[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE FINANCIAL HEALTH OF THE FEDERAL
HOUSING ADMINISTRATION'S SINGLE FAMILY
MUTUAL MORTGAGE INSURANCE FUND
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 20, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-6
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71-506 PS WASHINGTON : 2001
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Housing and Community Opportunity
MARGE ROUKEMA, New Jersey, Chair
MARK GREEN, Wisconsin, Vice BARNEY FRANK, Massachusetts
Chairman NYDIA M. VELAZQUEZ, New York
DOUG BEREUTER, Nebraska JULIA CARSON, Indiana
SPENCER BACHUS, Alabama BARBARA LEE, California
PETER T. KING, New York JANICE D. SCHAKOWSKY, Illinois
ROBERT W. NEY, Ohio STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York MAXINE WATERS, California
BOB RILEY, Alabama BERNARD SANDERS, Vermont
GARY G. MILLER, California MELVIN L. WATT, North Carolina
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
FELIX J. GRUCCI, Jr, New York STEVE ISRAEL, New York
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
C O N T E N T S
----------
Page
Hearing held on:
March 20, 2001............................................... 1
Appendix:
March 20, 2001............................................... 29
WITNESSES
Tuesday, March 20, 2001
Gaffney, Hon. Susan, Inspector General, Department of Housing and
Urban Development.............................................. 11
McCool, Thomas J., Managing Director, Financial Markets and
Community Investment, U.S. General Accounting Office........... 8
Phaup, Marvin, Deputy Assistant Director for Microeconomic and
Financial Studies, Congressional Budget Office................. 13
APPENDIX
Prepared statements:
Roukema, Hon. Marge.......................................... 30
Oxley, Hon. Michael G........................................ 39
LaFalce, Hon. John J......................................... 33
Sanders, Hon. Bernard........................................ 40
Gaffney, Hon. Susan.......................................... 73
McCool, Thomas J............................................. 42
Phaup, Marvin................................................ 87
Additional Material Submitted for the Record
Gaffney, Hon. Susan:
Written response to questions from Hon. Marge Roukema........ 80
McCool, Thomas J.:
Written response to questions from Hon. John J. LaFalce...... 71
Written response to questions from Hon. Marge Roukema........ 63
Phaup, Marvin:
Written response to questions from Hon. John J. LaFalce...... 94
Written response to questions from Hon. Marge Roukema........ 95
THE FINANCIAL HEALTH OF THE FEDERAL HOUSING ADMINISTRATION'S SINGLE
FAMILY MUTUAL MORTGAGE INSURANCE FUND
----------
TUESDAY, MARCH 20, 2001
U.S. House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Marge Roukema,
[chair of the subcommittee], presiding.
Present: Chair Roukema; Representatives Green, Bereuter,
Kelly, Cantor, Grucci, Rogers, Tiberi, Frank, Carson, S. Jones
of Ohio, Waters, Sanders and Watt.
Chairwoman Roukema. Good afternoon. We will call this
hearing to order. And we do appreciate everyone who is here
today. I am Congresswoman Marge Roukema, the Chair of the
subcommittee. And, of course, we have Mr. Frank, the Ranking
Member, here.
I guess I have to say to our panelists that I hope you
don't take it personally that there are relatively few people
here. It was unfortunate that in scheduling this as far ahead
as we had to schedule it, we did not realize that this would
not be a voting session until late this afternoon, and
unfortunately, many Members are still en route back to
Washington today.
That does not mean, however, that our membership is not
interested in this subject, and I am sure that there is
considerable staff attention being brought to it. And I
certainly, and I am sure Mr. Frank will be doing the same, will
be informing our Members of the importance and getting to them
the record of this hearing, particularly since we are using it
to build a foundation on which to handle a number of other
important housing issues this year.
So, again, don't take it personally. We shall be certain
that your very essential and relevant information is passed on
to all the subcommittee Members and certainly to the staff as
we deal with them.
As you probably recognize, this is the first hearing of the
Housing Subcommittee in this 107th Congress, and I am pleased
to be the new Chair of the subcommittee. And as many of you
know, or you may remember, I am not a stranger to housing
issues, having served as the Ranking Member of the subcommittee
from 1987 to 1994.
However, given the dynamic changes over the last 6 years,
particularly related, for example, to the economy, whether it
is a bullish economy or a bearish economy, and the demographic
population shifts, and certainly the evolution of financial
markets through innovation and technology and of course the
legislation that we passed, Gramm-Leach-Bliley last year, there
appeared to be a lot of developing issues confronting the
Congress, and certainly we will give them all a fresh look.
But I guess I must refer back to an old saying in this
context and acknowledge that saying. Quote: ``The more things
change, the more they remain the same.'' So we will see how
that applies to our housing issues.
Having said that, I look back on July 27th, 1993 at a
subcommittee hearing where FHA Commissioner Nicholas Retsinas--
have I pronounced that correctly? I hope so--Retsinas testified
that the 2 percent capital ratio targets mandated by the
statute: ``Are arbitrary to some extent since no one can define
with precision what constitutes a completely sound and healthy
fund.''
Mr. Retsinas' statement sparked an almost decade-long
debate on this very issue as to whether or not the 2 percent
capital ratio requirements are adequate for the Mutual Mortgage
Insurance Fund and to protect it from financial collapse.
Today's hearing, in which we are going to address this
subject, is entitled ``The Financial Health of the Federal
Housing Administration's Mutual Mortgage Insurance Fund.'' And
it was certainly prompted in part by the statement from Mr.
Retsinas almost 8 years ago.
And in 1998, as a consequence of those continuing
questions, it was requested that we have a GAO study. And the
February 28th GAO report is a product of 2 years of work, and I
am certain it will, or at least I fully expect, that it will
resolve some questions. But at the same time, it may raise
others regarding the simple issue of how to measure and
adequately protect the FHA Mutual Mortgage Insurance Fund from
adverse economic conditions.
And of course we have heard the reports of this past week,
although I haven't yet heard what Chairman Greenspan is
announcing today. And I hope no one let us walk in here today
if that announcement is being made. I understand that it will
probably be sometime mid-afternoon.
Anyway, this hearing is going to focus, regardless of what
Greenspan's action is or whether we are bullish or bearish,
this hearing is going to focus on essential elements of the
questions that are before us.
The HUD Inspector General's FHA financial audit for the
year 2000, we are going to examine that. And there will be an
examination of the explanation and review by the Congressional
Budget Office of the Fund as it relates to its estimated
economic value and what that means to the Mutual Mortgage Fund.
While there may be some who have a different perspective or
perhaps disagree with these witnesses who are before us and
their findings, these are the Federal agencies most
knowledgeable of the intricate accounting and actuarial
analyses necessary to assess the viability of the FHA program.
However--and I want to stress this for all who are here--
however, as the subcommittee moves forward on specific issues,
there will be an opportunity to hear other experts who may
present a different point of view from today's panel.
Questions most likely to be raised in this Congress, for
example, are whether the fund is healthy enough to absorb home
ownership programs tailored to municipal employees and/or
teachers; should the FHA provide premium refunds to those
borrowers who paid too much?
Another question: should the premium structure be risk-
based?
Is the FHA encroaching--and this is a question that comes
up from time to time--is the FHA encroaching on the private
sector and its ability to provide low cost mortgage insurance
for potential borrowers historically left out of the
traditional lending market? That is an essential question.
Ultimately I believe that this debate will also turn on
whether or not the Mutual Mortgage Insurance Fund should
sustain or contribute to proposed housing production programs.
While we can all agree that there is some extent a housing
affordability or availability problem, we are far less certain
on the solution to those problems or what the available tools
may be of a public policy nature.
I am planning to begin a series of hearings addressing
those specific topics. The first hearing is scheduled for April
5th. By the way, again, let me repeat what I said at the
beginning. This panel is laying the foundation for future
consideration of a whole range of issues.
But anyway, the first hearing is scheduled for April 5th
and will focus on two panels. The first panel will be academic
experts who have researched this issue and can help define the
problem of affordability and/or availability.
The second panel will consist of local practitioners who
are providing affordable housing.
Today we do know, however, that the financial soundness of
the Mutual Mortgage Insurance Fund is crucial to the FHA
single-family program, the cornerstone of our country's single-
family mortgage market.
