HEARING OF THE TRANSPORTATION, HOUSING AND URBAN DEVELOPMENT, AND RELATED AGENCIES SUBCOMMITTEE OF THE SENATE APPROPRIATIONS COMMITTEE
SUBJECT: THE ROLE OF THE FEDERAL HOUSING ADMINISTRATION IN ADDRESSING THE HOUSING CRISIS
CHAIRED BY: SENATOR PATTY MURRAY (D-WA)
WITNESSES PANEL I: SHAUN DONOVAN, SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; PANEL II: KENNETH DONOHUE, SR., INSPECTOR GENERAL, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; MIA VERMILLION, SENIOR LOAN CONSULTANT, GUILD MORTGAGE; J. LENNOX SCOTT, CHIEF EXECUTIVE OFFICER, JOHN L. SCOTT REAL ESTATE
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SEN. MURRAY: This committee will come to order. This morning this subcommittee will hold its first hearing of the 111th Congress, and I can't think of a more timely subject for us to examine than the current economic crisis and its impact on homeowners across the country. There is no question that a perfect storm of Wall Street greed, irresponsible mortgage lending, and uninformed decisions by borrowers are at the heart of our economic crisis. What this committee will explore today is what role the federal government, and more specifically the Federal Housing Administration, will play in the stemming of the housing crisis and assisting in our nation's long-term recovery.
First of all, I'd like to extend a very warm welcome to our newly confirmed HUD Secretary, Shaun Donovan. Welcome, and good to have you here today. This is Secretary Donovan's first appearance before the subcommittee, but he and I have had many conversations about the challenges that HUD is facing on a wide variety of issues from homeless veterans to housing counseling to this foreclosure crisis. We look forward to hearing from you today and to working with you to get the agency and nation headed down a sustainable path when it comes to housing.
I also look forward to hearing from our second panel of witnesses, including HUD Inspector General Ken Donohue and from our two housing experts from my home state of Washington, Mr. J. Lennox Scott who is the chairman and CEO of John L. Scott Real Estate, a family run business for three generations and Ms. Mia Vermillion who is the senior mortgage consultant with Guild Mortgage in Lakewood, Washington. Now, I travel home every weekend and hear from my home state families about the challenges that they face, and I think it's important that Congress get on the ground perspective from experts in our communities who know what works and alternatively where there is room for improvement.
Our nation is facing the worst economic crisis in generations. Since December of 2007, we lost 4.4 million jobs including 2.6 million in just the past four months. At the root of this crisis is years of reckless, unregulated, and irresponsible mortgage lending. Many of the mortgages that were initiated and then repackaged and sold during this period now have a new name -- toxic assets. They are a significant portion of the assets that are poisoning the balance sheets of some of the largest financial institutions in the world, bringing uncertainty to the entire international banking system.
This impact has been felt in every sector of the American economy, stifling credit from car and student loans to the credit extended to help small businesses meet their payroll. It's important to note that the housing crisis is not just some abstract phenomena impacting giant financial institutions. There are currently over 290,000 American homes in foreclosure, including 3,021 in my home state of Washington. The housing crisis has swept across our communities and some are now calling on the Federal Housing Administration to be the savior of the market.
The Federal Housing Administration was established in 1934 when the Great Depression ground the mortgage lending market to a standstill. The lending industry would only extend very short-term loans to high income households that could afford a very high down payment. Low and moderate income families had no hope of participating, so the FHA created a mechanism for working families to achieve the dream of home ownership. It also lowered the risks to lending institutions by putting the full faith and credit of the government behind new, affordable mortgages. The FHA was an overwhelming success. FHA was there in good times and in bad, especially during recessions and periods of declining home values as happened in the 1980s.
Today, 75 years after its founding to help American families purchase a home, the FHA is now being called upon to keep millions of families in their homes. In 2007, when Commissioner Montgomery testified before us, it was to talk about the fact that the FHA was almost irrelevant to the housing market. At the time, the FHA's presence in the market had dropped to only 3 percent because so many lenders had taken advantage of the housing boom and instead offered exotic mortgages that families couldn't afford. And the FHA's modest loan limits kept it out of many markets, including Seattle King County, the most populous county in Washington State. Working with my colleagues, I was able to increase the FHA loan limits to make it relevant in these markets.
But a lot of other things have changed with the FHA in a very short period of time that are threatening the integrity of the program and the taxpayers that stand behind it. The sub prime market has now evaporated, and even the most credit worthy borrowers are having a hard time getting a mortgage. I want to read to you a part of a letter from a constituent of mine in Kirkland, Washington who, like a lot of Americans, has scrimped and saved and has good credit and yet still can't purchase a home of their own.
They wrote to me, and they said, "In spite of my 18 years teaching public school in the Puget Sound region, my husband and I have been unable to purchase our own home. My husband was laid off from his job in 1998, returned to school to improve his employability, but couldn't for some time find more than part-time work. Now that we are finally in a more comfortable earnings bracket, we put every spare dollar into saving for a down payment and paying off the debt we incurred during those darker days. Certainly, there are many like us, unable to gather the money necessary to take the first steps to home ownership but stable-ly employed and with good credit, ready to make our own small contribution to the economy by taking on the responsibilities of home ownership."
That's not an unusual story, and it's one of the many reasons that the solvency of FHA is critical. The mission of the agency is to take care of credit worthy borrowers. Compared to the 3 percent market share FHA just had two years ago, today they guarantee over 25 percent of the total mortgage volume in the United States, and the number of lenders with whom it does business has grown by more than 500 percent since fiscal year 2006. In Washington State, the number of FHA loans increased from just under 9,000 in 2007 to over 30,000 in 2008. We all want to lend a helping hand to the struggling families who need it, but we need to focus on exactly who the FHA can help through updated laws and revised policies. We don't want to invite a trend in which the worst mortgages are moved off the bankers' books and onto the federal government's.
My constituents have been clear that they don't want to wake up to learn that Congress has taken steps that leave the taxpayer holding the bag. And that's exactly what could happen if the FHA is pushed to buy loans that could go bad soon or down the line. We have to ensure that FHA has the tools and flexibility to charge enough in fees to cover its costs, because if the FHA can't pay its debts it will be up to this subcommittee to appropriate the funds to cover that shortfall. And we do not have the dollars to do that.
We are in tough budget times. Every dollar we spend to cover defaults at the FHA is one less dollar going to public housing, homelessness prevention, or housing counseling to keep families in their homes. This subcommittee has previously examined long-standing challenges at the FHA like outdated technology, personnel shortages, and inadequate underwriting. Just because FHA has become a major player in saving the housing market doesn't mean those challenges have disappeared. As we talk about FHA's expanded role, we have to also discuss more rigorous underwriting and oversight.
I have convened this hearing with Senator Bond, and I want to thank him for working with me on this, because we want the FHA to be in a position to protect America's families and keep them in their homes. And to do that, we have to ensure that the FHA isn't spread thin and it has the tools and resources needed to adequately staff, underwrite, and monitor its skyrocketing loan volume. Both American home owners and the American taxpayers deserve to know the federal government is acting responsibly and swiftly to help families in financial distress and to jump start the ailing real estate market. So I look forward to the testimony and responses of all of our witnesses today. And with that, I want to turn it over to my colleague, the subcommittee's ranking member, Senator Bond, who has been very critical in helping us to put this together today. So thank you very much, senator.
SEN. CHRISTOPHER BOND (R-MO): Thank you very much, Madam Chair. And I hope I've been critical in helping and not in criticizing --
SEN. MURRAY: No, critical in helping, definitely.
