PANEL I OF A HEARING OF THE HOUSE FINANCIAL SERVICES COMMITTEE SUBJECT: FHA OVERSIGHT OF LOAN ORIGINATORS CHAIRED BY: REPRESENTATIVE BARNEY FRANK (D-MA) WITNESSES: PHILLIP MURRAY, DEPUTY ASSISTANT SECRETARY FOR SINGLE FAMILY HOUSING, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; JAMES HEIST, ASSISTANT INSPECTOR GENERAL FOR AUDIT, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT LOCATION: 2128 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C. TIME: 10:08 A.M. EST DATE: FRIDAY, JANUARY 9, 2009

REP. FRANK: This gathering will begin. As was noted last week, we are not yet formally constituted as a committee, but we do have a full complement of members by both sides. So while we have not yet been formally constituted by a vote of the House as the committee, the membership is now complete.

We are still happening somewhat informally. The ranking member -- (inaudible) -- request for 15 minutes of time, so we'll do 15 and 15. I hope we can move very quickly. Members on the Democratic side who wish to say something should notify the staff.

I will begin, first of all, by taking note of the disastrous job numbers we got today. That's within the jurisdiction of this committee. The collapse of the "leave the market alone, let capital do it for us" system is now stunning in its impact. The second -- we've lost over a million jobs in two months, really a very extraordinary negative impact that we haven't seen in a very long time. And it makes it all the more important for us to do sensible interventions.

I do want to announce the committee will be releasing today the draft of a bill to impose conditions on anything that would -- on any expenditure of the second 350 billion (dollars) of the TARP. And I'm going to talk about that briefly. When we passed that bill, there were some who scoffed at what we said were safeguards. (Inaudible) -- that the entire 700 billion (dollars) would be spent without any input.

We put in there, A, significant oversight, which has now begun to come forward and, B, more importantly, a requirement that after the first half was spent there'd be a period of notification for Congress before the second half could be spent and a resolution of disapproval. That has worked maybe even better than some people had thought it might, so that we have frozen the second 350 (billion dollars).

It is now clear, and the incoming administration understands that -- and by the way, we're beyond the point where the current administration could spend it. There's a 15-day period after the triggering that would now get you into the Obama administration -- there will have to be very strict rules. Many of us have a great deal of confidence in the Obama administration, but I am prepared here to draw on the wisdom of a previous Republican president: We will trust but verify. The verification will be a bill that will be mandating attention to foreclosure, to money being re-lent when it's given to the banks, to other things.

A draft of that will be released today. We will have another one of these non-hearing hearings on it on Tuesday. The bill will probably come to the floor next week. Members will see it. We are not constituted so that we could have a formal mark-up yet, but we will have the bill out there.

Members will see it. And we will be in conversations about it. And as I said, I think, it will go to the floor.

Now, the Bush administration has not yet requested the second 350. So this might be academic. But we thought it was important to make it clear, what our conditions would be, so that if there is a request for the second 350, either from the incoming administration, or one of the new ones does want to have the ability to deploy it, they will know what at least the House of Representatives requires for them to go forward.

Finally on today's hearing, we hope, if we are able to work out appropriate conditions, to get the second 350 freed up. If that's the case, it will increase, we believe, the role of the FHA. We passed a bill, Hope for Homeowners, was part of it last year, in which we tried to put the FHA in a position to help as a resource in diminishing foreclosures. And it turns out, it was drafted so restrictively that it hasn't been used.

We were concerned about being excessively generous. I think we erred on the other side. We've been talking to a variety of groups, including the chairman of the Federal Reserve and others, about making it more workable. Making that more workable will be something we hope will be done in the second half of the 350. But it involves a greater role for the FHA.

Subsequently in an article in BusinessWeek, on December 1st of this past year, and in a New York Times article on December 10th, both of which I ask -- well, I don't -- we don't really need unanimous consent on this; we're just going to put them in the record. If anybody wants to put anything in the record, it's open. We'll do that saying that there is a danger of the FHA not being able sufficiently to screen the applications.

We will be directing more people, including some people who have been in trouble, to the FHA, if the program works. It is essential therefore -- we're not here to talk about that program. We're here to talk about the FHA because we want to make sure that whatever increased role the FHA has, it's able to deal with it, whether it's got enough staff, whether it's doing its job right, that whole range of questions.

So the focus today is on frankly the allegations that have been published, in respectable publications, BusinessWeek and The New York Times, that there was too much laxity in the FHA. And we want to see if that's the case and if so, more importantly what we can do to make sure it doesn't happen going forward. Because having an FHA that's available, to work with lower-income people, is an essential part of having an alternative to the subprime mortgage schemes that got us in trouble.

And clearly, there were people who got subprime mortgages who shouldn't have gotten mortgages. There were other people who got bad subprime mortgages who, if they were given appropriate mortgages, would not be in trouble. That's in part the role of the FHA.

So this hearing is about the capacity of the FHA going forward to be an entity we can rely on. And for that to be the case, we have to know what is behind these allegations, whether they were accurate and, more importantly, if they were, what's being done and what can be done to diminish them.

The gentleman from Alabama.

REP. SPENCER BACHUS (R-AL): Thank you, Chairman Frank, for holding today's hearing on FHA's insurance program and the procedures for monitoring lender and mortgage-broker participation in the program and combatting fraud.

With the credit and foreclosure crisis, FHA has played an increasing role in assisting homeowners, and is attempting to fill the void left by the contraction of the conventional market. Over the past four years -- over the past year, FHA has seen its business share -- its business as a share of home sales increase from 4 percent in 2006 to 21 percent in 2008. That 21 percent represents a new peak. The last peak was 18 percent, in 1990.

FHA's share of total mortgage volumes has gone from 2 percent in 2006 to 26 percent in 2008. And this new level has not been seen since prior to 1970. According to the Department of Housing and Urban Development, a steady flow of homeowners continue to use FHA to refinance out of sub-prime mortgages. And FHA anticipates that it will likely insure over 1.6 million mortgages in fiscal year 2009, representing close to $300 billion.

Recent media reports indicate that HUD's Federal Housing Administration, FHA, significantly increased market share in 2008, raising concerns that the agency is ill-equipped to adequately oversee FHA-approved lenders and licensees, to employ appropriate technology, and to manage human capital to protect the taxpayer from exposure to significant financial losses.

The December 1st, 2008, article in BusinessWeek that the chairman mentioned quoted Inside Mortgage Finance, a research and newsletter firm, and an estimate they gave that over the next five years, new loans backed by FHA insurance will fail and perhaps cost the taxpayer as much as a hundred billion dollars. And as the chairman said, that's sort of what the driving force behind this hearing is, that report and others.

According to the article, former federal housing officials say FHA is ill equipped to deal with the onslaught of new lenders seeking to participate in the program. The HUD IG, Ken Donohue, mentioned in the article -- and he was quoted as saying that FHA faced, and I quote -- quote, "faces a tsunami" and -- in the form of subprime lenders that favor aggressive sales tactics and engage in fraud.

In that same article, Mr. Donohue noted that he is very concerned that fraudulent subprime lenders are reconstituting themselves and could potentially bring bad loans to the FHA portfolio. And that's what all of us want to avoid -- and get assurances that there are procedures in place to stop that.

The BusinessWeek article further states, and I quote, "FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as the tsunami has been building" that Donohue points out. "The FHA unit that approves new lenders, recertifies existing ones and oversees quality assurance has only five slots; two of those were vacant this fall, according to" the HUD's website.