I am hopeful that this hearing will provide a foundation
for future hearings on legislative remedies such as:
1. The GAO's recommendation for Congress to specify the
economic conditions under which the FHA Mutual Mortgage Fund is
expected to be actuarially sound;
2. The impact of new programs and initiatives on the
soundness of the Fund; and/or
3. The impact of rebates to borrowers who pre-pay their
mortgages, also known as distributive shares.
These are among other issues that may arise.
I am certain that my colleagues will agree that we begin
the process today of improving a great home ownership program
that will advance the pursuit of the American Dream. And I
don't think that we have abandoned or neglected nor should we
neglect that fundamental promise of our age, and that is, the
American Dream of home ownership.
And with that, I will yield to Mr. Frank, the Ranking
Member.
[The prepared statement of Hon. Marge Roukema can be found
on page 30 in the appendix.]
Mr. Frank. Thank you, Madam Chairwoman. And I appreciate
your calling this hearing, because it is a very useful one.
There is a terrible housing crisis in this country.
Increasingly, it is both a social and an economic problem. In
many parts of the country, the voucher program, which has been
the major form of housing assistance for the past number of
years, is rendered ineffective, as the Chair herself noted in
her original memo, because the price of rental housing in so
many markets has simply gone beyond what the Federal Government
is prepared to support.
And indeed, in areas of very tight supply, the voucher
program is flawed on good conservative economic principles. It
adds to the demand for housing in a way that is guaranteed to
have no positive impact on supply. And the result is inevitably
price increase.
It is worth supporting in the absence of an alternative,
because it provides some equity. But it clearly has an upward
price movement.
So we have got to find ways to increase the supply of
affordable housing. And the FHA Fund clearly is one such
potential source.
Now there are two issues here: How it is scored and how in
fact we decide to deal with it. The scoring is an important
piece of the action, but accounting does not dictate policy.
Accounting should be accurate. Accounting should give people an
accurate discussion of what policy is.
But, we in the Congress have a policy decision to make.
There does now appear to be in the Fund more money than can
reasonably be expected to be needed, and it is a growing
surplus. The question is, what do we do with that growing
surplus?
I believe that it makes sense to use some of it to deal
with this affordable housing crisis. What we have is the
Federal Government as an entity making some money off the FHA,
more even than had been anticipated by many. And it is entirely
reasonable to look to this housing crisis and try to deal with
it.
Now I did note that according to what we were told by the
scorekeepers that some use of these funds within the FHA could
be done without it being a charge against the surplus.
For example, we had a very successful program years ago,
and I think we did more through the Federal Government to
create home ownership in the economic levels where we don't
easily get it through these programs.
It was selling off part of the inventory that the Federal
Government took over from bank failures, both savings and loan
failures through the RTC and bank failures through the FDIC,
and for low-end housing, we sold it off, not to the highest
bidder, but to people who met income qualifications, and it
became home ownership.
If I read correctly some of the material I was given, if
the FHA were to decide at Congressional direction to take some
part of the inventory of recovered houses and put some of that
into a program whereby low-income people, people who were below
a certain level--80 percent of median is often the number we
have used to subsidize housing--if they were allowed to get
that housing at a less than highest bidder price, that that
would not be a scoring problem.
Now I would be interested in further comments on that. But
if that is the case, there is a way for us to get to what is a
commonly subscribed goal around here--home ownership for low-
income people--using some of these FHA funds in a way that does
not implicate the surplus.
That doesn't mean that we shouldn't do other things as
well. But we have a surplus being generated, and we have a
terrible affording housing crisis, and I think it is incumbent
on the Housing Subcommittee to see, as the Chair referred to in
her remarks, how these two could fit together.
Now obviously as part of that, I would also be interested
in the disaster scenarios and how likely people think they are.
And obviously, a disaster scenario would mean that you couldn't
touch it.
But I would think that at the very least, the disaster
scenario we are told could endanger the FHA mortgage fund,
would have an even more important impact. It would probably
make it unreasonable by anybody's standards to enact the
President's tax cut.
So if we are in fact to govern on the basis of the worst
case scenario, it is not just potential uses of the FHA surplus
that would be at risk. I think some elements of the President's
tax cut would be at risk. And I think we can prudently dismiss
some of the more extreme possibilities of disaster. People were
asked to tell us what they are.
But I believe if we can show that in all likelihood we are
going to have a significant surplus continuing, that it is then
our responsibility as the entity in this Congress charged with
dealing with our growing housing crisis to try and put that to
the best use.
Thank you, Madam Chairwoman.
Chairwoman Roukema. All right. Thank you.
Now I will say to the other Members of the subcommittee
that we are open for opening statements from you.
We will first have one, if Mr. Green, the Vice Chairman of
the subcommittee, has an opening statement. But for all
Members, I want you to know that the opening statements are
restricted to 3 minutes by the rules of the Committee.
Mr. Green.
Mr. Green. No.
Chairwoman Roukema. All right. Are there any opening
statements on the other side of the aisle? All right.
Mr. Sanders.
Mr. Sanders. Thank you, Madam Chairwoman, and thank you for
holding what is in fact a very important hearing.
I would hope that this subcommittee starts off all of its
work with the premise that we have a major housing crisis in
this country and that this subcommittee is going to do its best
to address it. Certainly that is the case in the State of
Vermont where we have many, many people who are paying 50 or 60
percent of limited income for their housing.
It seems to me that one way that we can begin approaching
this crisis is to use a portion of the FHA and Ginnie Mae
surplus to increase affordable housing in this country by
creating an affordable housing trust fund. And I will be
introducing legislation soon, and I hope Members of the
subcommittee will join me in co-sponsoring that legislation.
I think as you know, Madam Chairwoman, according to
Deloitte & Touche, FHA profits are expected to exceed $26
billion over the next 7 years. Yet apparently the Congressional
Budget Office has testified today that Congress cannot use this
funding to increase affordable housing in this country, and I
would like to ask why not.
Over recent years, Congress has said that money that is put
into the highway trust fund can only be used for highways.
Money that is put into the Social Security trust fund can only
be used for Social Security. Money in the airway trust fund can
be used for aviation needs. But when it comes to the FHA
surplus, we are apparently being told that this money must be
put back into the Treasury.
I think the time has come for Congress to, at the very
least, put a portion of the FHA profits into an affordable
housing trust fund to be used only for the purposes of
increasing affordable housing opportunities for the American
people.
And I thank the Chair.
Chairwoman Roukema. I thank Mr. Sanders.
Mr. Frank. Madam Chairwoman?
Chairwoman Roukema. Yes?
Mr. Frank. Can I get unanimous consent to put into the
record the statement of the Ranking Member of the Full
Committee, Mr. LaFalce?
Chairwoman Roukema. Without objection, so ordered.
[The prepared statement of Hon. John LaFalce can be found
on page 33 in the appendix.]
Chairwoman Roukema. Are there any other opening statements?
Yes, Ms. Kelly. You are restricted to 3 minutes for an
opening statement. Thank you.
Ms. Kelly. Thank you, Madam Chairwoman. I thank both you
and Ranking Member Frank for holding the hearing today on the
Mutual Mortgage Insurance Fund.
I think that the FHA has been charged with a mission to
assist families of lesser means to realize the American Dream
of home ownership, and that is a noble mission.
By accomplishing this through the programs that allow
families to put less money down when they purchase their home,
that is an important way we get these people into the
mainstream. And because of that low downpayment, the program
carries a higher risk to the Government.
I think the FHA has highly laudable goals that require the
Government assistance to realize, and because of this, the
program enjoys really broad bipartisan support.
I hope that we will continue to have that broad bipartisan
support. But we also do need to monitor the safety and
soundness of the programs, and I do thank you, Madam
Chairwoman, for having this hearing today.
I think this issue is a very important one, and I look
forward to discussing with the witnesses whether there is, in
fact, any real surpluses here that can be used for other
programs, as my colleague suggested.
I think obviously we all want to make sure that HUD is
doing everything it can to provide safe and clean, affordable
housing to people who have lesser means. But I think we also
have to ensure that we are not increasing the risk to the
American taxpayers that these high risk programs already
entail.
So I thank you very much, and I yield back the balance of
my time.
Chairwoman Roukema. All right. I thank you. Yes? Is there
another opening statement? Yes, Congresswoman?
Ms. Carson. Yes. I, too, appreciate very much the conveners
of this very vital discussion today with respect to the Federal
Housing Administration Mortgage Insurance Fund of the
Department of Housing and Urban Development. I am probably one
of the few people to sit on this panel who received FHA
mortgage insurance when I bought my first house. So I am very
sensitive to the value of having FHA there as an instrument to
ensure that people in low income status with families have an
opportunity to embark upon home ownership.