SEN. BOND: -- but I begin by endorsing your warning that this subcommittee and our ability to provide the many needs in housing is threatened by a potential major drain on our resources that we can't stand. And I appreciate your calling this hearing as I certainly asked you to do. I think it's time that we laid out where we stand, and I welcome our witnesses today.
I congratulate -- (laughing) -- the Secretary of HUD, Shaun Donovan, on his appointment and his willingness to take on a very challenging job during a very challenging time. I asked him repeatedly if he was willing to do it, and he indicated that he was willing to take the chance. I know Secretary Donovan from his previous work. I've had good conversations with him. I'm impressed with his knowledge and understanding that he's passed forward. I also recognize Mr. Ken Donohue, the HUD IG. Ken has done a great job of providing the department and the Congress with independent and objective analysis and oversight of HUD's responsibilities.
But make no mistake, the health and solvency of FHA is at high risk. There are very troubling signs. FHA defaults are at the highest rates in several years. FHA's economic value had fallen by almost 40 percent over the past year. FHA approved new lenders has increased by 525 percent over the past two years. And there are troubling signs that former sub prime lenders and brokers have been approved to conduct FHA business. Fraudulent activity in the mortgage industry is on the rise, exposing FHA to more risk. I've just been advised by the U.S. Attorney for the Eastern District of Missouri that she and her office have filed 58 individual and business criminal indictments, from large communities like Saint Louis to small communities like Sikeston. And they have over 100 cases currently in review, and that means the system is at risk.
FHA has a significant increase in foreclosures, which endanger the stability of communities in neighboring homes. The rise in FHA defaults in foreclosures, especially in areas already victimized by sub prime lending, threaten to make a bad problem worse. And it is clear that the families who suffer foreclosure go through a financial crisis. They go through a tremendous personal upheaval losing their homes.
But communities are suffering when the foreclosure rates become high. I've heard community leaders as well as housing advocates outline what happens to a community with foreclosures. And even on a broader basis, the geniuses on Wall Street who took these mortgages, securitized them, sliced them, diced them and set them out to poison not only our financial system but the world's financial system are really a very significant part of the worldwide economic crisis that we face right now.
Mr. Secretary, you inherited an agency that has long-standing challenges. I'm confident that you're up to the task of turning the agency around. I appreciate your recognition and willingness to tackle FHA's management and operational problems. But despite your skills and leadership, the Congress and the administration must not make your job harder by placing more risk on FHA until the problems are fixed and tell that the agency can handle it, or the agency will crash.
I believe I'm hearing from Americans there's a message for Congress and the administration. The taxpayer credit card is maxed out. The alarm has sounded. If Congress and the administration place more risk on FHA before the problems are solved, this powder keg will explode, and taxpayers will be on the hook.
Now, we know that FHA has suffered from long-standing management and oversight problems. And in addition, past incurred administrations and Congress have contributed to FHA's woes by making changes to FHA so they could refinance existing prime mortgages. For example, the Bush administration created a new program called FHA Secure to allow the agency to refinance sub prime borrowers who were late on a few payments. While the program served a fraction of troubled sub prime borrowers, and it was good -- it did provide some assistance. The FHA terminated the program because of the negative financial impact on its insurance fund.
In addition, Congress created the FHA Hope for Homeowners Program as part of last summer's Housing and Economic Recovery Act of 2008. Out of concern about the increased risk to FHA, I spoke against and voted against the bill. While this $300 billion program has not served as many borrowers as anticipated, the Obama administration and some in Congress are advocating changes that would relax the standards of the program to keep increased participation. In addition, there are efforts in the House to reestablish no down payment programs that significantly contributed to FHA's troubles. The seller no down payment program defaulted at an unacceptable rate higher than sub prime loans. As a result, I strongly oppose those efforts.
I look forward to working with the secretary to ensure that you, Mr. Secretary, have the needed resources to carry out FHA's mission. It's vitally important that the FHA hire the necessary staff, provide consistent and comprehensive training, ensure that you install necessary safeguards to minimize fraud and abuse, and get your IT systems up to the modern day capabilities and the needs of the agency. FHA has a very important role to provide home buyers with clear and comprehensive requirements to help ensure the success of their home ownership. If the home owners don't succeed, they lose, the communities lose, and we all lose. Thank you, Mr. Secretary, for taking on this major task.
SEN. MURRAY: Thank you, Senator Bond. Mr. Secretary, we will now turn to you for your testimony. And we do have your written testimony, and we would ask you to summarize it in about five minutes for the committee.
MR. DONOVAN: Thank you very much, Chairwoman Murray, Ranking Member Bond, and members of the subcommittee. Thank you for the opportunity to speak with you today about the state of the Federal Housing Administration. I come before you in a historically unique moment. Our economy has deep challenges. Unemployment is high, incomes are falling, and home foreclosures are greater than at any time since the Great Depression.
The Obama Administration has responded with a comprehensive program to stimulate our economy and revive our housing markets. Last week, President Obama announced his intention to nominate David Stevens to be the Assistant Secretary for Federal Housing and the Federal Housing Commissioner. I believe that Mr. Stevens is one of the best and brightest in the mortgage business, with a deep range of experience and will be a steady hand in helping to manage through these challenging times.
Current market conditions highlight the critical role of the federal role in keeping mortgage credit flowing.
In particular, FHA's role has grown substantially, from 3 percent of lending activity by dollar volume in 2006 to over 20 percent of all mortgages originated today. Like other market players, FHA is experiencing elevated defaults and foreclosures and with it losses that exceed prior estimates. In contrast, to the sub prime sector, where unsafe loan features and poor underwriting made those risky from the start, for FHA the primary reason for defaults and foreclosures continues to be economic factors, especially loss of income.
FHA, however, is unlikely to face the catastrophic losses borne in the sub prime sector. Moreover, much of our recent loss activities have been attributed to the growth in seller funded down payment assistance, which accounted for a large and growing share of FHA losses and which Congress terminated last year. I thank you for your leadership on this issue, and this should help to substantially reduce future losses in FHA's new business.
Several other factors should mitigate the damage that the current recession wracks on FHA's portfolio. First, credit scores of FHA borrowers have risen markedly as tighter underwriting standards in the private market have driven better borrowers to FHA. Second, before mid-2008, FHA's loan limits reduced its market share and exposure in some of the nation's highest cost housing markets, particularly in California. My overall goal then is to continue efforts to identify both the existing strengths and to honestly look at the weaknesses of FHA; to work with Congress to make sure that FHA has the right program mix and pricing structure; is actuarially sound; and has the organizational infrastructure to continue to expand home ownership opportunities to those families traditionally not well served by the private marketplace.
Let me talk for a minute about the investments in both technology and human resources we need to build a sound infrastructure. FHA relies too heavily today on manual processes and needs to adopt more automated processes for underwriting and risk management. FHA staff spend too much time manually performing risk management duties, monitoring lenders and appraisers, and reviewing the underwriting of individual loan files. We must accelerate our adoption of market standard technologies for both of these areas.
Specifically, technology can also enhance FHA's fraud detection by borrowers, lenders, and appraisers. We have already secured the use of anti fraud technology for our Hope for Homeowners Program and are now looking to expand the use of that tool to all of FHA's single family business beginning with a pilot application in fiscal year 2009. These efforts tie in directly to the Obama administration's multi agency Combating Mortgage Fraud Initiative. Under this initiative, HUD and FHA will be playing a central role by investing in bringing anti fraud systems online. This initiative will also include additional resources from the FBI and the Justice Department to investigate and prosecute mortgage fraud. I also want to say a special mention to the early cooperation and collaboration I've had with HUD's Inspector General, Ken Donohue.