And this -- I continue to quote here -- "Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable X subprime operations can reinvent themselves and gain approval."

And they close with another quote from the IG, saying, "They are absolutely understaffed and they need a much better IT system in place. That is one of their great vulnerabilities," end quote.

This hearing, I hope, will give FHA an opportunity to address the concerns raised in BusinessWeek and other articles and explain what steps the agency is taking to ensure that the program is being run in a safe and sound manner.

I hope today's hearing will help provide the committee with some answers on how we can ensure that the FHA continues to operate in a safe and sound manner and help worthy borrowers achieve home ownership.

Thank you.

REP. FRANK: Let me go to a couple of others on the other side. The gentleman from Delaware for two minutes.

REP. MICHAEL CASTLE (R-DE): Thank you very much, Mr. Chairman.

I share the concerns of both the opening statements by the chairman and the ranking member. I think we should be concerned. I have also read this BusinessWeek article and a few others and I would concur that there may be some laxity in the circumstance. I do not know, for example, Mr. Murray, if the FHA has sufficient employees to carry out its responsibilities. But my greatest concern is that there's no doubt that for the last half a dozen years, perhaps before this, we've had a group of individuals and not everybody, obviously, but a lot of individuals particularly in the subprime areas and the Alt A areas who had gotten involved in mortgage lending, who perhaps didn't have the background for that. Some got involved in it feloniously intentionally and if you read these stories and they may be highlights, but even if they're highlights, it's a problem, you have a lot of the same individuals being approved as approved under FHA. And I don't know what the vetting process is for the loan correspondence and firms that are granted the authority to act as direct loan endorsement agents. But my sense is that that is something that needs to be watched very carefully.

There's a huge shift right now as loans go to the FHA -- and I don't have a problem with that -- and our obligation, your obligation, in my judgment, is to protect the borrowers as best we can. And we're not doing that if, indeed, we have lenders out there who are able to violate the rules and we're condoning that if we approve some of these lenders, particularly those with rather questionable backgrounds from before and I just wonder if our enforcement mechanisms are sufficient.

Those are the kinds of answers that I'll be looking for today, how does the FHA involve itself in these situations? Are these companies all endorsed by the FHA? Are they able to advertise, if they have FHA backing, therefore, some sense of security to the borrowers out there that perhaps is unjustified?

These are issues, I think, that we need to make sure that we're looking into to protect consumers from fraudulent practices, so I look forward to the testimony, and, hopefully, we'll get answers that are satisfactory and start down a path of making sure that these problems are being addressed.

I yield back, Mr. Chairman.

REP. FRANK: The gentleman from Texas for three minutes -- the gentleman, Mr. Green.

REP. AL GREEN (D-TX): Thank you, Mr. Chairman. And I thank you for your comments on the trust and verify. I absolutely concur with you.

I would like to, if I may, repeat some of what has been said because there are times when things are so important that they bear repeating. It is important for us to note that FHA does not lend money directly. FHA is sort of like having your uncle co-sign for you and work with you to the extent that your uncle has co-signed a note. In this case, the uncle is Uncle Sam because FHA is a part of the federal government.

I think that it is exceedingly important that we make all efforts possible to assure people that those lenders who are now coming into FHA will not bring with them the same habits that they had when they were dealing with the subprime market, many of them doing business in less than an honorable fashion.

I do not want to paint everyone with the same brush. There were many persons who were honorable and who were doing credible business and doing an outstanding job, but we do know that we are in the circumstance that we're in because there were many who were not and because we had many who were not and because we have so many who are now moving into FHA, it's anticipated that -- well, actually, FHA has grown from 16,000 to 36,000 brokers according to this Business Week article; the number of approved lenders and brokers approved to participate in FHA grew from 16,000 in '07 to 36,000 today. That's a lot, and I think that it is appropriate for us to take all productive, constructive measures to make sure that we do not allow what has created a problem to continue to be a problem.

I thank you, Mr. Chairman, and I yield back the balance of my time.

REP. FRANK: The gentleman from Texas, Mr. Hensarling, for two minutes.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman. As we know, FHA is one of the few government agencies that is entirely fee- based and does not receive taxpayer subsidies. As we're looking at the single largest deficit in our nation's history since World War II, 7 (trillion) to $8 trillion of taxpayer exposure through sundry bailout plans and a promised stimulus plan that may top out at over $1 trillion, I, for one, want to ensure that FHA remains a fee-based institution.

With the onslaught of loan demand, though, I think it is entirely appropriate that we examine whether or not FHA has the budget, the resources, the expertise to handle the challenge. A significant part of the challenge will be presented by a multitude of fraudulent players who may try to qualify as FHA loan originators and borrowers. Now, we know that it wasn't just lax underwriting standards that brought us to where we find ourselves, but it was out and out fraud. According to FinCEN, mortgage fraud is up 1,400 percent in this decade alone, and for every predatory lender and there were many, there were also many predatory borrowers. And tragically, a lot of this fraud went undetected and, when detected, usually went unprosecuted.

It's also a reminder for those who advocate more regulation, it's not always a matter of simply more regulation. Quite often, the solution is enforcing the regulations that we already have on the books. As the ranking member indicated, FHA by some expert estimates may be looking at $100 billion of loss over the next five years. This simply cannot be allowed to happen.

As important as it is for this committee to examine loan originators, it is also even more important that we look at loan criteria. No greater correlation between default and the lack of significant down payment -- and I hope, Mr. Chairman, that this committee will look at increasing the downpayment requirement in lowering the conforming loan limits.

With that, I appreciate you holding this hearing. I yield back the balance of my time.

REP. FRANK: All the members who have requested time having spoken who are here, we will now turn to our witnesses.

We have and we appreciate his attending, Mr. Phillip Murray, who is the Deputy Assistant Secretary for Single Family Housing in HUD; and James Heist, who is the Assistant Inspector General for Audit, Office of the Inspector General of the Department of Housing and Urban Development.

Mr. Murray, we'll begin with you.

MR. MURRAY: Thank you and good morning.

Chairman Frank, ranking member Bachus and members of the committee, I appear before you today on behalf of the Federal Housing Administration. My name is Phillip Murray. I am the Deputy Assistant Secretary for Single Family Housing at FHA. I am responsible for managing all single family business for FHA and I have been with HUD for 29 years, with the past 17 at FHA.

Now, let me begin by saying that prior to my current position, I was the Director of the Office of Lender Activities and Program Compliance, responsible for administering various risk management activities of FHA-approved lenders, which included sanctioning lenders and other related partners who failed to comply with HUD and FHA requirements.

As HUD's former top cop, I personally take issue with recent press accounts suggesting that FHA is vulnerable to the same type of unsavory business practices as we've seen in the subprime market. These stories misrepresent a well respected federal program and has provided untold benefits to millions of Americans, as well as the efforts of hundreds of HUD employees who are administering it.

FHA-insured loans are neither high cost nor high risk to home buyers. Rather FHA is a vehicle for borrowers to access prime rate loans. FHA has never, never allowed the loose underwriting or expensive loan terms that were characteristic of subprime lending. FHA borrowers must provide evidence of income and employment to validate their capacity to make their mortgage payments and FHA products never carry teaser rates or pre-payment penalties.

Turning now to the specific topic of today's meeting. The department's efforts to protect FHA insurance funds and serve the public are best demonstrated by the thoroughness of its approval and monitoring standards. Lenders applying for participation in FHA insurance programs are subject to rigorous initial approval requirements. FHA scrutinizes lenders based on, one, the company's financial capacity and resources; two, the possession of appropriate state licensing; three, the eligibility of the company, its principles and officers to participate in government programs; and four, the company's quality control plans and compliance procedures.