To date, I guess the FHA has insured mortgage loans for
over 30 million American families and currently insures around
one million new mortgage loans each year with a total principal
of around $100 billion, for which I am very proud.
FHA's portfolio of insured loans, as I understand it, now
stands at $480 billion, with $6.7 million outstanding loans. I
understand that FHA's financial health is always called into
question, and that it is measured by the FHA Fund.
According to the General Accounting Office, the Fund's
balance is sufficient to withstand moderately severe economic
conditions based on historical conditions, and even more severe
economic scenarios would have to be accommodated in the event
that that occurs. So I would simply echo what my dear friend
from Vermont, colleague from Vermont has pointed up. That we
don't need to use any of FHA's funds for anything other than
for the intent of FHA resources.
It is a good program. It should be maintained. And I did
have some concerns about what happened in Baltimore when some
1,400 persons went into foreclosure when they were insured by
FHA, and whether or not there has been any experience from that
situation that can be used in the future to counteract similar
circumstances.
So thank you very much, Madam Chair, and I yield back the
balance.
Chairwoman Roukema. Thank you, Ms. Carson. I appreciate
that. Other opening statements on either side?
All right. With that, I would have hoped that Mr. Frank
would be back by this time. And if not--I don't want to kill
any time. Is he coming? Is he on his way? All right.
Just for the record, 2 or 3 minute opening statement, Ms.
Jones. Thank you.
Ms. Jones. Thank you, Madam Chairwoman. I am pleased to
have an opportunity to be here to discuss the Federal Housing
Administration. I am a sophomore in the Congress, and I serve
as the Chair of the Housing Committee for the Congressional
Black Caucus in Housing, a very important issue as we come on
the 107th Congress, and I look forward to the opportunity to
hear from each of the presenters that are here today and to
make inquiry as well.
Thank you very much, Madam Chairwoman. See, I am a good
filler for you.
Chairwoman Roukema. Thank you very much. That is very
cooperative. And with that, I would make that note that without
objection, all Members' opening statements will be made part of
the record.
Now I will turn to our panel now and note for them, I will
introduce each one of you individually, but I would like to
note for the panel that your full written statements will be
made part of the record.
However, in the interest of time and recognizing that we
have a lot to do this afternoon with many Members who are
interested in asking questions, that you will be recognized for
5 minutes to summarize your testimony, but that the full
statement of your testimony will be part of the record.
So I will recognize first Mr. Thomas J. McCool, who is
presently Managing Director of Financial Markets and Community
Investment of the General Accounting Office, the GAO. We are
very pleased to have you here today with your testimony
regarding the Mutual Mortgage Insurance Fund and the balance of
that and the economic conditions that we are currently facing.
I introduce Mr. McCool, and we look forward to your
testimony, because it is central to what the future holds for
us in this subject.
Thank you. Mr. McCool.
STATEMENT OF THOMAS J. McCOOL, MANAGING DIRECTOR, FINANCIAL
MARKETS AND COMMUNITY INVESTMENT, GENERAL ACCOUNTING OFFICE
Mr. McCool. Thank you, Madam Chairwoman and Members of the
subcommittee. We are pleased to be here today to discuss the
results of our analysis of the financial health of the Mutual
Mortgage Insurance Fund of the Department of Housing and Urban
Development's Federal Housing Administration.
Through the Fund, FHA operates a single family insurance
program that helps millions of Americans buy homes,
particularly low-income families and first-time home buyers.
In fiscal year 1990, the Fund was estimated to have a
negative economic value and its future was in doubt. Congress
enacted legislation that required the Secretary of HUD to take
steps to achieve a capital ratio of 2 percent by November 2000
and to maintain or exceed that ratio at all times thereafter.
As a result of these reforms, the Fund must not only meet
the capital ratio requirements, it must also achieve actuarial
soundness. That is, the Fund must contain sufficient reserves
and funding to cover estimated future losses resulting from the
payment of claims on foreclosed mortgages and administrative
costs.
However, the legislation does not define actuarial
soundness.
The 1990 reforms require that an independent contractor
conduct an annual actuarial review of the fund. These reviews
have shown that during the 1990s, the estimated economic value
of the fund, its capital resources plus the net present value
of future cash flows, grew substantially.
As you can see from the figure to your left, by the end of
the fiscal year 1995, the Fund attained an estimated economic
value that slightly exceeded the amount required for a 2
percent capital ratio.
On that graph, the gray area represents 2 percent of the
unamortized insurance-in-force. The white area represents the
actual economic value. As you can see, after 1995, the economic
value is greater than 2 percent for all years.
In fact, this past year, for fiscal year 2000, Deloitte &
Touche estimated the economic value of the Fund to be about $17
billion, which was 3.51 percent of the Fund's insurance-in-
force.
You asked us to estimate the economic value of the Fund and
also to determine the extent to which a 2 percent capital ratio
would allow the Fund to withstand worse-than-expected loan
performance.
I am going to talk first a little bit about our measure of
the value of the Fund, which is actually quite comparable to
Deloitte & Touche, so I won't spend too much time on that, and
then move onto the potential stressors that we put the Fund
through, at least in a theoretical sense.
The economic value of the Fund consists of current capital
resources and the net present value of future cash flows.
Investments in non-marketable Treasury securities represent the
largest component of FHA's current capital resources.
Estimating the net present value of future cash flows is a
complex actuarial exercise that requires extensive professional
judgment. Cash flows into the Fund from premiums and the sale
of foreclosed properties, as you can see again in the diagram
to your left. Cash flows out of the Fund to pay claims on
foreclosed mortgages, premium refunds, and administrative
expenses.
We estimate that the Fund had an economic value of about
$15.8 billion at the end of fiscal year 1999. This estimate
implies a capital ratio of 3.2 percent of the unamortized
insurance-in-force.
Although we did not evaluate the quality of Deloitte's
estimates, which were prepared using a different method of
analysis, we believe that our results and Deloitte's are
comparable because of the uncertainty inherent in forecasting
and the professional judgment made in this type of analysis.
Much of the difference seems to be a result of performing
the analyses at different times. Deloitte had to do its
analysis a little earlier, before the fiscal year was over, and
therefore had to estimate the capital resources, and Deloitte
admits that it probably overestimated the 1999 number by about
$1 billion.
The Fund's economic value principally reflects the large
amount of capital resources that the Fund has accrued. These
capital resources are the result of previous cash flows which
reflect the robustness of the economy.
The estimated value of future cash flows also contributed
to the strength of the Fund at the end of fiscal 1999. Many of
the loans in the current portfolio were insured in recent years
under conditions of low interest rates and a robust economy.
As a result, our models predict low levels of foreclosure
and prepayment and that cash flowing into the Fund for
mortgages already in the portfolio will be more than sufficient
to cover the cash outflows associated with these loans.
Now this again is all under certain assumptions about the
economic future, that is the expected economic future.
However, to provide a framework within which actuarial
soundness can be assessed, we need to move beyond estimates of
the capital ratio under expected economic conditions. We
believe that to determine actuarial soundness, one should
measure the Fund's ability to withstand worse-than-expected
conditions, although how much worse is a more difficult
judgment.
We generated economic scenarios that were based on economic
events in the last 25 years, and other scenarios that could
lead to worse-than-expected loan performance in the future.
Most of the scenarios we looked at had only a small impact
on the capital ratio. For example, the worst historical
scenario we tested, one based on the 1981-82 national
recession, lowered the capital ratio by less than \4/10\ of a
percentage point, that is from about 3.2 to about 2.8, about 20
percent of the required 2 percent capital ratio.
To see how the economic value of the Fund would change as
the extent of adversity increased, we extended regional
scenarios based on historical economic downturns experienced in
three States to the Nation as a whole. In two of these cases,
the estimated capital ratio was about 1 percentage point lower
than in the base case, which again was 3.2 percent.
However, our models estimated that extending the New
England downturn to the country as a whole would reduce the
capital ratio by almost 2.4 percentage points; again, this
means from 3.2 to about .8.
In another scenario in which we specify that interest rates
fall substantially, inducing refinancing, and a substantial
recession sets in that leads to increased foreclosures, the
estimated capital ratio also fell substantially, by over 1.8
percentage points.