Finally, as you well know, FHA's basic program data and technology systems are old and woefully inadequate. We will be requesting funding in our 2010 budget for IT investments and to prioritize the modernization of FHA IT systems to upgrade our technology and core systems. Automated tools to assist in risk management will be a good addition, but FHA also needs more staff and staff with a different skills mix than our current work force. I want to thank you, Chairwoman Murray, and members of the entire subcommittee for providing additional funding specifically for the Office of Housing to hire approximately 200 additional personnel in the FY '09 budget. The agency has already developed a staffing plan, and job announcements are underway.
So my first priority is shoring up the basic infrastructure of the program. In addition, two other priorities are at the top of my list -- helping homeowners avoid foreclosure and rethinking FHA's role in the new mortgage market. Last month, President Obama announced a bold plan to help borrowers avoid foreclosure. In addition to the Making Home Affordable components, the president has called on Congress to enact carefully crafted bankruptcy reform along with important reforms to enable FHA to play a larger role in the overall effort to stabilize our nation's housing market.
As you know, housing legislation, H.R. 1106, has passed the House and is now before the Senate. We hope it gets enacted quickly so that more borrowers can avoid foreclosures. There are two specific provisions that we would like to see enacted -- changes to Hope for Homeowners as a viable foreclosure prevention tool, and reform of FHA's loan modification process to allow FHA to enhance its use of partial claims authority to align our loan modification activities with Making Home Affordable.
Finally, the recent mortgage market meltdown has provided ample evidence that we must work to rethink each and every aspect of the nation's housing finance system. Building on its historic mission, I am committed to ensuring that FHA continues to provide liquidity and stability to the mortgage market while at the same time developing the new products and programs that continue to expand access to home ownership to lower income and lower wealth households not well served by the private market. In summary, I want to assure the committee that while significant challenges exist, the FHA is preparing to meet these challenges head on. I'm looking forward to having Dave Stevens confirmed and take the reins at FHA and look forward to answering your questions. Thank you.
SEN. MURRAY: Thank you very much, Mr. Secretary. We are now going to a round of questions by committee members. We will limit them to five minutes, because we do have votes starting at 11:30, and we have a second panel. We want to make sure we have enough time to get a second round for the secretary as well as do that. Let me begin, Mr. Secretary.
Back in November, right before the election, Business Week magazine published a cover story that was entitled "FHA Backed Loans: The New Sub Prime." It pointed out instances where sub prime lenders that had been disciplined in several states were being allowed into the FHA Guarantee Program. It pointed out times where companies that had officially filed for bankruptcy were still allowed to write mortgages with an FHA guarantee. And it even pointed out companies that never verified incomes when they made sub prime mortgages but now have been allowed to reorganize themselves into companies that are participating with the FHA.
The number of brokers and lenders doing business now with the FHA has gone through the roof. As of the end of 2008, FHA had over 3,300 approved lenders. That is a 525 percent increase compared to 2006. And when you add the number of brokers now doing business with the FHA, the numbers have skyrocketed from 16,000 in mid-2007 to 36,000 today. And I wanted to ask you if you believe the FHA has adequate procedures in place to screen out lenders and brokers that caused this housing crisis. And how do you do that when the number of lenders has increased by more than 500 percent in just the last two years?
MR. DONOVAN: Chairwoman, it's a very, very important question. And let me start first by making a distinction that I think is critically important. I am absolutely concerned and very focused on the issue of ensuring that troublesome lenders don't migrate to the FHA programs. But I also want to be clear that FHA's products are not sub prime products. We have never and we will never allow products that have exploding or hidden fees that are short-term with large adjustments in interest rates. And if you look at the default rates today and compare FHA's roughly 7 percent default rate to the roughly 23 percent default rate in the sub prime market, I think it's clear that on a product basis FHA is not sub prime and will never be sub prime. That certainly will not happen under my watch.
But to get more directly to your question, there is absolutely more that we must do and that we are doing to ensure that we do everything we can to stop the migration of troublesome lenders into the FHA products. We've already taken significant action under my watch to begin to do that. In fact, today we are issuing a mortgagee letter to remind lenders of the procedures and processes that they must put in place. A couple weeks ago, we activated SWAT teams to look at and make visits unannounced to 10 of the most troublesome lenders. And those teams will continue to focus on areas where we have troublesome data from those. And there are a range of other things that I talked about in my testimony that we must do -- improve our systems, improve our training and technology.
In addition to that, I would highlight that we have worked closely with you and the committee. And currently, there are, in the H.R. 1106 legislation that is before the Senate at this point, increased authority that would allow us to screen out lenders where they have been suspended or debarred from other programs and to give us other additional authorities to stop the migration of lenders.
So while we are acting quickly to try and limit that, and I'm certainly concerned about it, I think there's also more that we can do on a legislative basis to try to make sure --
SEN. MURRAY: Well, as the Appropriation Committee --
MR. DONOVAN: -- we do that.
SEN. MURRAY: -- our interest is knowing do you have the resources to adequately screen all of those people at this time?
MR. DONOVAN: What I would say is that the additional resources that we've provided in the 2009 bill by you are very helpful. But I think we need to go further in addition, particularly on the systems front. And I look forward to working with you as part of the 2010 process as well as report back to you on what we're doing with the investments in 2009.
SEN. MURRAY: Okay, and we will be asking those questions as been referred (ph). Recently, the FHA has experienced a spike in early payment defaults, defaults when a borrower has made no payment or very few payments before the FHA had to make good on its guarantee. In your view, is this just a sign of a worsening economy, or do you believe the FHA is now covering loans that should never have been made in the first place?
MR. DONOVAN: We've looked carefully at this data, and what we've seen is that early payment defaults have increased substantially. But they've actually increased slightly slower than the overall growth in the volume in the FHA program. So in other words, they've gone from about .8 percent to roughly .6 percent of all of the originations. So yes, there has been a significant increase. What we've also found is that the large majority of those early payment defaults results from job loss and other issues that are directly tied to the economy.
So having said that though, I do think there are -- and I've talked with Ken Donohue very recently about this -- there are ways that we can begin to ensure -- and this was part of the mortgagee letter that we released today -- to ensure that we are getting all of the detailed information we need on those early payment defaults, to look at them more closely and ensure that fraud is not happening even in a small percentage of those.
SEN. MURRAY: Okay. Thank you very much. Senator Bond.
SEN. BOND: Thank you, Madam Chair. I believe most people know my view on the no down payment mortgage issue. But for the record, with the movement starting on the other side for reinstating that, what's your view on no down payment mortgages?
MR. DONOVAN: Let me start by saying thank you, Senator Bond, and to the chairwoman for your leadership and the entire committee on this issue. When you look at the facts, what we have seen is a dramatic increase in defaults from these seller funded down payment programs. They have accounted for roughly a third of all the claims in recent months at FHA. And I think it's been a critically important change to make sure that we don't allow those types of programs to continue to hurt the future of FHA. So I want to thank you for your leadership on that.
SEN. BOND: Thank you for your clear statement. And Mr. Secretary, on the question of defaults and foreclosures, how does FHA define a default, and when does it move to foreclosure? We have, you said, 7 percent essentially in default. Where do you decide when to go from mitigation into declaring a default or foreclosure? How does that process work?
MR. DONOVAN: Yeah. Well, and I do want to say that there have been significant efforts at FHA around loss mitigation.
SEN. BOND: Uh-huh.