Additionally, lenders must renew their approval annually to ensure ongoing adherence to FHA lender approval requirements. Lenders that fail to meet these renewal requirements are terminated and thus cannot originate FHA loans. Please note that despite the extensive pressures to do so, FHA has not and will not lessen its standards.

Newly approved lenders must meet eligibility requirements and programmatic requirements and are held to the same standards as existing lenders. FHA is constantly monitoring loan level compliance, lender performance and portfolio performance through a variety of risk management tools. In addition to the rigorous approval standards FHA imposes, the agency has nationwide quality assurance divisions that comprehensively monitors lenders' performance and compliance through remote and on site monitoring reviews, as well as through electronic surveillance.

Furthermore, FHA conducts an annual actuarial review. It also maintains credit subsidy models that annually review FHA's book of business for risk factors to identify any necessary forward adjustments. As a matter of fact, it was these procedures that identified the unacceptable and high default rates on loans closed with federal down payment funding.

FHA's last two audits have been clean with no material weaknesses identified, and FHA is no longer on GAO's Troubled Agency Watch List. FHA is proud of these accomplishments.

While I can assure you that FHA is fully committed to continuing aggressive oversight of its programs, I must restate, FHA's longstanding need for additional resources to further bolster the agency's monitoring and oversight capacities.

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A critical area is information technology. We need to replace the 35 legacy systems FHA uses in its operations. In spite of the fact that these systems are based on technology and computer programming languages that are decades old, FHA has made these systems work, but this cannot continue and the IT infrastructure at FHA needs to be replaced now.

Finally, I want to address a topic pertinent to today's discussion of FHA's continued strength and vitality, the proposed cram down bill. FHA and Ginnie Mae do not have the legal authority to reimburse services for the cram down amounts not received from borrowers, but paid through to investors. This could create a powerful disincentive from doing business with FHA and Ginnie Mae while costing taxpayers additional dollars. FHA urges careful consideration as Congress contemplates this matter so we can continue to help more Americans realize the benefits of prime rate FHA insured mortgages.

Again, I want to thank you for the opportunity to explain FHA's comprehensive lender oversight and monitoring efforts. I'd be happy to answer any questions.

Thank you.

REP. MAXINE WATERS (D-CA): Thank you. Mr. James, is that Heest or Heist.

MR. HEIST: Heist.

REP. WATERS: Heist.

MR. HEIST: Chairman Frank, ranking member Bachus and members of the committee, thank you for inviting me to testify today.

I very much appreciate the opportunity to testify on behalf of the inspector general on the important issue of FHA oversight of loan originators.

Over the years, we have had concerns with FHA's systems and infrastructure to adequately perform its current requirements and services, which was expressed by the OIG prior to the current influx of loans. We continue to remain keenly interested in FHA's ability and capacity to oversee the newly generated business.

The past year-and-a-half has certainly produced a lot of turbulence. With the collapse of the subprime market, FHA has seen a dramatic increase in new business. In September 2007, HUD began to provide assistance through the FHA secure program to refinance existing subprime mortgages. The Housing and Economic Recovery Act passed last summer created a new hope for homeowners program to enable FHA to refinance the mortgages of at-risk borrowers. It also authorized changes to the FHA's reverse mortgage program that will enable more seniors to tap into their homes' equities.

The volume of single-family loans, FHA loans, has tripled from 59 billion (dollars) in fiscal 2007 to over 180 billion (dollars) in fiscal 2008. Market comparisons show that FHA's share of insured mortgage endorsements have increased from 21 (percent) to 76 percent, and this is based on the latest monthly data available compared to last year and that includes all endorsements, including refinancing.

We continue to believe there is a critical need for more resources at FHA, one, to enhance its IT systems; two, to increase its personnel to deal with the volume; three, to maintain a workforce with the necessary skills; four, to oversee numerous contractors; and five, to increase oversight in all critical front end processes including appraisals and underwriting.

We are gratified that a new penalty provision was inserted into the Housing and Economic Recovery Act. The statute now creates an increased criminal penalty for committing fraud against FHA programs and will be a useful tool for prosecutors.

The results of the latest actuarial study show that HUD has sustained significant losses in the single-family program. As of September 30th, 2008, the fund's economic value was an estimated $12.9 billion, an almost 40-percent drop from over 21 billion (dollars) in 2007.

The current value represents 3 percent of the mortgages insured by FHA. Although above the 2 percent ratio required by law, it is well below the 6.4 percent ratio from the prior year. If more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years, requiring an increase in premiums or appropriations to make up the shortfall.

Among our many audits, we have found that FHA needs to improve its internal control structure by formalizing risk assessments of its programming and administrative functions. In another area, our audit of the FHA appraiser roster identified weaknesses in the quality control and monitoring of their roster. Results from a number of other audits of FHA lenders have noticed significant underwriting deficiencies, inadequate quality controls and other operational irregularities.

We have also recently initiated an inspection of the mortgage review board enforcement actions and its efficiency, effectiveness and impact in resolving cases of serious non-compliance with FHA regulations.

We note that FHA's lender approval process is largely manual. FHA will be challenged within current resource constraints to keep up with the increasing volume of entities doing FHA business. We believe that the oversight of these lenders could be improved with modern loan pre-screening systems.

The tightening credit market has increased FHA's position as a loan insurer, and with that, is coming an increase in lenders and brokers seeking to do business with FHA and a concern with some of those loan originators. For example, we are currently investigating several FHA lenders who are also lenders in the subprime market. The movement toward FHA is already underway and is reflected in recent statistics.

FHA lender approvals increased fivefold in a two-year period. The previous investigation of all FHA lenders -- of an FHA lender in New York, led to the debarment of its owner for a period of five years. After the debarment was served, the lender resumed operations using the same fraudulent practices.

Another area of concern is the growing reverse mortgage program. The larger loan limits can be attractive to exploiters of the elderly whether by third parties or even family members who seek to strip equity from seniors. The Office of Inspector General stands ready to assist in whatever way is deemed necessary and will be vigilant in its efforts to protect the funds of the American taxpayer.

We thank you for the opportunity to relay our views and greatly appreciate the activities of the Congress to protect FHA's funds from predatory and improper practices and to ensure effective oversight of the lender community at this critical time.

REP. FRANK: Thank you. Mr. Heist, let me ask you on one last point you made. We have found -- I mean, a very enthusiastic response with regard to the home equity mortgages. That's been -- when done right, that's been very helpful. The AARP, for instance, has been very enthusiastic. The problem we have found is one you touched on, namely, there have not been any significant set of problems in the execution of the program itself, but once an individual gets the proceeds from that, in some cases, all the people who are not as sophisticated and may not be at the top of their game, have been vulnerable to bad advice about what to do with the money.

Now, one of the reforms that we put into the bill that became law was to say that you cannot be the same entity promoting that and then investing the funds for people, and we think that's helpful. But you very carefully referred to abuse by third parties or family members.

I would urge you if you have ideas about how we can further protect the recipients from abuse to share them with us because we think this is an important program and we're -- within an hour or later as we go forward, if there are further safeguards that we could put in there to prevent victimization of the people who got that money, please work with us. Yes sir.

MR. HEIST: We'll be happy to do that, and while I'm not at liberty to talk about ongoing investigations, our investigators are seeing schemes where the elderly are being steered into annuity products, for example, with unreasonable terms and --

REP. FRANK: Now these are being steered by -- is there collusion between -- and I don't want to impinge on the investigation -- between the entities that are selling these and then the entities that are doing the annuities?