Now in our economic scenarios, we didn't always generate
foreclosure rates that were as high as those that were actually
experienced in the 1980s. So in one of our exercises, we
actually imposed historical foreclosure rates from the 1986 to
1990 timeframe on the years 2000 through 2004. And again,
historical foreclosure rates at that level would reduce the
capital ratio by over 2 percentage points.
Chairwoman Roukema. Mr. McCool, can you summarize your
testimony?
Mr. McCool. Sure. I'm sorry. I'm just getting to the end
here.
Chairwoman Roukema. You've gone through 5 minutes, but this
is very important, so I'm going to be a little liberal with the
time commitment to you.
Mr. McCool. That's OK. I'm sorry I'm taking so long. I
guess the two final points that I'd like to make with respect
to our results are, first of all, while we think our models
make good use of historical experience, there are some
limitations that people need to be aware of.
In particular, a lot of the portfolio, the current FHA
portfolio, is composed of fairly recent loans, and we have very
little experience with those loans, and so we don't know how
they're going to perform in the future.
The second point is that there are changes that are being
undertaken by the FHA program that could have effects on,
again, the performance of the portfolio, but they're fairly
recent changes, and again, we don't know how they're going to
affect the portfolio.
Also, we are not estimating the effect of new loans, that
is to say, loans made after the end of fiscal year 1999, which
again will affect the portfolio in the future.
And then the last point I'd like to make is simply that
whether actions should be taken to change the value of the Fund
depends on whether the Fund's capital resources and expected
revenues exceed the amount needed to meet its expected cash
outflows under designated stressful conditions, that is,
whether the Fund is actuarially sound. Because we believe that
actuarial soundness depends on a variety of factors that could
vary over time, setting a minimum or target capital ratio will
not guarantee the Fund will be actuarially sound over time.
We believe that to evaluate the actuarial soundness of the
Fund, one or more scenarios that the Fund is to withstand would
need to be specified. Then it would be appropriate to calculate
the economic value of the Fund or the capital ratio under the
scenarios.
As a result, we believe the Congress may wish to consider
taking action to specify criteria for determining when the Fund
is actuarially sound. More specifically, Congress may want to
consider defining the type of economic conditions under which
the Mutual Mortgage Insurance Fund would be expected to meet
its commitments without borrowing from the Treasury.
Madam Chairwoman, this concludes my statement. I would be
pleased to answer any questions.
[The prepared statement of Thomas J. McCool can be found on
page 43 in the appendix.]
Chairwoman Roukema. I thank you. I'm sure there will be a
number of questions. You have given a full menu of analyses
there, and I thank you.
Now we have Ms. Susan Gaffney, Inspector General of the
U.S. Department of Housing and Urban Development. Welcome, Ms.
Gaffney. You've been here before, and we appreciate your
attendance today.
STATEMENT OF HON. SUSAN GAFFNEY, INSPECTOR GENERAL, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Ms. Gaffney. Thank you, Madam Chairwoman. As I've pointed
out in my written statement, we in the HUD OIG are not
actuaries. And so my testimony is going to be a little to the
side. It's going to be based on our audit and investigative
work in the HUD OIG.
Whatever the forecasts and assumptions are, I think we can
all say that the MMI Fund is in terrific shape relative to
where it has been.
What I want to talk to you about today is, please, don't
let that disguise some of the problems that exist in the MMI. I
would say that Single Family has been our major preoccupation
over the last 2 or 3 years in terms of audits and
investigations.
We now have--these won't sound like big numbers to you, but
they are big numbers for us--more than 250 criminal
investigations ongoing involving more than 2,000 single family
loans. And what we are finding is that we cannot keep up with
the number of cases that keep coming to us.
Fraud seems to be growing in the Single Family Program.
You've heard about this. I'm telling you our numbers are small
here, but as we increase staff, we increase the cases.
What happens is that the people who are being victimized by
this kind of fraud are often the people that we're trying to
help with the FHA program. And the other thing you see with
this fraud, and it was alluded to before, is that it tends to
be concentrated in certain cities in certain neighborhoods.
So, you have seen the stories about Baltimore, where there
is a big problem, and Harlem, where we had 203(K) fraud really
destroying major communities.
We have done a lot of audit work on the Single Family
Program. You can't stop all fraud. Someone will always find a
way to commit fraud. But we believe that there are internal
controls in the program that need to be tightened up to prevent
it and to protect the people we're trying to help with FHA-
insured mortgages.
If you look at the FHA financial audit that was just
prepared by KPMG and just issued by our office, what you see is
that FHA has been making progress. They've done a lot of good
things, but they still have some big problems.
To summarize that, they got an unqualified opinion, but
they have a material weakness in their information systems.
They have three other reportable conditions, which are other
serious internal control weaknesses. But, on the other hand,
since last year, they've corrected four other reportable
conditions.
What I would like you to focus on, if not now, then in one
of your future hearings, is that there are two basic problems
in FHA that persist as shown in the financial audit. One is
they have information systems that are 10 to 20 years old. They
are locally based. They are not integrated. It is very
difficult to run a program of this magnitude involving this
amount of money without up-to-date information systems.
FHA has a plan to bring their information systems up to
speed by 2005. But if you look at the progress that has been
made to date, I think you would have to question that goal.
The second issue in FHA is personnel. In Single Family,
their personnel have been cut by half. But more than that, FHA
Single Family is big business. This isn't like processing
widgets. This is big business. We need people who know the
business, who are paid so that we can attract them, and we need
to know that we have the right number of people.
The trouble is, neither FHA nor HUD knows right now how
many people they need.
So, I would ask you, as you consider FHA and MMI, to keep
in mind that FHA needs some flexibility. They need some
flexibility to solve their problems, to get their information
systems up to speed, to hire the right kind of people, to train
them right, get them on board. And with those attributes, I am
convinced that we can overcome the problems that the OIG audits
and investigations keep finding.
[The prepared statement of Hon. Susan Gaffney can be found
on page 73 in the appendix.]
Chairwoman Roukema. Thank you, Ms. Gaffney. I appreciate
that testimony.
And now the final panelist is Mr. Marvin Phaup, Deputy
Assistant Director for Microeconomic and Financial Studies, the
Congressional Budget Office. We welcome you.
STATEMENT OF MARVIN PHAUP, DEPUTY ASSISTANT DIRECTOR FOR
MICROECONOMIC AND FINANCIAL STUDIES, CONGRESSIONAL BUDGET
OFFICE
Mr. Phaup. Thank you, Madam Chairwoman. I am pleased to
participate in today's hearing on the FHA's Mutual Mortgage
Insurance Fund.
Chairwoman Roukema. Excuse me. Could you move the mike up
closer? We are not able to hear you.
Mr. Phaup. I'm pleased to participate in this hearing.
Chairwoman Roukema. That's much better.
Mr. Phaup. Your letter of invitation asked CBO to address a
fairly narrow question. The question was, does the MMIF have a
surplus that can be spent on meeting new housing needs? The
answer to that question is no.
Under current rules governing the budget process, rules to
which the Congress has at least tacitly agreed, it is
absolutely clear that MMIF balances do not constitute new
budgetary resources available for new spending.
The rule that there are no free lunches applies fully here,
because accumulations of premiums in excess of the required
minimum are available under current law only for paying
insurance claims.
If the Congress decides to spend money to meet new housing
needs, it should do so independently of the estimated net
position of the MMIF. But, of course, if the Congress takes
such action, this would probably have a cost and reduce the
budget surplus.
Fund balances do not constitute authority to enter into any
new obligations, not even for new guarantees. Appropriation
action is required before FHA can issue new commitments.
Through the budget process, the Congress approves the making of
new FHA loan guarantees by setting an annual limit on the loan
volume. In 2001, that limit is $160 billion.
But it is that process and not the existence of any
estimated net balance in the Fund that provides the resources
for FHA to make new loan guarantees.
I would close my brief statement by making three additional
observations. The first is that the MMIF provides policymakers
with information, not budgetary resources. Even though the MMIF
is not a source of funding for new housing needs, it can be a
useful accounting device. And accounting itself is not
everything. As Mr. Frank said, at best, it can only inform
policy decisions.
The second point I would make is that these estimates of
the economic value, or net position, of the MMIF provide
policymakers with information about the performance of these
programs in terms of an important objective; namely, that
program costs under some reasonable long-term economic
scenarios will be covered by premiums. That is useful and
important information.