MR. DONOVAN: And I think we've seen, through the efforts more broadly that we've made through the Making Home Affordable Plan, that there is an opportunity to avoid the major costs that foreclosures have both on families and communities. But as you rightly point out, there are situations where you can't go far enough to save that home and that foreclosure is the only option. What we've seen over recent months is that in roughly two-thirds of the cases where we have a default, we are able to figure out some loss mitigation that will allow that person to stay in their home and to avoid foreclosure, whereas about a third of the cases that we look at where they're seriously delinquent end up in foreclosure immediately.
What we've also seen, and you've been very clear that this is an important thing to look at, and you're absolutely right -- making sure that that loss mitigation that we're doing is successful in the long term. Our recent data indicates that two years after loss mitigation, more than 90 percent of the modifications and adjustments that we're making continue to be successful. So we do feel like our loss mitigation efforts have generally been successful.
We continue to look closely at the fact of whether there are other things we can do. We are making some modifications along the lines of the Making Home Affordable Plan. There are some changes in H.R. 1106 that we do think are helpful for partial payments of claim in certain situations that we don't currently have authority on. But that's an explanation of the way our programs are working.
SEN. BOND: What is the cost -- on the two-thirds that you have been able to go into loss mitigation, is there a portion of that loss assumed by the FHA? What are the costs of those mitigations to the FHA fund?
MR. DONOVAN: I actually have a precise number on that, if -- this year, there were about 48,000 loss mitigation cases. And the cost of those mitigation efforts was about $107 million. If we had had a loss on all of those 45,000 --
SEN. BOND: Right.
MR. DONOVAN: -- the value of those mortgages was about $2.5 billion. I'm not saying we would have taken the full loss on that, but you can see that should they be successful, those loss mitigation efforts, that $107 million cost far outweighs the losses we would have had on the far -- (crosstalk).
SEN. BOND: (Crosstalk) -- yes. We're all about keeping people in homes that they can afford and making reasonable adjustments. I'd like to see the originators sharing more of that cost and not just the taxpayers, because there ought to be some burden on the people who write the mortgages that aren't working. And in the private sector, I know there is a loss. But certainly, mitigation of $107 million compared to what the burdens would have been makes some sense. Do you know how many mortgages currently are in mitigation, and do they differ from state to state?
MR. DONOVAN: We do see significant differences state to state. I gave the figure, the 48,000 that we've done over the past year. I don't have an exact number here. I'd be happy to provide you more information of the details of what's in mitigation. What I would say is that unlike the broader mortgage market where our delinquencies in the rest of the market have been heavily concentrated in states like California, Florida, Nevada -- 50 percent of all foreclosures in the country are in California and Florida. We're seeing FHA's portfolio is, because of the loan limits, very differently spread geographically.
And so our -- Midwest is where we have a lot of our loss mitigation efforts, and we have seen a higher level of foreclosures in those areas, Detroit in particular, in Ohio. Senator Voinovich is here. We had discussions about Cleveland and other efforts there where we can try to minimize the effect of those foreclosures in those communities.
SEN. BOND: (Off mike.)
SEN. MURRAY: Senator Lautenberg.
SEN. FRANK LAUTENBERG (D-NJ): Thank you, Madam Secretary. And I ask consent that my statement be included in the record.
SEN. MURRAY: Without objection.
SEN. LAUTENBERG: Mr. Secretary, when I see you here and look at your history of service to Washington to a previous administration, you look so young. The job must be easy.
MR. : (Off mike.)
SEN. LAUTENBERG: Right now, New Jersey, for instance, currently has a surplus of vacant, affordable housing because prospective home buyers can't find an agency to ensure their loan. Now, will FHA consider changing its policy so it can start ensuring loans on properties that are restricted for low and moderate income home owners?
MR. DONOVAN: Two things I would say about that, senator -- and I appreciate your comments about my appearance of youth despite the difficult circumstances that we're facing in the housing market in the country today. What I would say is first of all, that in many ways this is the time that FHA needs to be ensuring that there's adequate credit available to low and moderate income home owners. And we continue to be a source for people traditionally left out of the market, particularly low and moderate income buyers, to be able to become home owners.
Further than that, as you point out, there are vacant homes around the country. And it's been very important, through our own foreclosures as well as through partnership with funding that Congress has appropriated -- and we're very appreciative of through the Recovery Bill under the Neighborhood Stabilization Program -- to begin to try to buy up and ensure that foreclosed homes get rehabilitated and get sold again as quickly as possible often times to low and moderate income borrowers. And so we are working closely with our own portfolio of REO homes with Neighborhood Stabilization funding to make sure that we limit the period of time and the impact that those vacant homes have on communities, particularly low and moderate income -- (crosstalk).
SEN. LAUTENBERG: So FHA essentially writes off the loss from what may have been a sub prime loan. And that's FHA's responsibility, is it not? I mean, the failures are FHA's -- fall into FHA's lap.
MR. DONOVAN: We do not take losses on any sub prime products. The sub prime products have not been part of FHA's programs. We do have losses on traditional FHA products --
SEN. LAUTENBERG: The regulations were there to prevent that from happening before the crisis began developing.
MR. DONOVAN: That's right. But what we will do, through the funding in the Neighborhood Stabilization Program, which runs actually through our Community Development Block Grant rather than FHA, that's where we have funding appropriated by Congress to work with --
MR. DONOVAN: -- local areas to acquire those homes that may have had sub prime mortgages on them. There also is the Making Home Affordable Plan, which is modifying loans to affordable interest rates that might have been sub prime to begin with.
SEN. LAUTENBERG: Yeah, because it's a sad situation to see people who need housing and empty houses and not to be able to at least get them out of the weather and keep them holed for awhile.
MR. DONOVAN: It's absolutely right. In fact, when the president put forward the Making Home Affordable Plan, we did extensive research and believe that by stopping those foreclosures and avoiding the vacancies of those homes -- the blight that they can introduce into a community -- we can save all American homeowners, not just the foreclosed homes, but all American homeowners roughly $6,000 on average in the values of their homes. So that goes exactly to your point.
SEN. LAUTENBERG: The FHA currently funds its own operations through homeowner fees. Now, with the increase in demand for FHA backed mortgages, can FHA adequately continue to help home buyers, homeowners and still remain self funded?
MR. DONOVAN: Let me say, senator, we are looking very closely at that issue, at the premiums that we charge, at the losses that we have. And at the time that we provide details of the president's 2010 budget, we will have detailed information in there about whether we believe the current insurance premiums fully cover the losses in the programs. We have had to take, over the last few years, additional losses against the claims and the foreclosures. But we are looking very carefully, and we should, within a few weeks, be able to present to you our estimate of whether it will be self financing in the current programs.
SEN. LAUTENBERG: Thank you. Thanks, Madam Chairman.
SEN. MURRAY: Senator Voinovich.
SEN. GEORGE VOINOVICH (R-OH): Thank you. The chairwoman has talked about the fact that you've had a 500 percent increase in lenders. And what I'd like to know is -- and you don't have to give it to me now, because you probably haven't got the numbers -- but how many people do you have working in that area right now? And with the additional work that you have, are you going to be able to handle that work with the current folks that you've got, and how many more do you think would be needed to do the job the way it's supposed to be done?
MR. DONOVAN: Yeah. Very important question. First of all, let me just say, while we do have a large number of new applicants for FHA business, that you've got the numbers right -- over a five fold increase over the last few years -- our volume has gone up not quite that much but close to that. And our largest 10 lenders continue to be roughly 90 percent of all loans originated. So while we do have lots of new lenders, they tend to be much smaller lenders and not, in aggregate, to originate that much of the business.
What I would say is we have begun hiring a significant number. I'm happy to provide you detailed information about exactly how many of those folks are doing lender approvals and lender monitoring.