MR. HEIST: We've seen where they've had identity of interest.

REP. FRANK: All right. Let's do this -- and I don't want in any way to interfere with your ability to break that up. Please work with our staffs, and I think this is a clearly bipartisan interest we have, in whatever recommendations you want to make to minimize that because I don't want to see a program that could be beneficial and has been beneficial dealt with that way.

MR. HEIST: The other thing we're doing is partnering with organizations such as AARP to get the word out regarding education and fraud awareness.

REP. FRANK: All right. Well, you know, one of the things we can do with that is to say that, for instance, we can make sure if these are done through the FHA, that the FHA takes on a major role in warning people against this. So we -- you know, we did take the one step of saying -- I think Senator McCaskill has been very interested in that -- I would tell my colleagues and others, we have taken one step, but we're ready to do more to fix this program.

Mr. Murray -- and I apologize because I had to go out and deal with another matter -- but we've heard some of the criticisms. Have you specific responses to some of them? I guess the question is, you know, are there inaccuracies or are these things that can be cured going forward? And in particular, are you staffed adequately and do you have sufficient authority to find people who ought to be rejected from participation and reject them?

MR. MURRAY: Well, first, I rather appreciate having the article because it caused us to be here to discuss this. Let me assure you, first of all, the sky is not falling.

REP. FRANK: You're a very tolerant man, Mr. Murray.

MR. MURRAY: Yes sir. (Chuckles.) Well, the sky is not falling, but yes, we have real needs to upgrade our technology. We have absolute needs to hire more staff. Although we hired 142 people last year, but with retirement and moving elsewhere, we only netted 60 individuals and we are in dire need for additional contracting money so we can procure some more fraud detection tools, more people to work on our front end detections.

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And --

REP. FRANK: And I assume if we are successful in fixing hope for homeowners -- which we passed in the form in which the intentions outpaced the capacity to deliver -- if we're able to fix that and send you even more business, then these needs would be, obviously, exacerbated.

MR. MURRAY: Yes, sir. But in terms of the story, although it may, in most places, appear to be factual, what we did we allowed Business Week to have access to our public sites, on our neighborhood watch system where you or any other citizen can look at the performance of any lenders. They chose a few lenders and decided to explore them further.

The problem that I think that we have with this that -- that may misrepresent is that they look at these individuals and their performance in the subprime market and then the next is thing is they refer it to FHA. These two do not --

REP. FRANK: In other words, you're suggesting that some of the abuses that they alluded to were in non-FHA products? Is that --

MR. MURRAY: Absolutely, sir.

REP. FRANK: All right.

MR. MURRARY: And what the article also failed to say in its five -- of these five lenders without talking about any specifics -- two of the lenders, one only made one loan, the other made 63 loans, which is a very minimal loan for any of our lenders. The other three, they were already on our radar screen. There have been actions taken by either my compliance enforcement people and/or the IG. And we've made referrals. So --

REP. FRANK: Actually, I think it would be interesting -- I don't see any reason why you could not send us a document that would identify those individuals. If there is a confidentiality problem with one or two, you can cover that up. But I'd like that.

Well, thank you. My time has expired and I appreciate that. And I, obviously, will encourage -- I don't' know, do you stay on or do you leave in a week? Or what's happening?

MR. MURRAY: No, sir, I'm a career person.

REP. FRANK: You're career?

MR. MURRAY: Yes, sir.

REP. FRANK: Good. Then what we would like is -- so we don't have to change it -- make sure and tell them that we are specifically requesting -- I know there are problems with OMB -- please let them know that the committee of jurisdiction will be specifically requesting what you think you need to staff up, both in terms of technology and individuals to deal with this because we want to make you more of a player than you are.

So we need to know what we need to put into your hands in terms of resources so you can do that job.

MR. MURRAY: We stand poised and ready to serve.

REP. FRANK: And that's a direct request from us. The gentleman from Alabama.

REP. BACHUS: Thank you.

Mr. Murray, Mr. Heist in his written testimony talked about your process for selecting lenders or monitoring their quality of their loans is a post endorsement process, it's not a pre-screening process? Is that correct? And does that bother you?

MR. MURRAY: We -- there's an approval process with new lenders coming in and that's one separate stat. Once they're in, lenders, full eagle lenders submit loans to us. During that process, there are front end analyses of that process.

REP. BACHUS: But that's just random and not all of them are -- ?

(Cross talk.)

MR. MURRAY: It is random. There's algorithms done, a significantly statistical sampling of our loans done through an algorithm. And so, currently, we do a random sampling of 5 percent.

REP. BACHUS: Mr. Heist, what is a -- what would you -- you're recommending actually a pre-screening -- just a program that large lenders use? Would that be --

MR. HEIST: One of the concerns we have about review and the post-screening --

REP. BACHUS: And pull the mike a little closer.

MR. HEIST: -- I'm sorry, I forgot to push the button. One of the concerns we have with the monitoring that's done it oftentimes can take a period of time for the default statistics to show up to provide for some intervention. FHA has done a lot to enhance its early warning and targeting; in fact, we work with FHA when we target lenders for our audit work.

With advances in technologies, there's opportunities to do more on a pre-screening basis where you can actually -- and actually insist on the lenders doing more pre-screening to identify red flags if you will, anomalies in appraisal information, whether the individual owns multiple properties and is disguising himself as an owner/occupant, those sorts of things.

REP. BACHUS: All right.

MR. HEIST: But FHA needs the resources to be able to do those sorts of things.

REP. BACHUS: All right. So you just don't have the resources? Is that what -- or have you thought about doing that?

MR. MURRAY: Actually, we agree with the IG, but for funding resources we would have that. But bear in mind, we have many, many tools. There's not true panacea for anything. So when the new lenders come in, we do test cases. We run them through test cases. They actually have to pass a test.

REP. BACHUS: But once the loans are made, I mean, you're reviewing only about one out of 20, is that right?

MR. MURRAY: That --n I think that refers to our post-tech endorsement on the front end. Once they come through the door, we do a thorough analysis on 5 percent of the cases based on the properties and the underwriting criteria.

REP. BACHUS: For every loan?

MR. MURRAY: Five percent of all the loans coming through the --

REP. BACHUS: Five percent.

MR. MURRAY: Five percent. Yes. Our office of evaluation tells us that it's an adequate statistical sampling to do that with. However, we would be more than happy to do a larger amount, but again, it all comes back to staffing and funding.

REP. BACHUS: Yeah. If you pre-screen, if you require a pre- screening, that would obviously cut down on your losses, would it not?

MR. MURRAY: All of our tools help us in assisting, so as you go along the way with their checkpoint that we stop. When you're first approved, we make certain that you actually know how to do FHA business through test cases. If you don't pass our test cases, you don't get approved further to do work. Once that happens, once the loans are made, we have a variety of tools to monitor to --

REP. BACHUS: But that's all manual and it's random, right?

MR. MURRAY: Okay. I'm understanding -- the -- what you're talking about is the very front end when they first commence the loans in; it's a manual screening as well as an electronic screening. Seventy percent of our loans are done through lender insurance, which is a electronic self-assuring process. The other 30 percent is manual, and I can say despite a lot of objections with us introducing lender insurance some years ago, I can tell you today the reason why we're still standing and are able to handle this workload is because we went through lender insurance where 70 percent of our loans are being done.

(Cross talk.)