The third thing I would say is that even though these long-
term estimates of Fund balances are uncertain and move around a
lot--you have heard much about re-estimates and estimates of
the Fund balances--and even though they're not a source of new
budgetary resources, for a variety of good management and good
policy reasons, they're well worth making and monitoring
carefully.
So while my answer to the narrow question is negative, but
based on the rules under which the Congress operates, I want to
emphasize that the FHA actuarial reviews have important program
and policy value nonetheless.
That concludes my statement.
[The prepared statement of Marvin Phaup can be found on
page 87 in the appendix.]
Chairwoman Roukema. All right. I thank you very much. I'll
tell you, you've given us a lot to think about here and a lot
of detail. I will ask one or two questions, and I'm not sure,
but that your testimony didn't give me a full answer. But if it
did, I didn't hear it. And I'm going to begin with Mr. McCool.
You did talk extensively about the actuarial soundness and
the questions of the reserve ratios. But may I ask the question
this way. Do you believe that Congress should take action? Is
there an action required here for Congress in terms of whether
or not the existing system meets your recommendations as to
what should be done with various types of economic conditions?
You postulated a few different circumstances. But I wasn't
quite sure as to whether or not you absolutely agreed that the
existing system is adequate, or does Congress need to require a
ratio that would cover catastrophic conditions that might be
projected out there?
Mr. McCool. Well, I think the answer is that 2 percent, as
I think everyone knows, is a fairly arbitrary number.
Chairwoman Roukema. Yes. That is what we are trying to get
at here.
Mr. McCool. Two percent could be actuarially sufficient
under certain circumstances, and it may not be sufficient under
others, both in terms of the composition of the portfolio and
also with respect to, again, the risks that Congress is trying
to ensure against.
Our recommendation is that Congress think about setting
forth some actuarial soundness criteria. What sort of scenarios
the Congress wants the FHA Fund to be able to withstand, I
think, is what we're asking for.
Just as an example, it's not necessarily the perfect
example. But in the 1992 Act that set up OFHEO, the regulator
of Fannie Mae and Freddie Mac, Congress did set forth, maybe
some would say, a very specific set of scenarios that were to
be the basis for a capital ratio for Fannie Mae and Freddie
Mac. Again, it may have been overly specific in some people's
mind or maybe not specific enough. But it certainly is much
more of a rigorous actuarial safety and soundness standard,
rather than just say 2 percent or put in some number.
So I think what we're looking for is something that sets
forth a little bit more criteria about what you mean by
actuarial soundness for the Fund.
Chairwoman Roukema. What do you mean by actuarial soundness
for the Fund?
Mr. McCool. Well, again, we don't know whether you want the
Fund to be able to protect against the Great Depression or to
protect against a moderate downturn or a small downturn.
Chairwoman Roukema. I see.
Mr. McCool. You have to protect the taxpayers' money. You
have to decide what the Fund should be--how big it should be to
protect that and what the risks are you are concerned about.
Chairwoman Roukema. So there is a lot of discretion here
and a lot of--all right. All right. We will look over that
again in some detail.
Ms. Gaffney, I do have question for you. And I am not quite
sure whether--I don't think you were explicit in your
testimony. If so, I kind of missed it. But you made inferences.
In the context of the fraud that you talked about, I am not
quite sure how you account for this increasing fraud.
But it raised in my mind the question is HUD contracting
out too much of its oversight responsibilities to private
companies? Is that what you were inferring here, or does that
have no relationship to the increasing fraud questions that you
are talking about? And how that relates to the internal
controls that you have existing now.
Ms. Gaffney. I don't think there is a right answer to how
much you contract out, but it's clear that you shouldn't
contract out from weakness. I think what all of us have learned
is that when you contract work out, you had better have people
on your own staff who know that work better than the
contractors do--so they can monitor and hold the contractors
accountable.
I think what has happened sometimes in HUD is, because of
the downsizing of the staff, that we have contracted out
without having that component of in-house staff truly able to
monitor and hold the contractors accountable.
Chairwoman Roukema. All right. You have alluded to the
second question that I had in mind. That was the question as to
whether or not we have provided adequate--have enough full
time, qualified employees to provide that lender oversight,
adequate lender oversight. And you are indicating maybe we
don't.
Ms. Gaffney. We believe from what we have seen that FHA
does not have sufficient trained staff to provide adequate
lender oversight. The problem, though, is that neither HUD, nor
have we, done a tight analysis to know what that right staffing
level should be.
I understand, though, that something may be in the works
now to do that. It is really very important.
Chairwoman Roukema. Or maybe we should be giving more
attention to how we select those private companies and what
criteria they have to meet.
Ms. Gaffney. That is also true.
Chairwoman Roukema. Yes. All right. Thank you.
Mr. Frank.
Mr. Frank. I want to begin by expressing my appreciation
for General Gaffney's acknowledgement that sometimes we can cut
too far, and that this notion that less Government is always
better and that staff who are pejoratively called bureaucracy,
can always be cut and that you can have the private sector make
it up.
I mean, I appreciate your pointing out the fallacy of that
kind of thinking. And I agree that we have cut the HUD staff
too far, and we then wind up blaming HUD, because having cut
the staff too far, we have an agency that is not able to fully
carry out its responsibilities.
I also do have to note that with all the problems, it does
appear that with the concerns we had about the FHA, that the
previous Administration did leave it in pretty good shape, and
now the question is, how do we preserve and build on that?
And we have gotten some negative economic scenarios here
about, you know, what it would take to cause this fund to go
negative. So, Mr. Phaup, I would be interested, CBO is in the
business of doing economic projections. According to CBO's
economic projections, how likely are we to see the disaster
scenario in the economy that would wipe out this fund?
Mr. Phaup. Well, Mr. Frank, it is very unusual for us to
predict cyclical downturns. Our long-term budget projections
almost always show some trend rate of growth, even for
forecasts that look 1 and 2 years ahead. I can't remember the
last time that we predicted a recession that we weren't already
in.
Mr. Frank. Is this some inherent institutional optimism
that we have here? What is this?
Mr. Phaup. I think it is a matter of professional
intellectual limitation. That it's just very difficult.
Mr. Frank. I'm reminded of our late colleague, former
colleague, Jake Pickle's question, and maybe I would reform it:
``Is Rosy Scenario the highest ranking woman at the CBO?''
Mr. Phaup. I'm not sure our scenarios are rosy with respect
to where we end up in the long run.
Mr. Frank. All right. Well, now that you've discounted the
CBO forecasting, let me repeat my question.
Mr. Phaup. All right.
Mr. Frank. Given the inherent optimistic bias to which, for
the first time in my experience, CBO has now confessed, what in
CBO's projections is the likelihood of the kind of disaster
scenario that would wipe out this Fund?
Mr. Phaup. As far as I know, we do not have any projections
that would be sufficiently severe to do so.
Mr. Frank. OK. In CBO's range, I know we've all seen that
range of projections.
Mr. Phaup. Or distribution projections.
Mr. Frank. And even at the low end of CBO's projections,
you would not see this Fund----
Mr. Phaup. I could not say that. We generally focus on the
midpoint.
Mr. Frank. You've seen the projection. Let me say, I would
be interested at the low end of the projections whether you
think that's like that. But you think it's very unlikely,
according to your projections?
Mr. Phaup. Certainly the ones that we base our baseline
projections on, yes.
Mr. Frank. All right. I appreciate that. And I think this.
If you look at this Fund and you look at the way things are
going, not only is it unlikely that we would have the kind of
level of disaster that would wipe us out, but if we were to
legislate the FHA Fund on that basis, it would be the only
element in the Federal Government where we legislated on that
basis.
That is, the extremely pessimistic assumptions that it
would take to see this being wiped out would be applied only
for the purposes of dealing with that.
Let me ask through the GAO to Mr. McCool, you've given on
page 18 some of the historical periods, but they were regional,
sectional. Has there been in recent times--or let me put it
this way. When was the last time the economy was at the point
overall which would represent a scenario that would wipe out
the Fund?
Mr. McCool. That would wipe out the Fund? I'm not sure that
in the postwar period it has occurred.
Mr. Frank. It's never happened since the postwar period?
Mr. McCool. No.
Mr. Frank. Thank you. That reassures me that we can now
think about how to spend it. So let me now go back to Mr. Phaup
and the CBO. Nobody is projecting it. It has never happened, so
I'll let somebody else worry about it.
If we were in fact to do some adjustment of prices within
the FHA's inventory, is it possible to do that without
triggering a scoring and and so forth?