But we have begun to increase that, and I think in the 2010 budget you'll see our proposal for the additional staff that we would need to be able to do that. I'd be happy to provide more details to you.
SEN. VOINOVICH: The other thing that we -- I didn't really talk to you in your office -- was the fact that in my city we have a -- the City of Cleveland -- a provision that says that when you sell a property you're supposed to notify the person that it's on the demolition list. And I'm pleased that you have changed that policy and you're going to abide by that ordinance. And I'm sure there are ordinances all over the United States like it.
The thing that's troublesome to me is that in so many of your properties they get on the demolition list. And when they do it appears that, for example, you're selling properties to the City of Cleveland that are in pretty bad shape but you're expecting the city to pay for the demolition of those properties with the NSP funds or some other funds. And I just wonder why doesn't HUD, when they have properties that have so deteriorated that they have been condemned, not pay for the demolition of those properties.
I know you hire people to go out, and they're supposed to maintain them. But from my experience, they go out; they allegedly maintain them. And before you know it, they're in a position where they're on the demolition list. And I just wonder if somebody ought to look at -- maybe the people that you're hiring -- to try and either get them to do a better job or look at it from the point of view that they're your properties. They've gotten in bad shape. An ordinary person owning them would have to pay for demolition. Why doesn't HUD pay for the demolition?
MR. DONOVAN: First of all, let me say the leadership and the approach that I want to bring to HUD is that when -- not to be defensive. When you brought us an issue about the way we were coordinating or not coordinating with local areas on this issue of demolition and where homes have been condemned, you were absolutely right. We made a change to our policy that's now nationwide. So I want to thank you publicly for bringing that to our attention and working with us on that. And that's the kind of approach that I'll try to bring to any issue where we work together.
I think it is a fair point that we ought to be looking more broadly at our policies around our foreclosed homes and to be working more closely with cities across the country. And I think that is an issue worth looking at and evaluating whether we ought to be involved in the cost of the demolitions -- (crosstalk). So I'd be happy to -- (crosstalk.
SEN. VOINOVICH: Yes. I'd like you to look at it. And the reason why you're not -- have a public policy. It seems to me you should take care of them if you let them get in bad shape. But it's a reason why you don't have it in your budget to get the job done.
I have three other questions, real quick. One of them is you've received recommendations for a change in regulations for the NSP Program. And I'd like to know the status of those recommendations, because they come from some very responsible organizations. And the other thing is, you've got the Hope for Homeowners Program and then now the president is making Home Affordable. And I'd like to have some written explanation as to what's the differences between the one program and the other program.
And last but not least, on the Homes for Homeowners or Hope for Homeowners, whatever they call it, that very few loans have been made under that program. And I'd like to know why and what you're doing to remedy it so that more people will be able to take advantage of the program.
MR. DONOVAN: Do you want me to answer now -- (crosstalk.)
SEN. VOINOVICH: (Crosstalk) -- I'd like to have the answers to that in writing, if I could.
MR. DONOVAN: Absolutely. I'd be happy to do that as quickly as --
SEN. MURRAY: If you could provide those in writing, the committee would appreciate knowing that as well, so thank you.
MR. DONOVAN: Happy to do that.
SEN. MURRAY: And again, we have votes in about 40 minutes. So I just have a couple of really quick questions, and if anybody else has any quick ones, we want to get to the second panel. The first one was about mortgage scams. We're seeing these signs in communities, call 1-800. And people are being ripped off, and we put $2 million into the Appropriations Committee last year to deal with that and $6 million into the Neighborhood Reinvestment Corporation. Can you just share with the committee really quickly if -- what you are doing in terms of dealing with that?
MR. DONOVAN: Yeah. This is a serious issue. I've seen it from my own experience as a local housing official as well as the concerns that you're raising at the national level. Two things that we're doing, one is we're moving very quickly. I've already sat down and met with Attorney General Holder about this issue. And we are beginning to work together with them along with the FBI and our own IG to try to target these rescue scams in a range of areas as well as bringing in state attorney generals from around the country who often times are on the front lines of this issue. I think you'll also see, as we get into the details of our budget proposals, that this is an area where we think, not only through FHA but also through our fair lending area -- because often these scams tend to target minority communities more heavily than they do other communities -- that we will have an increased focus both in funding and programs on this issue.
SEN. MURRAY: Okay. We're going to continue to follow that as well. And I would like for you to provide in writing -- we are guaranteeing loans now that are as large as $730, 000. I supported that; I thought it was the right move, but I would like you share with the committee the default and delinquency experience of the borrowers with those higher loans as we look to what our next policy is going to be.
MR. DONOVAN: Absolutely.
SEN. BOND: Madam Chair, I'm going to keep this very short, because we have to move on, and we need to hear the IG. I would just note that last year, at the recommendation of the Treasury, I introduced the Origination Commission proposal to regulate the clicks. We regulate the bricks of the savings and loans and the banks, but nobody is regulating the people who don't originate loans. And that is one reason why I think there are 58 criminal indictments just in the Eastern District of Missouri alone and more than 100 under investigation. I would like any thoughts that the secretary has on whether that's the right way to go and any suggestions you have on the legislation.
I do want to ask one last question. On the HECMs, how many have been originated and how many defaulted? Are there any specific problems with the implementation of the program and the financial risk to the United States?
MR. DONOVAN: I'd be happy to have a further discussion and provide you more detailed information on the HECMs. What I can tell you -- because of the nature of the program, it doesn't have a default issue per se --
SEN. BOND: Right.
MR. DONOVAN: -- in the same way. But what we've seen is that, in the entire history of the program, under 10,000, about 9300, HECM loans have been assigned to HUD out of a total of 391, 000 loans, so a very small percentage. We do see some increase, given the economic climate recently, in HECM borrowers who are unable to pay their taxes and insurance. And we are looking very carefully at that issue to make sure that our HECM lenders are responding appropriately. I think that's an area where we have to make sure that we don't end up, because of the nature of the HECM program, with a problem down the line. So that's an area where we need to have some increased focus.
SEN. BOND: Well, I should have phrased the question differently. But if people start living a whole lot longer, as all the senior citizens hope we will, there is a potential downstream risk. And I don't know whether you've looked at it. We'll be happy to discuss that with you. Thank you, Madam Chair.
SEN. MURRAY: Thank you -- (crosstalk.)
SEN. BOND: And thank you very much, Mr. Secretary.
MR. DONOVAN: Thank you, senator.
SEN. MURRAY: Mr. Secretary, thank you very much for your testimony today. We will have a number of questions in writing that we'll submit to you, and hopefully we can get a prompt response, but thank you very much.
MR. DONOVAN: I appreciate your interest in this issue and all of the collaboration we've had thus far. Thank you.
SEN. MURRAY: Great. We will now turn to our second panel, and if those witnesses would please come forward. We are going to be hearing from our Inspector General, the Honorable Kenneth Donohue, who will begin his testimony as soon as he is at the table here. We also will be hearing from Mr. Lennox Scott, who is the Chief Executive Officer of John L. Scott Real Estate in Bellevue, Washington and Ms. Mia Vermillion, who is a Senior Loan Consultant with Guild Mortgage in Lakewood, Washington.
So once our witnesses are in front of us, we will begin their testimony. I want all of you to know we do have your testimony in writing. It will be part of the record. And we would ask each of you to limit your verbal testimony to five minutes. There you go. Thank you, Mr. Scott. Mr. Donohue, we'll begin with you.