REP. BACHUS: Let me ask you real quickly. You mentioned that this new legislation on bankruptcy cram down could present some unique problems for FHA and VA. Would you just give me what you see as those problems?

You mentioned that --

MR. MURRAY: Yes, yes, yes, I did.

Well, my job was just to sort of just make you aware of that. But I'll give you one example. We pay partial claims. And if -- and if every borrower who we have, in partial claims, decided to file bankruptcy, that would cost us $640 million of lost revenue. That's just one example.

REP. BACHUS: So there would be significant losses, if you weren't carved out of that.

MR. MURRAY: Yes, sir, because we don't have the authority, to do that, nor do we have the funding to pay for it.

REP. BACHUS: Okay.

MR. MURRAY: Because the investors -- (inaudible).

REP. BACHUS: Right.

REP. FRANK: Well, I mean, we do the authority; the appropriators do the funding. Don't hesitate to ask us regarding both.

The gentlewoman from California, the chair of the subcommittee.

REPRESENTATIVE MAXINE WATERS (D-CA): Thank you very much, Mr. Chairman.

(Cross talk.)

REP. FRANK: The once and future chair of the subcommittee on Housing.

REP. WATERS: Mr. Chairman, I thank you for holding this hearing. This is very important. We all have worked very hard to strengthen FHA and to make sure that it was equipped to be back in business doing what it was intended to do when it was originated here in the Congress of the United States. And it looks as if it's doing pretty well.

It appears that FHA is now in business. We recognize that FHA was practically killed off by the subprime market that was offering all kinds of exotic loans, which basically made FHA irrelevant. But now we're moving in another direction. But Mr. Chairman and members, I want you to hear this and hear it well. We don't intend for FHA to do business with some of the bad subprime lenders that got us in trouble in the first place.

Now, there's a scathing article in BusinessWeek, about the fact that FHA is allowing some of the worst actors and perpetrators of fraud to come in and be FHA-approved and putting and them back out in the market again. We have a lot of work to do here, with regulatory agencies, to clean up the mess that has created this economic crisis that we're in.

Can you tell me why you cannot vet and determine the bad subprime actors, some of whom have been indicted, some of whom have gone to prison, some of whom have just changed the name on the door? They're still the same, the players. Why can't you know the difference, between legitimate lenders and these mortgage companies that we're reading about?

Mr. Murray?

MR. MURRAY: Yes. That's a very good question. And we do. We do a thorough vetting process to approve lenders. The article is sort of misleading because in it -- it -- it's guilt by association: because your father did this, your brother did this, your sister did this, you're therefore somehow guilty.

Unless -- any lender who comes in for approval, they are allowed -- afforded due process. We take actions against lenders through the Administrative Procedures Act. We are very diligent in pursuing individuals.

You may not have been in but I -- in my opening remarks, when I was saying that prior to this job I was housing's top cop. And I think in the 75 years of FHA, this is probably the first time that you've ever had an enforcement-compliance person running the show. So let me assure you that we are very, very aggressive in going after individuals, and very diligent at doing this.

Now, do we need additional authorities? Absolutely. Do we need additional resources to help us get to where we need to be? Absolutely. I do believe in the new loan officer registry program, that will even help us even further for local authorities who sanction individuals who can then feed back to us the actions that they're taking in a more -- quicker way.

REP. WATERS: If I may -- if I may just take back my time for a moment?

MR. MURRAY: Yes.

REP. WATERS: Are you familiar with Premier and Paramount Mortgage Companies?

MR. MURRAY: Yes, ma'am.

REP. WATERS: All right. Are you telling me that Premier and Paramount, given their background of subprime lending and problems -- that you deem them to be all right to be approved by FHA to do business with?

MR. MURRAY: As I recall, with those lenders we have -- we have no evidence that they've been convicted or indicted of some wrongdoing. We have many lenders who engage in subprime and are perfectly -- and even their own subprime business may be fine --

REP. WATERS: What about Lend America, in Melville?

MR. MURRAY: Lend --

REP. WATERS: Mr. Ashley, who pleaded guilty in 1996 in federal court, two counts of wire fraud, on and on and on; then opened Liberty Market?

MR. MURRAY: Mm-hmm.

REP. WATERS: Was on five years probation; $30,000 fine; father spent four years in prison -- is it okay to do business with them?

MR. MURRAY: According to our attorneys, there's a -- what would the term be? -- there's a period of time -- I guess the question would be when was -- when did this happen? What was the offense? Is there a nexus to the business?

For example, I'll give you a case that I recall. We had a lender who was convicted 30 years ago when he was in college, and we found that the conviction was that while he was in college he got in trouble with drugs. That did not have a nexus 30 years forward to his FHA --

REP. WATERS: Excuse me, if I may. Obviously, we're not talking about those kinds of cases. What we're talking about is this. Based on what I'm reading, I see the bad actors moving over to FHA, because the money has dried up and they can get these guarantees. We're going to have a large amount of defaults, and we're going to have to pay.

Now, we really want -- I would like to hear from FHA how you're going to stop this. If you need some help from Congress, you need to come and ask us what -- and tell us what you think we can do to help us to make sure that we don't -- you have one company that's doing Alt-A loans. Why would you authorize the FHA backing for a company that's doing Alt-A, when Alt-A loans are at the epicenter of the crisis on these subprime loans?

MR. MURRAY: I don't have a legal basis for stopping someone who's doing some other business with FHA. The practices that they may or may not be doing has no bearing on what the FHA -- on FHA's business, because we don't allow that. They cannot put that square peg into our round hole. It does not happen. I mean, we have many of our best, top, most respected lenders who also do subprime lending. That doesn't necessarily mean --

REP. WATERS: Well, you know, the argument has been made here there is some good subprime lending and bad subprime lending. Obviously, I'm talking about the subprime lending that created the subprime meltdown in this country and the economic crisis that resulted from that.

We really do believe that -- I believe that FHA does not have to deal with people who have a record and a history of fraud and creating problems. What are you going to do about it?

MR. MURRAY: I agree with you full-heartedly and I share your concerns with that. As a matter of fact, we are in the throes of proposing new rules to help us deny these --

REP. FRANK: Mr. Murray, we're over time. These are very important questions, obviously central. We will ask you to respond in writing to the questions of the gentlewoman and we may be back to you on that.

The gentleman from Delaware.

REP. MICHAEL CASTLE (D-DE): Thank you, Mr. Chairman.

Mr. Heist, I don't know if you can answer this question or not, but Mr. Murray indicated that there's a thorough vetting process to approve lenders. That may or may not be true. My question is, is this vetting process a complete enough process? Should we be doing something more?

I think everybody up here is vitally concerned about rather questionable lenders. We're hoping that FHA can stop the bleeding of subprime lending, et cetera. And the reports that I've read and seen indicate to me that the failure prediction under FHA loans is pretty high as well. And I'm very concerned about these lenders, a lot of whom, by their previous practices, are pretty marginal.

So do we have the right vetting processes in place? I'm not sure if that falls in your role as inspector general or not, but --

MR. HEIST: Well, and I can't comment fully on the vetting process, except to say that regardless of whether FHA is constrained on its ability to keep people out, we advocate that they -- and we've talked about that in answer to other questions, that they take advantage of technologies --

REP. CASTLE: I know. I know.

MR. HEIST: -- that are available, to be able to pre-screen the loans on a more comprehensive basis, through advances in technology to overcome the --

REP. CASTLE: Oh, but my question really -- my question pertains to the -- to the who's being approved as a lender, who's being approved as somebody they're dealing with, not to the actual people borrowing in this circumstance. But maybe you aren't qualified to answer that, I don't know.