Mr. Phaup. My answer would be that if the Congress directed
a particular action, it would be scorable. If the Secretary
took some action under existing authority, it would not be a
scorable act; we would just adjust our baseline for it.
Mr. Frank. What if Congress--you said if we directed it,
it's scorable, and if it's done under existing authority, it's
not scorable. What if we changed existing authority to empower,
but not direct the Secretary?
Mr. Phaup. We have some budget analysts here. They say they
would like to read the legislation before they offered an
opinion.
[Laughter.]
Mr. Frank. Oh, well, see, you want to read the legislation
before you decide whether to score it, and we want to read the
opinion before we write the legislation.
[Laughter.]
Mr. Phaup. I understand that.
Mr. Frank. So we may get into it.
Thank you, Madam Chairwoman.
Chairwoman Roukema. Isn't that, giving that kind of
discretion, isn't that--that's rearranging all the chairs on
the Titanic, isn't it? No?
Mr. Frank. But we're not on the Titanic, as we've just
seen.
Chairwoman Roukema. I'd like to ask the OMB Director that,
please. Is it?
Mr. Frank. You'd better summon him, then, because he's not
here.
Chairwoman Roukema. I'm sorry. I'm sorry. You know who I'm
talking about. CBO. CBO. I'm sorry. I meant CBO.
Mr. Phaup. Under existing law, the Secretary has the
authority to take certain actions that, as Mr. McCool can
testify more fully, would affect the net position of the fund,
including actions such as changing the premium, which he did in
January of this year. And he also can take action to resume the
distributive shares program, if he takes into account four or
five statutorily imposed criteria first.
So these possibilities are already a part of existing law.
Chairwoman Roukema. All right. We will have to think about
that.
Mr. Green, please, the Vice Chairman.
Mr. Green. Thank you, Madam Chairwoman.
Ms. Gaffney, in your testimony you made reference to the
increasing use of foreclosure avoidance techniques. I'm
intrigued by that. Can you tell me what those techniques
include?
Ms. Gaffney. Well, the simplest, most straightforward one
is the lender would call the borrower and try to see what the
problem is, see whether there is a short-term fix, some kind of
short-term hiatus in payments; whether there is a longer term
fix, such as extending the term of the mortgage or counseling
about how to budget funds in order to pay the mortgage, that
kind of reaching out.
Mr. Green. So very much what is done in the private sector
with conventional lenders?
Ms. Gaffney. Exactly. That is what the Federal Government
is trying to emulate, yes.
Mr. Green. Can you tell me why it is that those techniques
or the use of them appear to be a recent occurrence with FHA?
Ms. Gaffney. I don't know, but that is very much the case
that when we looked at this 2 years ago. FHA was really just
starting. We're going to be looking at them again. But I'll ask
a colleague, if you don't mind.
Mr. Green. Sure.
Ms. Gaffney. Oh, the assignment program.
Chairwoman Roukema. Excuse me. Could you speak into the
microphone, please?
Ms. Gaffney. Sorry. I should have known the answer to that
one. You'll remember the assignment program under which
defaulted loans were assigned to HUD, and then HUD kept them
forever and ever and ever, and it created a huge problem, and
then the Congress finally stopped the assignment program.
It was at that time that we started loss prevention.
Mr. Green. OK. Is that also why FHA has had a much higher
foreclosure rate over the years than some of its private sector
counterparts?
Ms. Gaffney. That's one possibility. But FHA is trying to
fill a niche in the market that the private sector doesn't. And
I think all the statistics show that FHA is meeting that need.
It's the higher loan-to-value ratios, it's targeting
minority borrowers, it's targeting portions of cities where
other lenders fear to go.
Mr. Green. I'm sure that may have some effect, but
obviously there are housing authorities around the Nation that
serve those sectors of the market very well and don't have a
higher foreclosure rate. So I mean I think it's a little bit
dangerous to say that just because you're serving that sector
of the market that you're necessarily going to have a higher
foreclosure rate.
Ms. Gaffney. No, absolutely. I didn't mean to imply that. I
meant that HUD is--HUD/FHA--is willing to accept somewhat lower
standards in order to offer mortgage insurance to these groups
of people, particularly first-time homeowners.
Mr. Green. Thank you.
Mr. McCool, I guess I'm going to try to get at the same
issues or conditions that the previous questioners have had.
We've heard reference to something between the Great
Depression and a moderate downturn in the economy. Given that
breadth there, is there anything you can do to help us learn
more about what kind of conditions the Fund at its current
level could in fact withstand?
Mr. McCool. Well, again, within the scenarios that we
played out, the Fund, at least at 3.2 percent, was able to
withstand the shocks.
Now again, remember that a lot of what that results from is
the fact that we're starting from a very good starting place.
And so we're introducing shocks that are shocks of 4 or 5
years.
And what happened in the 1980s that actually caused the
Fund to become negative in 1990 was a series and a sequence of
shocks that also were played out in an economy that wasn't in
the same situation to start with. It was an economy with very
high interest rates in the early 1980s, a national recession
followed by some regional shocks.
So none of the individual shocks we introduced starting
from where we are was able to deplete the Fund. But again, that
doesn't mean that a sequence of shocks, starting from a
slightly different place, couldn't deplete the Fund.
Mr. Green. Could you help me a little bit?
Mr. McCool. I'm sorry.
Mr. Green. Define a little bit more what a ``shock'' is.
Mr. McCool. Well, again, in our scenarios, or in this case
it's effectively a substantial downturn in the economy, and in
particular one that generates falling housing prices and higher
unemployment, and, as a result, leads to higher foreclosures
for the FHA.
Mr. Green. OK. Madam Chairwoman, that's it for my
questions.
Chairwoman Roukema. I thank the Vice Chairwoman.
Congresswoman Waters.
Ms. Waters. Thank you very much, Madam Chairwoman. Most of
the questions have been raised I think. Most of us are
interested in knowing how we can take this good information
about a surplus and turn it into housing opportunities for the
people who are in such desperate need.
I've heard it described recently as a housing crisis out
there in America where we have people who are living four and
five families to one residence. We have people who have been
waiting in line for housing. We have underfunded Section 8, on
and on and on.
So while we are very conscious that we must comply with the
law relative to the use of the surplus, we are looking for
options that can take us to the kind of outcomes that we are
desirous of having in order to deal with this crisis.
So I'm just wondering if I can hear some positive
speculation about how can we do this. I know we may have
uncertain outcomes, but as you think about this, you think
about the good and you think about the bad. I want to hear what
thoughts you may have about what we can do to use this
opportunity to increase housing for people who are in desperate
need. Anybody?
Mr. Phaup. Well, Ms. Waters, I think my message is so
limited that I'm not sure it's going to be responsive. But what
I would say, based on this statement, is simply that given
these needs that you describe, the right surplus to think about
doing something with is not the surplus in the MMIF but the on-
budget surplus.
In other words, it's the whole budget surplus that's the
right number to look at in terms of what you want, what policy
actions you may want to take, rather than these balances in
this Fund. That's a very narrow answer, but that's the best I
can do.
Ms. Waters. What would you suggest, if the surpluses
continue to grow in this Fund, what would you suggest we do?
Just watch it grow and grow and grow? I mean, what would you
suggest?
Mr. Phaup. Well, I think that the 1990 Act actually
envisioned some downward adjustments. Perhaps one of the others
here would disagree, but it seems to me that the 1990 Act
envisioned the use of distributive shares as a way of keeping
the balance from building up--the use of lower premiums to
prevent the balance from building up--and I think those actions
are already authorized for the Secretary.
Ms. Waters. Well, it appears from my reading that we have
taken some of those actions, and we still have a growing
surplus. Are there any other thoughts about how we can utilize
this for the good of the consumers out there? For people--what
else can we do? Even if you do it on the front end.
For example, I'm listening to Ms. Gaffney talk about the
fraud and talk about people who are being qualified for loans
who are not able perhaps to pay back, some of those
descriptions here.
But what we have learned about creative thinking in this
area is you can do no downpayments. As I understand it, there
is nothing that has proven that people who make downpayments
pay their mortgages any better than people who perhaps would
not make any downpayments.
We are talking about, as you described, the processes that
are being used to try and keep people out of foreclosure. And
you say in your report that you are not sure it is working,
that maybe it may extend the length of time, but the
foreclosure takes place anyway. What can we do with these funds
on the front end to help people early who come in under special
arrangements? What can we do to help them avoid foreclosure,
not waiting until they get in trouble?