MR. DONOHUE: (Off mike) -- and members of the subcommittee. Thank you for inviting me here today. I appreciate the opportunity to testify on the role of FHA in addressing the housing crisis. Through our work in auditing and investigating the many facets of FHA programs over the course of many years, we have had concerns regarding FHA's systems and infrastructure to adequately perform its current requirements. This was expressed by the OIG to the FHA prior to the current influx of loans and to numerous proposals that expand its reach.
We remain keenly interested in FHA's ability and capacity to oversee newly generated businesses. The volume of single family loans have increased by tripling from $59 billion in 2007 to over $180 billion in 2008. FHA's share of insured endorsements has increased from 21 percent to 70 percent, which includes home sales and refinancing. We believe there's a critical need for more resources for FHA: one, to enhance its IT systems; two, to increase its personnel to deal with escalation in processing requirements; three, to increase its training of personnel to maintain a work force with the necessary skills; four, to oversee the numerous contractors it maintains; and five, to increase its oversight in all critical front- end issues including areas such as appraisal, lender approval, and underwriting processes.
We are gratified the new penalty provision we helped craft was inserted into the HERA Bill. That statute now creates a penalty for committing fraud against FHA programs and will be a useful tool for prosecutors and the law enforcement community to employ. The results of the latest actuarial study show that HUD has sustained significant losses in its single family program, making a robust program reserve smaller.
As of September 30, the fund's economic value was an estimated $12.9 billion, an almost 40 percent drop from over $21 billion a year ago. The current value represents 3 percent of the mortgages insured by FHA. Although above the 2 percent ratio required by law, it is below the 6.4 percent ratio from the same time last year. If more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years, requiring an increase in premiums or congressional appropriation intervention to make up the shortfall.
The tightening credit market has increased FHA's position as a loan insurer, and with that is coming an increase in lender/brokers seeking to do business with the federal programs and a concern regarding some of these loan originators. For example, we currently have under investigation several FHA lenders who were also lenders in the sub prime market. The movement towards HUD is already underway, as reflected in the recent statistics. FHA lender approval has increased 525 percent in a two-year period. We note that FHA and Ginnie Mae's lenders, in issuing its approval process, are largely manual. Both groups will be challenged with current constraints to keep up with the increased volume. Given the recent aggressive history of the industry that is now seeking to do business with the FHA, we think it may be prudent to review standards for participation.
As you can see from my exhibit, the current application contains a certification for those seeking to do business with Ginnie Mae that if they knowingly make a false statement they could be subject to criminal penalties such as 18 United States Codes 1001. There are no such (after station ?) requirements for lenders and applicants at the FHA. Moreover, we are recently initiating inspection of the Mortgage Review Board enforcement actions and its effectiveness in resolving cases of serious noncompliance with FHA regulations, particularly during the period of significant changes in the housing market.
Another area of concern is the growing Home Equity Conversion Mortgage Program. We are aware that the larger loan limits can be attractive to exploiters of the elderly, whether it is by third party or even family members who seek to strip equity from seniors. Due to the vulnerability of the population this program serves, we are also concerned about the evasions of statuary counseling requirements. Finally, the HUD OIG has initiated a broad range of strategies to leverage limited resources. As you can see from the other exhibit, we are key partners in the variety of federal and state task forces, such as the Department of Justice's National Mortgage Fraud Teams and in many key jurisdictions across the country. Thank you, madam.
SEN. MURRAY: Thank you. Mr. Scott.
MR. SCOTT: Thank you, Chairwoman Murray, and Ranking Member Bond. I would like to talk a little bit about what's going on the housing market. I'm going to refer to my charts quickly about how the housing market is working and reports of FHA in today's -- solving the housing crisis. Today I represent the 1.2 million members of the National Association of Realtors, myself and my company.
In looking at the chart, this -- (off mike) -- foundation of the residential housing market is the first-time home buyers coming into the marketplace. Some of them buy new construction, but the majority by resale homes. And so when you bring in first-time home buyers, it causes a chain reaction of sales off the price points. We break the market into four categories, the first-time home buyer category, the more affordable, above the mid-point, and the high end. The inventories are always lower in the first-time home buyer category, and they increase as you go up the price points -- (off mike.)
We've seen an increase in sales activity in the first-time home buyer category because of four reasons: the first one being there's the FHA loans. With the flexible credit score, this allows then more families to come into home ownership. And these are individuals or families who have good credit and can make the payments. And the other -- the next item would be the mortgage interest rates have come down one percentage point since last October. And this is due mainly in part to the Treasury stepping in to buy mortgage backed securities. And that 1 percent lower in interest rates has created a 12 percent increase in purchasing power.
The other two items that we have that are helping the marketplace are that prices have adjusted lower. This past five months, starting in October, we saw inventory levels raised since October, and prices adjusted lower. Even if the first-time home buyer price range, they adjusted approximately 5 percent lower. And then the last item that we have is that Congress approved and President Obama signed a stimulus package on February 17th that had an $8,000 first-time home buyer tax credit. And buyers were waiting for that tax credit. It came about, and they are entering the marketplace.
To give you a sample of loan supply real quick, in the Tacoma- Pierce County area, the month supply for existing homes in the first- time buyer category is 4.6 months. Around the mid-point, it's eight months. Above the mid-point it's a 13.8 month supply. And in the upper end, it's a 20 month supply. So that just gives you an idea of where the monthly inventory is and pricing dictates off the monthly inventory levels. So we have a low inventory level in the more affordable -- in the first-time buyer price range.
Overall, the month supply is 7.2 month supply in Pierce County, Tacoma. Healthy is thought to be in the 5-6 month supply range. King County, for example, where Seattle is, is at a 8.3 month supply. So, we believe FHA is playing a very important role and they can play even a greater role in the recovery of this housing crisis that is taking place.
There's four points. First, we ask that FHA receive the funding necessary to increase the staff and improve technology. This just expedites the programs and the efficiency and the security of them.
Second, we would like to see the $8,000 first-time buyer tax credit modified, which means that it's available at the closing table so that buyers can use that $8,000 for a down payment. I was talking NAR Chief Economist Lawrence Yun yesterday and we are projecting that would bring in an additional 500,000 first-time home buyers into the market place. They have good credit. They have the capability to make the payment. It's just that they do not have enough money for the down payment. That would stimulate the first-time buyer category and cause that chain reaction of sales up to price point. Already, we're seeing in many areas of the nation, prices stabilized in the first- time home buyer category and this would then stabilize home prices in the more affordable and work its way upward.
They would then pay this $8000 back from the first-time buyer tax credit, which has already been approved by Congress and signed by the President. This would release pent-up demand. Also, we'd like to see the higher role limits made permanent. They are making a difference, especially for move-up buyers. They could then receive the lower interest rate. Their equities have gone down in this last market correction. They need the FHA loans for credit. They have the capability. They're both buying and selling in the same market timing. It's okay to buy and sell at the same market timing in the upper price ranges. They just need the lower interest rates and the credit available to them.
Lastly, ease the financing for condominiums. Right now there is a requirement for an environmental review on a federal level. We'd like to see that if the environmental reviews are at the state and local level, be accepted. This would expedite the process for condominium projects to be able to move forward. Also, we'd like to see that the 51 percent occupancy ratio be lowered to a number below 50 percent for that.
We have submitted our written statement and we'd like to thank you for your support of the federal housing program and Senator Murray, I'd like to thank you, in particular, for raising the temporary loan limits up to help us move this market forward during this housing crisis.
SEN. MURRAY: Thank you very much for your excellent testimony.
Ms. Vermillion, we'll go with you.
MS. VERMILLION: (Off mike.)
SEN. MURRAY: And you want to turn on your mike in front of you.