MR. HEIST: Yeah. I mean, there are limitations.

We have an investigative case, for example, where at the time, the case didn't meet the dollar thresholds to prosecute criminally, but nevertheless we pursued a debarment case against the individual. The debarment was for a period of five years. Five years ran, and the person was back in business doing the same thing.

You know, we took the steps to have -- working with the Justice Department, to file an injunction to prevent that individual.

I mean, there are limitations to the vetting process. You've got an example. Somebody was barred. The individual served their time. And FHA has to let them back into the program. But there are things that they can do to increase --

REP. CASTLE: Let me jump to Mr. Murray.

Do you think that we should enhance or update or make stronger the vetting process? Or do you feel the vetting process is presently successful?

MR. MURRAY: Oh, no, sir, I don't.

I fully agree. We need additional tools to help us to further not allow folks in. There are many individuals I will take a look at.

REP. CASTLE: When you say you need additional tools, I understand the technology and those kinds of things. But do the additional tools -- is this something we should be doing, as a Congress, or something the FHA could be doing, or --

MR. MURRAY: That is something that we ourselves can do, by -- through additional rulemaking, because as time goes on, different practices, people get engaged into different schemes and the like. We need to constantly reinvent ourselves and to move forward.

There are many folks that I see as --

REP. CASTLE: Well, why aren't you doing this now? I mean, I say this, because we're going from the subprime problem and continuing problems with loans, in this country, to an FHA shift, huge numbers, which you've indicated here today.

So if we do need to enhance the vetting process or the lending process, for insurance purposes, you know, why don't we?

MR. MURRAY: Yeah. No. We are.

Currently we have a committee, in FHA Single Family, across the board, putting together new rules and procedures to address this subprime issue, to address the new frauds and the things that we see coming down the road.

REP. CASTLE: Right, okay. Let me ask you another question.

What is the FHA doing to review and update its net worth requirements for FHA originators? Is that part of this?

MR. MURRAY: Yes.

REP. CASTLE: Part of is that the lenders should be able to cover potential losses, whatever it may be. And if their net worth is not higher, that's an issue.

MR. MURRAY: Well, to cover loss is not the purpose of the net worth. But to answer your question, that is one of the issues we have on the table. We have a litany of things that we are putting together, drafting, and we're going to propose for rulemaking.

REP. CASTLE: Can you give me a rough time estimate as to when, you think, this work will be completed, in terms of the things we've talked about?

MR. MURRAY: Well, we're wasting -- candidly we can't do anything until the next administration comes onboard. And that is my intent. The first thing, when we're asked what we're working on, is to present all these rules that we have.

And --

REP. CASTLE: Do you -- are you thinking spring, or early summer, or --

MR. MURRAY: I'm hopeful in the spring that I'll have the chance to present it, once we get an okay to do it. Rulemaking normally takes 18 months, and that's outside of our control. But that's what it normally takes. But to the extent that we can do things through mortgagee letter, I fully expect us to do it that way.

Believe me, as a compliance person, I am very aggressive in handling any potential fraud and people who are hell-bent on doing mischief. That is something that I simply do not tolerate.

REP. CASTLE: Thank you, Mr. Murray.

I yield back, Mr. Chairman.

REP. FRANK: Since we're not in regular order, I'm going to use some discretion here.

The gentlewoman from California, Ms. Speier, who's been a very diligent member of the committee and spends long hours down at the bottom -- although the good news for her is that she's now gained several members to whom she is senior on this committee -- but she had a question that was directly relevant, as a follow-up to the -- her colleague from California's. So in the absence of what I'm sure will not be strenuous objection, I'll call on the gentlewoman from California.

REP. JACKIE SPEIER (D-CA): Thank you, Mr. Chairman.

Mr. Murray, you just said that you are very keen on compliance. And the gentlewoman from California went through a list of problem lenders, and you suggested that they were lenders who had very few loans, or lenders who had violations that were not -- that did not have a nexus.

Have you had an opportunity to read the inspector general's presentation to the committee?

MR. MURRAY: Yes.

REP. SPEIER: All right. So you're aware, then, of his reference to problem lenders. As he highlighted in their audit, this -- he references a lender who had a number of serious issues related to RESPA violations, such as paying marketing fees, non-competition fees, and quality incentives to real estate companies in exchange for more than $57 million in FHA mortgage business. The corporation's license was suspended by the state of Arizona, and it filed for bankruptcy.

One of the principal owners and principal managers reconstituted under a different name, but operates from the same location. In 2008, HUD approved the new entity to originate and process FHA loans despite its principal's prior convictions for RESPA violations. How do you respond to that?

MR. MURRAY: Yes. I am glad you mentioned that, because that's an issue that is very near and dear to my heart.

The issue here is, the problems are with the lending entity. The individual was not (a subject of that ?). If that individual had been debarred, indicted, convicted, fine. I would have some legal authority to -- not to let them in. Absent that, I have no authority to stop them from coming in.

Now, having said that, that is part of one of the new rules that we're putting together. We're putting together, to allow us to say, if you were a principal of a company, we get a chance to ask you, what was your role? And we can then decide whether or not we'll allow you to come into FHA.

I have -- even without the authority, I have attempted to do that, but, you know, through our own attorneys, they cautioned me that legally I cannot do that.

REP. SPEIER: Are you saying that you have no discretion to determine whether or not to allow someone to be a lender?

MR. MURRAY: I have no discretion to say. because you were a part of this company, and this company did bad acts, that I can infer those bad acts to you and not allow you to come in.

REP. SPEIER: This is a principal of that company.

MR. MURRAY: Yes, ma'am.

REP. FRANK: Would the gentlewoman yield?

REP. SPEIER: I do.

REP. FRANK: And I appreciate it, Mr. Murray, and I thank you. This has been very useful. You say it takes 18 months to do this by rule.

MR. MURRAY: For rulemaking, yes.

REP. FRANK: But if we were to do it by statute, specifically to give you that authority would take a lot less time, wouldn't it?

MR. MURRAY: Yes -- yes, sir.

REP. FRANK: All right. I'm sure the gentlewoman -- my two colleagues from California will want to work on that. Thank you.

MR. MURRAY: I'm glad to work with you.

REP. FRANK: The gentleman from -- well, they gave me the list and I've lost the list. Where's the list? Oh, the gentleman from Texas, Mr. Hensarling.

REP. JEB HENSARLING (R-TX): Thank you, Mr. Chairman.

Gentlemen, back in April of last year, when this committee marked up the FHA modernization bill, I offered an amendment that was accepted by the chairman -- doesn't happen often around here, but it happened on that particular day -- that required borrowers to agree in writing to be liable to repay the FHA any direct financial benefit achieved from the reduction of indebtedness on the existing mortgage that was derived from any purposeful misrepresentation that was made in their certifications and documentation.

I'd offered another amendment, which was not accepted, that required that the mortgagor would actually provide documentation to the originator of the mortgage that certified that the data was complete and accurate, including statements regarding income, assets, debt, occupancy, matters of identification.

The chair didn't accept that. There was a legitimate debate on discussion, and I think the chair concluded he thought that was too onerous. I didn't conclude that; he did. His opinion was relevant.

But as most of the questioning from the panel has centered upon fraud on the lender part, I want to focus somewhat on potential fraud on the part of the borrower. The first question I would have with respect to the language that was included in the statute, how is it being implemented? How are applicants being notified of the process? Is there a form that they now sign acknowledging that they will be liable for the indebtedness for purposeful misrepresentations?

