues that we have at f.h.a.? and does she really have the ability to press the administration to overcome political issues to actually cause the fund itself to be actuarially sound? because it appears to me that we are still not quite doing the things we ought to do to make the fund operate. it seems to me maybe there's a little political pressure and maybe she's not strong enough to make that happen. >> here are the facts as i see country. police we have taken the most

aggressive steps in the history of people agency to make sure the business we are doing is strong. if you look at that chart right there, you will see a huge profitability relative to the history for the new loans we are making. we have only so much that we can do to fix the problems of those older loans. i agree with you on many of the steps you have described today. what we should not imagine is that somehow taking those steps can take us from the difficult financial condition we find them in today, somehow to eliminating what has been an enormous trauma in the housing market. i have enormous confidence that carol can and will lead us on the path we should take. the evidence of the changes we have made, the steps we took, you remember last year, the president's budget thought we might need it last year. instead of a negative balance, we ended the year with a

positive balance. those were aggressive steps that she took. i listened to her, and i believe that is the kind of leadership to help us continue down this path. >> thank you. senator? >> thank you. thank you for your testimony today mr. secretary. i know the senator asked about reverse mortgages. i am concerned about that issue. i am particularly concerned that $2.80 billion of the $16 billion economic shortfall are related. can you talk a little more about why these losses are so severe? >> here is the fundamental problem, without getting into too much detail. the loans were generally

variable rate and allowed the borrower. there is basically no option for them to do anything but draw the full amount. >> why? >> we do not have the statutory authority to be able to make the changes to the program to allow us to limit the draw up front. that is the change we are asking to be made. our alternative, and i was just discussing this, we could basically eliminate or put a moratorium on our regular program, which is somewhat safer. the problem is we do not have that authority under that program to avoid the full-draw feature of it. the right answer is to give us

the authority to make the changes we need so we end up with a safer product and frankly, a safer and better product for seniors. what we are finding is too many seniors and up in a situation where they cannot cover their taxes and we lead to a situation where they have more leverage, more debt, than their home is worth by the time they are ready to sell at home. >> because of that change, that is what resulted in the huge, $2.90 billion? >> for most of the new loans we are making, they are at this full-draw, and there will be enormous losses going forward because of that feature. >> ok. also, the last time you

testified before the committee, we discussed the national mortgage sediment. can you talk briefly about the fund, how it has benefited from the settlement? >> in the most direct way, it has benefited by well over $1 billion that came directly to the fund from that settlement. or that series of settlements. also important, though, is we put in place, not just for fha loans, but for every kind of loans that were part of it, new standards for how they foreclose on loans, how they work with troubled borrowers, and those changes will have very

important effects in the long run, because we will have fewer foreclosures and better recovery on the loans, whether it is through short sales were keeping the homeowners in their homes. >> the debt forgiveness for the bar worse, what is taxable -- this is set to expire at the end of this year. what is the interplay and how would the exploration of that division impact? >> it would be a cruel irony if homeowners have the ability to stay in their homes because of a principal reduction that is both good for them and their lender because it will lower the

losses on that loan in the long term, only to get, come tax time, a giant tax bill for that principle reduction, which drives them back into delinquency and potentially for closure. the president has made it a real priority to try to get that provision into whatever tax extenders' we may do at the end of this year and it is a very high-priority for us. >> thank you. >> senator? >> thank you. thank you, mr. secretary. as i said at the beginning, i have the real concern shared by a lot of committee members that the changes and reforms fha has made you are talking about today are not significant enough

given rigid given the looming threat. those things could be true. they could be more than ever before but not enough. is it not right that under the federal credit reform act, it would allow the treasury to make necessary credit transfers to fha in order for them to continue making payments automatically? >> that is correct. that is the way not only fha but other similar programs are designed. >> that is obviously a significant for the taxpayer. we all care about that. can you commit to us that you will keep us and the congress fully apprised of your moving

projections with regard to that? >> i am committed to make sure that if we would take that step, you would be fully and notified. >> my question was more than that. keep us fully apprised of your current and updated projection. today and whenever that changes, and if that happens? >> we do provide a monthly report to congress on the status of the fund. if there is additional information or different information that would be useful to you in that. we are very happy to work with you on that. >> what i am talking about, as of today, the bailout?