I mean, are there ways that we can assist first-time home
buyers and others so that we can do a better job that we are
doing today with this?
Ms. Gaffney. Ms. Waters, the answer to that is, absolutely,
you know that there are a number of things we can do.
I really lack expertise in what Marvin is talking about,
which is the legality of how you can use these funds. But, I
always thought that the Congress enacted laws, revised laws,
and assuming that the President signed those laws, that that's
what governed how we operate.
Ms. Waters. You are not incorrect. We look to those of you
who----
Chairwoman Roukema. Excuse me. Will you conclude your
question now? You're long over your 5 minutes, Congresswoman.
Ms. Waters. All right. Then I'll yield back.
Chairwoman Roukema. No, no. Just finish your last
statement.
Ms. Waters. OK. We look to those of you who have some
responsibility in these areas to help us understand as best we
can what is happening out there so we can try and fix it, we
can try and promote ways by which to be more effective, all of
that. So that is why we inquire of you and query you in such
ways so that we can gain information about what we can do to be
helpful to the American citizens.
And when I said that I was looking for some discussion on
positive incomes, I am very serious about that, because we want
to know how to be cost effective and effective period in
helping consumers and people who want homes and loans and
mortgages.
Ms. Gaffney. Right. I am restrained--those are all policy
decisions, and I'm not supposed to be involved in policymaking
decisions.
Obviously, everyone knows there is a crisis in affordable
housing. In my limited world of audits and investigations,
there is a need to help people from being the victims of fraud.
And people really are being victimized.
Ms. Waters. We can use the surplus to do some of that.
Ms. Gaffney. Yes.
Ms. Waters. All right. Thank you.
Chairwoman Roukema. All right. Thank you.
Excuse me. May I just make the point for all Members that
if anyone has additional questions that you haven't had time
for, aside from maybe a second round here, you may submit those
questions to the panelists in writing for their response.
Congressman Bereuter, please.
Mr. Bereuter. Thank you, Madam Chairwoman. Between trying
to do some things on the House floor and attending a hearing,
this has not been most successful day at a hearing. So I'm
sorry I didn't hear all the testimony.
I've been trying to read some of the written material
provided to us. I'm wondering if I could cut through to what
seems to me to be a basic question, Mr. Phaup, if I could
address you.
With respect to the Fund's estimated economic value and the
insurance-in-force, we're at 3.66 in the 1999 economic value.
That is well over the requirement. And I am looking at the
headline items in the GAO report provided to us and seeing that
the 2 percent capital ratio appears sufficient to withstand
some worse-than-expected loan performance.
What is ``worse than expected''? What kind of an economic
downturn would give us something that would still say the 2
percent capital ratio is sufficient? For example, are we
talking about something more severe than the period between
1983 and 1985? Or how steep an economic downturn would we have
to have to find that 2 percent was not adequate? Can you help
me with that, Mr. Phaup?
Mr. Phaup. Mr. Bereuter, I am usually not reluctant to
answer questions, but I believe Mr. McCool should speak to
that. Those are his model simulations.
Mr. McCool. Again, I think that when we put our models
through individual historical stresses, because of where we're
starting from, they did not generate the defaults and
foreclosures that we actually experienced in the mid-1980s. So
part of it is a slight disconnect.
If we look at the actual foreclosure rates that we
experienced in the 1980s, those rates can bring the Fund down,
according to our estimate, by more than 2 percent.
Mr. Bereuter. Brings it down by more than 2 percent?
Mr. McCool. By more than 2 percent. It would bring it down
from 3.2 to .9 in our scenario where we expose the Fund to the
same foreclosure rates that we experienced, the economy
experienced in the 1986 to 1990 timeframe.
Again, that is just one scenario. It is not necessarily the
right scenario or the best scenario, but it is one scenario.
Mr. Bereuter. Let me proceed to the next step. And maybe it
is you, Mr. Phaup, that ought to get this question. Maybe it is
Mr. McCool. I know that, Mr. Phaup, you're not in a position
where you can give us policy recommendations.
But is there any out-of-the-box thinking about how we can
bring down the ratio and still provide adequate protection by a
change in legislation or some other mechanism that will enable
us to bring down those resources and to use them for other
purposes and still have a failsafe kind of approach in case we
have a very severe economic downturn?
Have you done a survey which suggests that there is
thinking out there which gives us any kind of alternative to
the current system that we have in place by statute?
Mr. Phaup. We have not. I would like to pass on offering an
answer to that.
Mr. Bereuter. I think that Ms. Gaffney is not the person to
answer this, unless she just happens to have run into
something. But Mr. McCool?
Mr. McCool. Again, I think that our view is that it's up to
the Congress to decide what minimum ratio it wants, what target
ratio it wants and then, again, what it wants to do with
anything that it feels is--I won't say left over. That's not
the right way to think about. But again, there is no right
answer for minimums. There is no right answer for targets. It
depends on the riskiness of the portfolio.
Mr. Bereuter. Well, we could set a different target if we
understood that there was a different system that could be
checked in when we run into a really severe economic downturn.
And I am wondering if you can give us any guidance as to what
people might think as an alternative to relying strictly on the
current statutory mechanism we have in place.
Mr. McCool. Well, again, our view is you should try to set
the Fund at a level that will protect you from a downturn that
you fear.
Mr. Bereuter. That is almost a waste of resources in the
meantime.
Mr. McCool. Well, I understand that. But the problem is
that once things start to turn down, then it's hard to build up
the resources. That's the reason why you, in a sense, prefund
these systems.
I understand that that's not necessarily the easiest way to
think about it. But part of the problem is that when things do
start to turn sour, it's hard to build up funds.
Mr. Bereuter. Madam Chairwoman, I hope we might look at
some less conventional approaches as a failsafe on this. I
don't know what they might be, but surely someone must have
thoughts about this subject.
It seems to me this is a waste of resources to keep an
excessive amount here during all this period of time and yet in
the possibility that we're going to have a very severe economic
downturn.
Chairwoman Roukema. Yes. There are pros and cons to that.
Mr. Bereuter. And I yield back.
Chairwoman Roukema. And I guess underlying all of it is
what someone said earlier on, and that is, there are no free
lunches. But we have to make some sound fiscal judgments about
these things.
Mr. Frank. If the gentleman would yield.
Chairwoman Roukema. This hearing today opens up a whole
number of questions which we will take up in subsequent--I
don't know whether or not you were here earlier. I know you
were here initially, but when I made the statement that this
will be the foundation for probably a series of hearings maybe
from others in the field who have different perspectives.
So we'll look to you to work with you on that.
Mr. Bereuter. I did hear that, and that's a good basis. If
I had time, I would yield to the gentleman.
Mr. Frank. I think we're well beyond it not being any free
lunch. At this point, we're buying lunch for about 2077, and
we're putting the money aside. And I think we're not talking
about free lunch, we're talking about, or alternatively, the
most expensive lunch I ever saw, or we're assuming the price
will go up.
But I think it's not a case of a free lunch. I think the
gentleman from Nebraska is right. We've put aside far more
money than by any rational justification we've heard seems
necessary.
Chairwoman Roukema. Well, the question is, what do you do
with insurance policies? How broadly or how in-depth do you
need insurance policies?
We'll go on now to our Congresswoman Jones here who is
waiting patiently.
Ms. Jones. Thank you, Madam Chairwoman.
My first question goes to Ms. Gaffney. I was in my
Congressional district last week where I attended an event
where a community development corporation participated in the
grant program to take over HUD housing that had been in the
community kind of standing on its own--not standing on its
own--but was dilapidated, and accepted a grant to be
responsible for the oversight of rebuilding and remodeling
these homes.
And I want you to know, it was such a wonderful feeling to
see a woman, a single woman with five children, excited that
she had a chance to have a home of her own.
And the other thing that made it so good for me, it was in
the neighborhood that I live, but I also grew up in, but to
walk into this home. It was a five bedroom home in a low-,
middle-income neighborhood.
But the woodwork was mahogany. The third floor was wood
slated from the floor to the ceiling with windows all around. I
said a lot of people would love to be able to get in these
neighborhoods and get these homes.
But my point is that your conversation about loans, trying
to work on loan mitigation with foreclosure--before it got to
foreclosure--excuse me. Wouldn't it make sense that we spend
some of these dollars on programs that educate people about
what it means to buy a home and how their credit will be spent
and perhaps reduce the cost of high risk mortgages down the
line?