Mr. Murray, what can you tell me about the matter?

MR. MURRAY: (Conferring off mike.) I'm sorry, are you referring to HOPE for Homeowners?

REP. HENSARLING: Yes.

MR. MURRAY: (Conferring off mike.) Yes. We've proposed we have the borrowers sign a certification and to provide counseling to them that they are signing the certification, that they will be liable for any fraudulent statements that they -- (inaudible).

REP. HENSARLING: I'm sorry, I didn't hear the first part of the statement. This is currently being done? I know the program has had scant demand, but --

MR. MURRAY: Yes. The H for H committee, they have developed a form for the express purpose of notifying a borrower that they will be held liable for any fraudulent statements that they make.

REP. HENSARLING: Okay. But I'm still unclear. Is it currently in use; is it not currently in use?

MR. MURRAY: Yes, it is.

REP. HENSARLING: Okay, thank you. Thank you.

MR. FRANK: It's called the Hensarling oath.

REP. HENSARLING: (Chuckles.) I like the name, Mr. Chairman.

Can you enlighten me, Mr. Murray, then, just on the general vetting process? We've talked about the vetting process for the borrowers. I'd like to be enlightened more on the details of the vetting process for borrowers.

MR. MURRAY: Borrowers?

REP. HENSARLING: Borrowers. Again, according to FinCEN, we had a majority of the mortgage fraud over the last decade that arose from borrowers misrepresenting their income, misrepresenting their assets, misrepresenting their occupancy. So again, there was much predatory lending that took place in the market. I would also offer the opinion there was much predatory borrowing. According to the inspector general's observations already the single-family program has sustained significant losses. We've got a 40 percent drop in value. So I'm concerned about, again, as I mentioned in my opening statement, about sustaining the fee-based program that we have here. And I'm concerned about what is the vetting process that is being used on the borrower's side, not just the lender's side, to protect the taxpayer.

MR. MURRAY: Okay, thank you. We have a -- we've introduced a Social Security check that ourselves and the lenders can use to go in to ensure that the person who is representing themselves is not dead or that they are truly in fact they themselves who are there.

We validate their employment and we also validate and verify their income. And we also do a federal check.

REP. HENSARLING: Now, how does the -- how are you validating and how are you verifying? Can you get more specific?

MR. MURRAY: Yeah. That's part of the loan underwriting process, where you actually go out, using the --

REP. HENSARLING: Clearly it hasn't been done well in the past. So I'm somewhat concerned to how you're using this now.

MR. MURRAY: I have no indication that has not been done well in the past.

I think it's important to say that the little snippets of the examples, of wrongdoing and fraud by everyone, and I as an enforcement person, I can tell you many, many stories. But when you get down to it, it's less than 2 percent of people who tend to do wrong things.

The FHA is no different. It's a microcosm of society as a whole. There will always be someone there trying to circumvent the system. But having said that, we are very diligent in making certain we go after those folks, try to stop them in any way, fashion or form that we can do that.

But historically we've always done verification of a borrower's income, identified who they are, make sure that they don't own other federal debt and verified that they are in fact employed. That's totally unlike in the subprime.

REP. HENSARLING: I see my time has expired. Thank you.

REP. FRANK: Thank you.

The gentleman from New York.

REPRESENTATIVE GREGORY MEEKS (D-NY): Thank you, Mr. Chair.

Mr. Murray, let me ask you this. One of the big problems I've had, with a number of the mortgage brokers, is that they're able to charge what, I think, is basically almost a kickback. And I know they do this on FHA loan originations also; yield spread premiums.

And these yield spread premiums seems to be -- it gives the lenders an advantage for steering borrowers into higher mortgages than what they actually qualify for. And this has a devastating effect, on poor people and folks who are just aspiring for a better life, having to pay these yield spread premiums.

So I'd like to know whether or not the FHA, you believe, the FHA loans, which are supposed to be low-cost as it is, should ban the use of yield spread premiums.

MR. MURRAY: Good question, and I share your concern. FHA has absolutely no authority over the use of spread premiums.

(Cross talk.)

If the House would like to provide us with that, I'd certainly find it useful.

REP. MEEKS: So you're saying that if we do something statutorily, with reference to that, that would be something that you would see helpful.

MR. MURRAY: Yes.

REP. MEEKS: I agree. Would you work with us on developing that legislation?

MR. MURRAY: I would gladly work with -- work with you on any and every possible thing that we can do to safeguard the federal funds and the American public.

REP. MEEKS: And we'll be in touch with you to make sure that we work on that.

MR. MURRAY: Thank you.

REP. MEEKS: Let me also ask -- let me stay with you on this, then. Maybe you can help me with something else, because I'm having this huge difficulty in my district also in regards to foreclosures. And I have found that when I was able -- I've got people coming into my office every day, counselors and lawyers trying to help the number of individuals who are going into foreclosures. And when we are able to get to the banks, et cetera, you know, we've been able to help some people stay in their homes.

But when I look at the voluntary program, those -- all that's facing -- like, it should be good, when I look at the HOPE program, the HOPE for Homeowners, it doesn't seem to be as successful. And I was wondering if you could give us any insight as to why -- for example, you know, it looks -- I think the statistics are 2.2 million subprime foreclosures through the end of next year. And we've got to stop this hemorrhaging -- whether or not you can give us insight why HOPE is not working or how HOPE can improve? Because it seems like these voluntary programs are not doing what they're supposed to be doing.

MR. MURRAY: We have been concerned with that, is that the eligibility criteria is -- candidly, is a little too restrictive. Now, recently there have been some changes to make it a little bit more workable, and we are now seeing more loans being done. I think we are now at 380-something applications have been filed. And there's actually 15 loans that have gone to closing.

And so hopefully, some of the relief that we've given -- but candidly, we would love to see further relief and some refinements to that program.

REP. MEEKS: Well, can -- we agree that something needs to be done. And I think that's something, again, that we need to work on very closely because, you know, every day somebody is being put on the street.

MR. MURRAY: Yes, sir.

REP. MEEKS: And until we get to the bottom of stopping this problem, we're going to continually have the economic problems, the problems of the value of homes continue to depreciate as people leave out.

Neighborhoods are being destroyed because you have homes that are being boarded up. And we're feeling -- or I'm starting to feel that maybe just the voluntary participation in the program is not working. We've got to do something more than that.

REP. FRANK: Would the gentleman yield? Let me -- in fairness to the people -- (inaudible) -- part of the problem is we drafted it -- HOPE for Homeowners, which we wrote -- we did it at a time when there was a lot of concern that we were being too lavish, too openhanded. And to respond to that, we toughened it up some. We may have toughened it up beyond what current circumstances require.

We have requested, in consultation with HUD and others, changes in the plan to meet some of those problems, and we're hoping it'll be in either the stimulus or maybe the TARP bill. So part of that has been our fault, and we've been working. Some changes have been made administratively, but we acknowledge that we were tougher than was workable, and we're trying to, without being excessive, open it up some.

REP. MEEKS: And my last question is to Mr. Heist. And again, I'm trying to work my way through this, because we're trying to make the market move again. And it seems as though now that the only one that can buy a house or get involved in a house -- because I still believe that the best investment that one can make is in real estate or into owning their own home, if they can afford it. But now you've got to have 750 or better scores in order to get a house, which then keeps the market stagnant, and we can't get out of these crises.