what is your best projection? >> what i would say is our best projection would be contained in the president's budget. we are still working on the underlying economic assumptions that go into that. i do not have anything beyond what the actuary did that would be a different prediction. >> today, you have no best guess about that? >> i am not sure what you would suggest is a best guess. we expect $11 million of revenue and the changes we believed would bring billions of dollars of revenue. >> based on all of that, do you expect a taxpayer bailout? if so, when? >> based on those steps, i

believe we have significantly decreased the chance. i will not sign a probability at this point. we are still working on the other steps in the budget. i would be able to give you a number when we have completed the budget projections. >> i want to re-ask for your best information on that as it develops. we do not have that today. i think you have some idea of some best guess. i would like that. with regard to changes that are being made, you just said they are unprecedented and the proof is in the pudding and the changes made last year stepped

us back from that possibility. i want to add for the record there was a big factor of $40 billion that had nothing to do with reforms or changes. i also want to associate myself with the senator's suggestion about a whole menu of things we believe exists that you all are not doing that i believe is warranted. there are several ways that fha has much laxer standards. as a result, you are creating a huge magnet to the worst problems because of that. one of those is the maximum loan limit. another is the issue he brought up of allowing a borrower to

re-borrow. on those two things and anything else like that, why would you not aligned fha with fannie and freddie to stop this negative election? >> it is not that the fund remaining positive last year was because of the settlement. if it had not happened, we still would have been positive. i do not see it as unrelated to the policy changes. it is part of what we need to do to make sure we hold lenders accountable and that we minimize losses from those older books of business that are causing distress to the fund. i believe very strongly with the right policy division the right steps would be taken, and even if it happened, we would have remained positive.

we do not have the authority without congress acting that administration advocated that loan limits come down. i thought it was perverse to bring fannie and freddie's loan limit down and not lower fha's at the same time for the same reasons you said. we are concerned we would drive business that should go back to the private market. i would urge you and others, i know you are supportive, but to work with your colleagues to do that as quickly as possible. i agree we need to look at the standards for how we allow borrowers who may have defaulted in the past. we should not hold a responsible homeowner, who has demonstrated their ability to

pay back their debt and be a successful homeowner, simply because they may have lost a job due to what is an unprecedented economic crisis we have been through. this is not just about time line. it is about what the standards are for when we allow folks to borrow. >> my broader point is this and several other factors should also be about doing it in a way that you are aware of what competing opportunities' rules are. if fha has laxer standards, you will clearly encourage the accumulation. i think that is obvious. >> a few weeks ago, we established we are implementing standards on short sales that are aligned with what fannie and freddie are doing. we are looking for

opportunities wherever we can to try to align those standards. aligning, where appropriate, makes great sense. >> as i understand it, another significant factor in terms of potential loss is the whole reverse mortgage program, which is projected to be a drain on the system, even in the best economic circumstances. as i understand it, fha has the authority to suspend that program. it is a huge profit center for folks to participate in the private sector. it is costing the taxpayer money, essentially, or threatening exposure in the best of times. why would we not extend that tomorrow?

>> that is an option we are clearly looking at. we believe there is a better option, which would be to get legislative reform to allow us to implement a better product. that is something, as i talked about with the senator, we would love to work with you in the next few weeks. we would love to be able to do something in this session of congress. >> please wrap it up. >> i think if you expand that program tomorrow, you will start saving the taxpayer money and create more pressure for the reform you are describing. >> senator? >> thank you. while i clearly have questions, let me create some balance from my perspective. first of all, am i wrong to say the report says fha continues

to be impacted by losses originated prior to 2009? >> that is exactly right. if you look at the chart to the right here, what you see is that, through 2007 and 2008, in particular, there are huge costs to the fund that 2009 we saw improvement. 2010 to 2012, those loans are expected to contribute substantially. >> a good part of what we have been suffering with took place prior to the administration. >> that is correct but i would give you all credit. at the end of 2008. >> there was some talk about higher loan limits. does not the audit also say the loans tend to perform better compared to smaller loans? >> our early data is these

larger loans are performing better. we believe it is too early to make final conclusions about because these loans have not had enough time to season. >> it seems to me, they have probably strengthened fha's balance sheet. concluded there is a problem. the are part of the country in which those loan limits would make fha not as valuable to its core mission as it would in other parts of the country. that is why, on a bipartisan basis, we have passed preserving the higher loan limits. i am looking forward to seeing the continuing performance. i am waiting for the private

sector coming in. it does not seem to be happening. there are some who would suggest it has not been performing well. maybe my eyesight is not good. i look at that second chart and it seems to me in the time she has become the acting head, the performance of the portfolio under her watch has gone from the negative performance that existed before her watch to a positive performance during her watch. is that fair? >> it is absolutely fair. i would add the chart just to the left of it also shows we have done that while reducing be market share. we have taken steps to bring