MS. MIA VERMILLION: Madame chair, distinguished members of the subcommittee, I am honored to be here today. I'm glad to assist this committee in any way possible. Please note I am here as a lender, with over 25 years experience, and not a representative of my current employer. I started originating home loans in Texas and have been in the great state of Washington for the last nine years. My experience includes a number of HUD products, such as the Tribal 184, but for today we're discussing only the basic FHA fixed rate loan.
As you have pointed out, in Washington State, FHA loans went out of favor and have now come back. Many loan originators during '04 and '07 have no knowledge of FHA. They'd never done anything that required asset and income verification, so if you didn't have to ask anybody for information, it was very simple to close loans. In retrospect, the lower volumes in these bubble years actually benefited the FHA insurance fund by avoiding the losses associated with the revaluation of those assets.
Currently, we have a great climate for FHA loans and they have played a critical role in reviving this real estate market. Thanks in great part to Senator Murray, the increased loan limits have allowed buyers of more expensive homes to benefit from FHA financing. First- time home buyers are out in droves. I usually teach three to four home buyer classes each month, from the five-hour format of the Washington State Housing Finance Commission, and our class attendance is sharply up -- a good indicator that buyers want to be better informed before committing to a mortgage loan.
Our trade organization, I'm sure, has let you know that the biggest challenge for FHA lenders relates to warehouse capacity. We have a huge demand for funds and many lenders are struggling to accommodate the value. The FHA loan program is a cornerstone of our prudent lending as we move forward.
One of my personal concerns is the attempted revival of the seller funded down payment assistance program. The current down payment for FHA is only 3.5 percent. There are a number of sound down payment assistance programs, such as the Washington State Housing Finance Commission offers. The down payment can come from relatives, 401K, or buyers' own funds. When a seller funnels the down payment to a borrower, we're not only actually doing zero down loans. In most cases that borrower is paying more at a higher price for that home than they otherwise would.
In conclusion, I hope we all learn from this current housing crisis and do not repeat some of the practices that have lead us here. Thank you for your time and attention.
SEN. MURRAY: Thank you very much and I appreciate both of you traveling all the way out here from Washington State to lend us your advice and counsel as we move forward to deal with this very important issue. So, thank you for being here.
Mr. Donohue, I do want to start with you on questioning. None of us want to see the FHA portfolio infected with the kind of bad loans that caused the current economic crisis that we're in. Historically, FHA's strong underwriting and programming compliance processes prevented that from happening. Your testimony and your written testimony explained in great detail the different forms of fraud that can enter into the FHA loan guarantee process. Have your audits shown that there is a significant increase in any of these forms of fraud since the FHA's role started to expand in this current credit crisis?
MR. DONOHUE: Senator, first, let me thank yourself and Senator Bond for the support you've given me over the past several years as the IG. And I do want to say, too, that my time with Secretary Donovan, met regularly and discussed these very issues in a very proactive way.
I think the best way to answer this question is that with the increased volume of FHA activity going back on, we're seeing an increase with regard to fraud activity. It stands to reason, and certainly the FBI and ourselves both commented, that as the time goes on with the more activity, that the way I look at it is to instill as much prevention as you possibly can to ensure that you're doing what you can to prevent that. I made reference to my easel over here that I think stating to the effect that when applicants come back into our business at FHA, they need to know that if they lie, they provide false information, that they're going to be held accountable to a particular criminal statute.
I think FHA, and I was pleased by the comments, Secretary, as far as doing some great proactivity as far as ensuring the policing of lenders and brokers. I have a host of ideas. I've spoke to the secretary about that. I think my comments will mention that. Such as, I have the best example of this, Senator, was that a matter that came up in your very state in Seattle, Washington. I couldn't help but notice about a month ago there was an article in the paper about a scam that went on with regard to activity, it mentioned convicts including embezzlers, robbers, rapists being involved in mortgage fraud activity. It was the leadership of the Senate and I believe the State as well to try to police that and make sure that it doesn't happen again.
So, I think we're trying to work in close with the state, the federal authorities, and DOJ to make sure we police these activities when we hear about it and we get information from the department. They refer cases to us on a regular basis.
SEN. MURRAY: Okay. Thank you very much. Mr. Scott, in your testimony, you talked about the raised loan limits and our support of that. As the law is currently written today, the maximum loan limit is supposed to be adjusted downward by over 100,000 on January 1, 2010. Maybe you and Ms. Vermillion both, could comment on what you believe would happen to the market if those higher loan limits are allowed to adjust downward as is currently called for.
MR. SCOTT: Well, the higher loan limits provide a lower interest rate for borrowers in those price ranges and that increases the purchasing power. It allows them to move forward in their purchases, especially in the condition where the month supply is so high. It helps get the markets moving in that price category. Otherwise, they're jumping maybe from a conforming loan up to a jumbo loan. The jumbo loan interest rates are higher than the government-backed loans of FHA. So, it is extremely important in the market place.
Also, I talked about first-time buyers -- 500,000 additional if we can get the money at the closing tablethat would equate into a million sales overall because of the chain reaction effect of monetizing the $8000 first-time home buyer tax credit at the closing table and that combined, the higher loan limits are a piece of that chain reaction of sales.
SEN. MURRAY: Ms. Vermillion, can you comment on that?
MS. VERMILLION: I agree with that and I think it's really critical we have the first-time home buyers out right now because of the combination of low interest rates, lower home prices, and the $8000 tax credit. So, as Mr. Scott has pointed out, that is the very first chain on our chain reaction and I think the higher limit for FHA are critical to ensure good loans for upper income borrowers.
SEN. MURRAY: I expect that you don't expect the current economic crisis to be gone by 2010 that would say we're past this and we need to move on. Do you see that extending on into next year?
MR. SCOTT: Well, economics will come forward as they may, but it, also the higher loan limits create fairness across the nation to have access for families to have affordable priced loans. So this on both coasts and in several areas throughout the nation, there are higher-cost areas and just making loans accessible.
SEN. MURRAY: Okay. Are either one of you concerned about an influx of shady lenders or brokers into the FHA program now that the sub-prime market has disappeared?
MS. VERMILLION: I'm very concerned about that. We're seeing a lot of quote, unquote "mortgage rescue scams." We're seeing a lot of quote, unquote "loan modification scams" and we are seeing increased fraud in the FHA arena since that's the primary lending mechanism now. We saw that in Texas back in the '80s and we're seeing it again.
SEN. MURRAY: Okay. Thank you very much. Senator Bond.
SEN. CHRISTOPHER BOND (R-MO): Thank you, Madame Chair and special thanks to our private sector witnesses from Washington traveling here. It really helps to hear your views of the challenges on the ground and providing adequate financing for home owners and Ms. Vermillion, I appreciate your recognition of the point that I made with Secretary Donovan that he so strongly endorsed, that we don't need any mechanisms that encourage fraudulent or foreclosure - it may not be fraudulent, but they are just in a position to be foreclosed -- if they don't have enough money to put down a down payment.
Turn to our good friend the Inspector General. Mr. Donohue, and with this tremendous five-fold increase in business to the FHA, what's your honest assessment that the explosion of FHA authorities and responsibilities might lead to a default or requirement for a significant bailout from tax payers, either through what I consider to be a back doorway of marking down as directed spending, taking it out of the budget, or appropriating it or having to recognize it elsewhere on the budget. What are the risks to tax payers?
MR. DONOHUE: Well, Senator, based on my testimony, you can see that the impact this had on the FHA MMI Fund is going the wrong direction. I will state again, as I know that you've been an avid supporter, as the elimination --- (inaudible) --- you know how strongly I felt about that -
SEN. BOND: We were together on that one.