Ms. Gaffney. I'm going to get myself in big trouble if I
say how these funds should be used.
Ms. Jones. I'm asking you a question so when you go back,
tell them I asked you the question so you were forced to
answer. Then you won't have to worry about it.
Ms. Gaffney. Let me tell you, the educational part of it is
so absolutely key. You know, really, the people who are being
victimized by this fraud, they are people who are being offered
deals that you and I would say, ``Hey, that's so crazy. That
can't possibly be true.''
These people don't know that.
Ms. Jones. And let me cut you off for a moment. Wouldn't it
even make sense to spend some of these dollars dealing with the
predatory lenders that are preying on our communities and let
some of those dollars be used to pull them back in?
Because it's clear that many of the foreclosures occur
under circumstances where people who understood financing and
who had a little more education, and it doesn't mean they
shouldn't be in a home, but if they had a little more
education, would never enter into these loan agreements anyway.
Ms. Gaffney. I could not agree with you more.
Ms. Jones. Let me take it a little bit further. My
experience as a prosecutor doesn't let you answer. I just ask
the questions.
[Laughter.]
Ms. Jones. Wouldn't it also be important that HUD spend
some time--and I see you made this in your statements
somewhere--with regard to looking at the lenders themselves and
saying you cannot put them out of business.
When they enter into agreements that are causing the kind
of losses that you suggest might occur under the circumstances,
that they ought not be able to lend at all, and that way, some
of us wouldn't be in the dilemma that we are in.
Ms. Gaffney. For sure.
Ms. Jones. Let me ask you, Mr. McCool. I'm not quite
understanding--do I have your statement? Is this you? Yes, Mr.
McCool.
On page 13 it says, ``If, for example, FHA loosens
underwriting standards, future loans may perform worse than
past experience suggests. In addition the recent reduction in
up-front premiums could reduce cash inflows into the Fund,
although it could also lower the riskiness of the loans that
FHA insures.''
Upon what basis do you say that future loans may perform
worse that past experience suggests just because they loosen
underwriting standards?
Mr. McCool. Only in the sense that if you do lower
underwriting standards, you increase the pool and you increase
the potential riskiness of that pool. It doesn't necessarily
mean it's a bad thing.
Ms. Jones. Well, let me ask you this. If the underwriting
standard was--and at some point this is what it was in many
African-American communities--is you couldn't be black and get
a loan, that didn't cause any greater loss for people when
African-Americans had a chance to purchase homes, right?
Mr. McCool. No, no. Again, we're talking about legitimate
underwriting standards.
Ms. Jones. Well, I'm questioning the legitimacy of some of
the underwriting standards that denied low-income and minority
persons opportunities to purchase homes that are still in
place. The race is not there, but it's there still.
Mr. McCool. I understand. I think that, again, we would
presume that the underwriting standards were based on true
estimates of financial risk. If they're based on arbitrary
rules of thumb, that's a very different issue.
Ms. Jones. Give me an example of what are true underwriting
standards for the record, please.
Mr. McCool. Well, again, there are relationships between
net worth and income and likelihood of being able to maintain
loans of a particular size. Those sorts of things.
Ms. Jones. I mean we've very recently----
Chairwoman Roukema. Mr. McCool, would you speak more
closely into the microphone, please?
Ms. Jones. This is my question, Madam Chairwoman.
Chairwoman Roukema. Please.
Ms. Jones. More recently last year HUD decided to allow
Section 8 dollars to be used for downpayment for purchase of
homes. By them doing that, does that lower the underwriting
standard, because these people previously didn't have
downpayment dollars to buy homes?
Mr. McCool. I wouldn't think it would, no.
Ms. Jones. OK. So that's a good program. Maybe we could use
some of the surplus then to allow for no downpayment loans. I
think someone else suggested that. But maybe we could use some
of these funds where we've got people in a dilemma where they
can't afford to buy a home. I didn't hear that answer.
Mr. McCool. There's lots of----
Ms. Jones. You're like my son who's 17. I say ``Hello,
Marvin, how are you?'' He'll go----
Mr. McCool. There's lots of ability to increase
flexibility, I'm sure. And I don't mean to be personal.
Chairwoman Roukema. Excuse me.
Ms. Jones. I'm just trying to get some real issues, thank
you, Madam Chairwoman, on the record, with regard to the
inability of people to buy homes. I thank you very much for
your time.
Chairwoman Roukema. And I would remind the members of this
panel that you do have the opportunity to come back for the
record with fuller explanation or amplification if you feel you
haven't had time.
But we will go on to Mr. Frank.
Mr. Frank. Thank you, Madam Chairwoman. I got the distinct
impression from at least Mr. McCool and Mr. Phaup that a desire
to answer more fully is not one of the things that is greatly
motivating them at this point.
[Laughter.]
Mr. McCool. It depends on the question.
Mr. Frank. I don't think either one of them felt deprived.
My question, because it's relevant to the kind of policy
judgments that might be made, in the pricing policies of FHA,
they get revenues from at least three sources. There's the up-
front premium, there's the annual payment and there's sales,
auction sales when they repossess.
How precisely is the internal pricing? That is, my
impression is that there might very well be elements of cross-
subsidy and that the goal is to produce an overall balance and
that it's not very carefully done from an internal pricing
standpoint. Am I accurate on that, Mr. Phaup, Mr. McCool?
I mean, when they say, you know, this class of property--is
each class of property sort of standing on its own or is it as
long as it comes out well in the end is that OK?
Mr. McCool.
Mr. McCool. Well, again, my understanding is they have
certain flexibility, but it's with respect to types of loan
programs and the extent of, for example, the loan-to-value
ratio affects the premiums. They are fairly broad categories
though.
Mr. Frank. Mr. Phaup.
Mr. Phaup. I agree. That there are cross-subsidies in the
FHA program, no doubt.
Mr. Frank. I appreciate that, Madam Chairwoman, because
that seems to me to give us some flexibility to urge the FHA
administrator to----
Mr. Phaup. Urge?
Mr. Frank. Not us. I understand, Mr. Phaup, we can't do it.
Only the Executive can do it by itself. But it does give us
some flexibility to urge the FHA administrator to take
advantage of his ability or her ability to cross-subsidize and
have a different policy outcome since there are cross-subsidies
now.
That's all. Thank you. And don't elaborate on that in
writing. I'm happy with what you said.
[Laughter.]
Chairwoman Roukema. If you can ask a real short question
and then I'll conclude.
Ms. Jones. Mr. Phaup, I didn't get to ask you this. And I'm
new at this. Who makes a decision as to how the funds of the
MMI are invested to make returns on those dollars?
Mr. Phaup. The U.S. Congress. Current law requires that
those balances be held in Treasury securities.
Ms. Jones. Would you suggest that they be done somewhere
else to make it advantageous for the Fund or not?
Mr. Phaup. I would not as a special case for FHA. That's a
big overall question that the Congress now has before it and
will deal with further.
Ms. Jones. Anything but Social Security. Anyway, go ahead.
Mr. Phaup. Yes. I'm thinking about Social Security. But
there are plenty of other cases where people have exactly the
same interest, and that's an important policy question that
deserves careful weighing. I wouldn't make the change for one
program only.
Ms. Jones. Thank you, Madam Chairwoman.
Chairwoman Roukema. All right. Thank you. I do want to
thank this panel and also remind them that according to the
rules of our Committee, Members who have additional questions
will have up to 30 days to submit them to the panel members.
I would simply submit one more question to you, not for
answer now, but for you to supplement what was said in the
panel concerning my question regarding the fraud that you have
indicated has been increasing and what we do with the private
companies that are dealing with these issues. Are they part of
this fraud question? And how we deal with this growing problem
and whether it needs additional legislation or whether it's
strictly administrative ways that we can do it.
Because I think it was indicated that fraud is increasing
and that there are more needs for internal controls, and I did
acknowledge what you stated about the need for more full-time
employees to deal with this.
But I think we have to deal with the private sector as
well, and if we could get the advantage of your experience on
the ground and in the real world, whether or not it's purely
administrative or whether there's a need for legislative
corrections.
And with that, I thank you very much, and we appreciate
your contribution. And as I said, it will be the foundation for
future action. Thank you.
[Whereupon, at 3:35 p.m., the hearing was adjourned.]
A P P E N D I X
March 20, 2001
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