private capital back but still to have the performance improves substantially. >> do you have a different view that shows the fha's presence in the market prevented housing from dropping another 25%? >> that is good and as thorough an analysis as we have seen. the country went through a crisis, either a regional crisis, whether there was lending available, or a national crisis. that was the role fha played with that increase in market share. we agree it is time to shrink that share. but not to do it in so precipitous a way to raise premiums. >> i would say that in a time where the housing market is used to indicate is moving up word, it is still a very

significant challenge. you do no harm, especially in the midst of a recovery. i look forward to seeing how we move in this dual track. i want to turn to hurricane recovery. this hurricane, we are not used to hurricanes in the northeast. when you have a super storm that comes with a full moon, high tides, and a drawing in of what was the hurricane because of a front that came from the west, you have a perfect storm in all its innovations. i lived in new jersey my whole

life. i have never seen the type of devastation that exists in the state. the pictures some of my colleagues have shown the to not do justice. there are thousands of people who do not have a home to go back to. when people talk about the jersey shore, because of some of these shows, they think of a certain thing. these are people's homes. their lifetime homes, year- round communities, that do not have a home to go back to. i am talking about a $35 billion tourism industry that is devastated. i am talking about the mega port of the east coast that

suffered huge damages, national security, because we closed the only port that was a military port and now we use the commercial port 1 we need to in the case of emergencies. i could go on and on. talk, told her, i want to get a sense from you as to the commitment of this administration and the federal government to help in new jersey, and certainly new york, and the region, recover. when we had hurricane katrina on the gulf coast in mississippi and alabama and louisiana, i was there. when we had tornadoes in missouri, i was there. when we had flooding along the mississippi, i was there. when we had cropped instructions in the midwest, i have been there.

i believe this is the united states of america. i fully expect that now, for the first time, we have the type of devastation others have suffered and should understand we are going to have the type of response others have received. i would like to get a sense of you as the type of commitment this administration has? >> this is a region i also have roots in. i married a jersey girl. i have worked in new jersey, grew up in new york. besides the personal commitment i have, i also see the president who is on the ground in new jersey almost immediately

and has done everything he can to help the short term and has given me the responsibility. you have my commitment we will do that. we will get the pass in the next few weeks because, frankly, there are too many homeowners, to many small businesses, too many renters that have lives that are simply on hold until they know what resources will be available to them. fema can not provide for a full recovery. they are a response organization. we need to take further steps through a supplemental this month to be able to move towards a full recovery and give those families and businesses some hope that there is a future for them.

>> let me close by saying, number one, we await what the supplemental looks like and we will reserve judgment until then. regardless of the size, we need flexibility in being able to seek the recovery we all want. in addition to a perfect storm, there is another perfect storm here. we get this storm in the midst of the beginning of winter. most of the hurricanes are in gulf seasons. totally different in terms of the consequences. huge in terms of the impact but still time to recover without

the ravishing of the winter months. if we have a northeastern, our defenses are so down that it would be like a person's immune system being susceptible to any type of illness. thirdly, we come with less than 30 days to the end of the congress. have to be done. i feel like i have to be houdini to accomplish this. we will do this. i look forward to your work and help. thank you for your indulgence. >> i would note that the senator will chair a subcommittee in new jersey next monday, december 10, on super storm sandy. >> thank you for joining us. i would like to understand better an aspect of the review. the question that i have arises from the interest-rate assumptions and the environment

that is used to determine the prevailing view about the value of the mutual mortgage insurance fund. more specifically, you observe the fact that, the lower the interest-rate environment, -- he walked through the mechanisms by which lower interest rates, while good for the economy overall, tend to have an adverse affect on the fund. my understanding is the review contemplates a low interest- rate environment. in that environment, the value of the fund is -$31 billion. are we in a low interest rate

environment today? maintaining current policy a least three years or so should that be the prevailing environment assumption? >> you make a very important point in terms of the fact that the review was done not today but at a point with economic projections in july, over the summer. it is accurate that interest rates have dropped further than were built into the primary, actuarial view. there are two factors to that. home prices have performed better than were used in the actuarial.

it would be significantly better today just on that one variable. the second point is that the view is a point in time that assumes we do no further fha business. one of the things that is artificial about it is that, when interest rates go lower, it assumes people pay off faster. that is accurate. wht