MR. DONOHUE: Yeah. I'm so pleased to see that end and so on. But, I do think as it goes I think the FHA is trying to make corrective actions. They're working with us. Obviously, if in fact it goes down to the 2 percent margin, then of course they're faced with the very thing that is raised today and that's the fact these are appropriated funds or increase in premium. I think that's the only two alternatives that would be placed to ensure the fact that the FHA stays solvent.
SEN. BOND: What do you think is the real - I mean, are we looking at the potential of significant tax payer bailout given where we are now? Can you assess that?
MR. DONOHUE: Well, it's hard to say, sir. I think that based on the numbers we're seeing, I think that it's going the wrong direction by the shear volume. I think it's something I have to take a look at in more detail to comment to you about it as far as the volume. I think with increase volume, certainly increased premiums. Their actual studies would indicate that it has impact on this past year. What I see my job, sir, is to try and do everything I possibly can to work with FHA to ensure in a proactive way that we prevent any bad activity from coming further into this program as a result of it. But, as far as specifics, it's just the pattern we're seeing and the direction it's going is not going in the direction which I would like to see and as you would like to see.
SEN. BOND: I'd be interested in any further thoughts that you have on needs for FHA staffing. We'll be seeing that in the budget and the IT system. But, there's a particular area where I think we've seen some really questionable activities and that is in the appraisal process. A good appraisal is essential to make sure that we're not insuring something that isn't worth it. The value of the property has to be accurate. There's always a risk of conflict of interest. I live in a small town. The appraisers are good friends with everybody else. There's also a danger that appraisers and I believe that some of the 58 actions that have been brought by the U.S. Attorney for the Eastern District put appraisers in with the mortgage originators. What kind of steps, what additional steps should FHA take to make sure that they are getting, that the appraisals are being made by competent people, without conflict and on a professional, realistic evaluation of the property?
MR. DONOHUE: Senator, I think this is a concern that we share for some time. The large amount of increase in appraisal activity has grown the application process. We've seen in our cases and of course the country, expired licenses. We've seen the absence of good reviews. As you all know, dating back to 1994, FHA had a appraisal fee panel that used to actually go back and approve FHA appraisals specifically and monitor that number.
I talk to appraisers, as well, and of course their challenge is that they're asked to hit the mark, whether it's going down or going up and I think that's of great concern. I couldn't help but notice that the New York Attorney General with Fannie Mae had gone back and expressed a third-party resolution to have some uninterested person that could hire the appraiser involved and I think that it's an interesting notion.
The former General Counsel that I had spoken to, and he came out of the Mortgage Bankers Association, he expressed to me directly concerns in the ongoing process that appraisers is the thing that we have to look at so very, very carefully. And, finally, sir, the VA itself, which doesn't deal with the volume we deal with, has a appraisal fee program that's still in place and they approve their appraisers on a regular basis.
SEN. BOND: Is that something that the FHA should consider?
MR. DONOHUE: I think they'd have to look at that, sir. I think that it's considered well. They don't certainly do the volume that FHA has done, but I certainly think it's worth taking a look at.
SEN. BOND: Thank you very much for your suggestions. Thank you, Madame Chair.
SEN. MURRAY: Thank you. Mr. Scott and Ms. Vermillion. Ms. Vermillion, you live and work in Pierce County, that's one of the hardest hit areas in our state and Mr. Scott, I know you're familiar with that area as well. I wanted to ask you if there's something particularly there that we should be focused on doing here at the federal level to help that county.
MS. VERMILLION: Pierce County has been hardest hit compared to many places in Washington. I believe a great deal of that is due to the economic numbers. The other thing I would like to see and I don't know if HUD has the ability to do this -- I'm assuming they do - is the tracking of foreclosures based on originators or based on sellers. I know we have the notice of deferment, I'm sorry, we debar people if they've been involved, but it was my experience previously that typically, if someone is involved in fraud, that they don't typically do one transaction. They typically do multiple transactions.
The other thing that's happened in Pierce County is probably just the economy. We did an FHA loan for a real estate agent, very successful. Obviously a full documentation loan, tax returns, et cetera. That person's income has sharply gone down to the point where she is currently working additional part-time jobs, but she is at risk of losing her home. And that is not something that anybody could have anticipated in retrospect.
SEN. MURRAY: Mr. Scott, are you (concurrent ?) to that?
MR. SCOTT: Yes, the Pierce County market changed a year before the Seattle market did and so the cumulative effects of the years of the economic situation, but as I pointed out earlier, the month supply and the first-time buyer category is already stabilized and we're seeing renewed activity, you know, that will move up the price points. If we can monetize the $8000 for an FHA loan at the closing table, that would make a huge impact. If FHA and the IRS could get together and figure that out, that would be just incredible for our nation to move these programs forward.
We are very excited about having David Stevens, you know, as nominee for the head of FHA. The National Realtor Associations is very excited about that.
SEN. MURRAY: Okay. That's good to know. Thank you very much for that. Mr. Donohue, I wanted to ask you about HECMs. Senator Bond referred to them earlier. They're relatively new, but it is a pretty rapidly growing business for FHA and those reverse mortgage programs are obviously mostly senior citizens. Can you talk a little bit about any special concerns you might have about HECMs and their potential impact on solvency?
MR. DONOHUE: I certainly can, Senator. I'm sure you agree, this is a very vulnerable population of people with regard to HECMs. From everything from the third party to family participations, we're seeing, we have (cases ?) throughout the country that deal with some of these as well. The loan, larger loan limits, are certainly going to have concern with regards, it has to make it attractive to go and pursue these matters.
The other thing we're interested about is the (statuary ?) counseling, making sure they are going back and sitting down with these people and addressing these matters as a primary concern.
I've met with Senator McCaskill and the Senate Committee on Aging. We've met with the AARP, the Mortgage Bankers Association. They're all concerned about the effectiveness of this program and I think we'd like to see as they go through the process, be the counselor or the closing agent to make sure when they see something that's not right, refer those matters to us and address those things rather quickly. It's a consumer issue that I think, as I said AARP and them are very much involved with. We're trying to do as much outreach, too, which is also into letting the community know to be on guard with regard to the possibility of this activity.
SEN. MURRAY: Okay. Thank you. Alright, Senator Bond, thank you. I just have one final question to Mr. Scott and Ms. Vermillion. FHA's not been known as the easiest bureaucracy to deal with. You're on the ground out there. Can you tell me your experience? Is it improving? Not improving? Does it need improvement? What are you seeing?
MS. VERMILLION: I'm an FHA fan, I've been doing them for a long time, so when you say it's a bureaucracy, in our level we're originating the loans, we're funding the loans, we're fine. In terms of going back to the appraisal issue, that has become a concern for a number of appraisers. VA has us use a panel. FHA used to do that and it became so unwieldy, it was a problem. I think again, if we can address that with monitoring quality, that we will be there. But, I'm a big fan of FHA loans. I would appreciate them having the additional technology and staff to do what they need to do to keep us going.
MR. SCOTT: We appreciate the FHA loans. It's making a difference in the marketplace. Of course, the technology enhancements always make a difference.
SEN. MURRAY: You both talked about increase staffing, particularly because it's of the high use right now, too so I appreciate -
MR. SCOTT: Well, it's not only newly originated transactions, it will also be refinance activities coming through on top of that and they will need the staffing.
SEN. MURRAY: Well, I'd like to thank all of our witnesses today, especially for keeping your testimony as tight as we are in budget mode here, we have a number of amendments that we'll start voting on shortly. But, thank you again, to both of our Washington state folks for coming out here, to all the FHA and to Mr. Donohue, we appreciate your testimony and at this time, the subcommittee will stand in recess subject to the call of the chair.