And I was just wondering, you know, just trying to figure out, you know, with your FICO scores of 750 or better being the only way that you can get a mortgage nowadays, liquidity thereby shutting down, people who have decent credit can't get a house, what -- do you have any ideas or solutions? How can -- I'd like to hear your thoughts on how we can deal with this dilemma that keeps spiraling -- you know, it seems like we can't get out of this circle.

MR. HEIST: As someone who's responsible for auditing these programs, I can only deal with the requirements that are in place right now. The reality is, as you've suggested, it is a dilemma. And there is a correlation between credit scores and the likelihood of that loan's default.

That's a reality that FHA has to deal with and factor in when it makes its rules and sets standards for lenders when they underwrite loans.

REP. FRANK: I yield -- do you (have any last comments ?). I took some of the gentleman's time.

REP. MEEKS: I'll yield back.

REP. FRANK: All right, thank you.

The gentleman from Florida, Mr. Posey.

REP. BILL POSEY (R-FL): I thank you very much, Mr. Chairman.

Gentlemen, in last year's Housing and Economic Recovery Act, a provision was inserted to prevent the FHA from implementing a risk- based premium-pricing structure for the riskier loans.

Under the proposed initiative, in exchange for a significantly lower interest rate, those with higher risk of default would have paid a slightly higher insurance premium. We've seen a significant expansion of the FHA loans over the past year. We've seen the balance in the insurance fund drop by 50 percent, approximately. We've seen FHA take on riskier loans. And we've seen the Congress pass a law that prevents the FHA from managing risk.

It looks to me like the Congress may have put in place policies that increase the risk of FHA going into default, (like as ?) did the conventional market. Do you think that by eliminating the ability of FHA to adjust for risk in this manner, the fund is less solvent and thus the taxpayers put in a potentially greater risk?

And I'd like a response from both of you. Yes or no would be perfect.

MR. MURRAY: We don't believe the FHA has riskier loans -- (audio break).

REP. POSEY: Is that a yes or a no -- Mr. Chairman, I'm sorry.

REP. FRANK: Well, that's all right. I was just saying that was a Senate provision, so don't feel inhibited in answering fully. (Laughter.)

REP. : Yeah, we actually -- we passed a bill, and it was bipartisan agreement in the House, to put risk-based pricing in. It did move to the Senate, and a member there added that amendment -- I mean, the amendment prohibiting risk-based premiums.

MR. : I think my only observation at the time was that implementing a risk-based pricing -- and the ability of FHA, again, to deal with the increased complexities and the resources and the systems to be able to do it effectively -- as far as the concept, we were neutral on that, this concern as far as the capacity to implement it.

REP. POSEY: Thank you for (a follow-up ?), Mr. Chairman.

But do you have an opinion whether the ability to do that would make the taxpayer safer from risk?

MR. HEIST: No, I don't.

REP. POSEY: You really don't know?

MR. HEIST: No.

REP. POSEY: Do you know who in the world might be able to give us an answer on that?

MR. MURRAY: Well, for us, it reduces the burden of welfare premiums and the like on the less riskier borrowers. In other words, the cost for a FHA loan will be slightly less. So in other words, the risk goes to those who are -- need to be the more riskier borrowers.

REP. POSEY: Thank you, Mr. Chairman. I didn't want to even take up this much time, but I think it's just a fundamental good question.

REP. FRANK: No, I appreciate it. I think it's a case of Congress doling out authority to the FHA. And she's no longer there, so maybe it'll change.

The gentleman from Kansas.

REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman.

To both of the witnesses, I think we all would agree that there's a foreclosure crisis going on in our country right now. FDIC Chairman Sheila Bair has a plan, which I believe is reasonable, to address this problem. And I believe we all appreciate the lenders who are working with homeowners who are refinancing and modifying loans to keep people in their homes.

As Congress considers how to allocate the remaining TARP funds, would it be appropriate to utilize a substantial amount -- perhaps a hundred billion dollars -- for foreclosure mitigation, to keep people in their homes and address this foreclosure crisis? And I'm addressing this question to both of our witnesses.

MR. HEIST: I would defer to Mr. Murray on that one.

MR. MURRAY: I'm sorry. Reason I was asking because -- I really can't answer that. I don't have an answer for that. Sorry.

REP. MOORE: All right. Do you have any thoughts as to what we might do to address the foreclosure crisis, then, if we don't use TARP funds?

MR. MURRAY: I would be more than happy to send you a written response on that.

REP. MOORE: I'd appreciate that.

MR. MURRAY: (Off mike) -- on our part. Thank you.

REP. MOORE: Thank you.

REP. FRANK: Mr. Meeks? Is he here?

Then Mr. Campbell, from California.

REP. JOHN CAMPBELL (R-CA): Thank you, Mr. Chairman.

I wanted to ask Mr. Murray, during Mr. Heist's testimony, he talked about the reserve requirement being 2 percent, and how it's fallen from six to three. And we all know about, you know, the conditions in the marketplace and so forth.

But since FHA is making -- the volume is up so much, and since there's such -- a much greater percentage of the market is now FHAs going out there, shouldn't we be making loans now that should be adding to that reserve requirement and not having it fall quite so much, giving all this increased volume?

I mean, am I wrong? Is there -- or what's happening?

MR. MURRAY: I would initially tend to agree with you that with the uptick in volume that that does add to the reserve. But that whole calculation is a highly, highly technical thing with people who are far brighter than I, at HUD, who deal with that. And I would be more than happy to have any questions answered for you, if you'd like.

REP. CAMPBELL: Mr. Heist, I don't know if you're one of those far brighter people. But perhaps you could take a stab at it.

MR. HEIST: Absolutely not but I do know that those estimates are profoundly sensitive to changes in overall macroeconomic conditions: how much house prices are going up and down. When you foreclose on a property, given the market conditions in that particular community, how much are you going to get on that property?

FHA's loss rates, for example, have been going up from what was in the 30 percentage range up through the 40s over the past couple of years. So those sorts of factors really drive how much FHA is going to expect to lose.

REP. CAMPBELL: Yeah, and for both of you, I mean, here's where I'm going. And I think you can tell that what I'm worried about is that we all know that no matter how good your underwriting was and so forth, you're going to have losses, on things that have happened, because of the drop in house prices and the unemployment that's continued to increase, et cetera.

So we all know that's going to happen. But now we have the benefit of knowing that that has all happened, as we're making new loans, and that presumably the new loans we're making should be on more solid footing and thereby should be adding to that.

I guess I'm just concerned about this thing, as the volume gets bigger, and the reserve numbers keep dropping, that's a concern.

Where am I -- is there something wrong with the underwriting that's going on now? I mean, everybody's touched on this to some degree. Is this because the underwriting we're doing now isn't as good as it ought to be and we're putting new loans on the books that are actually damaging the reserve requirement as we're putting them on?

MR. MURRAY I think -- again, I don't want to step out here -- as our roomful of Ph.D.s articulate to us, it's more of an accounting process; that the reserve is small because of increase in volume; that we took dollars from the reserve to cover potential losses associated with the new huge book of business. So it's an accounting function. But that's totally outside of my viability to even comment, and so I don't want to mislead anyone.

REP. CAMPBELL: Mr. Heist, anything more you want to add?

MR. HEIST: Not at this point now.

REP. CAMPBELL: Okay. Madame Chair, I'm -- hopefully -- I'm not sure we got necessarily adequate response to that. I do think it's something that we need to be concerned about. That clearly there will be more volume going through here as we go forward, and that volume should be helping the reserve balance, not hurting it, I would think.

REP. WATERS: Absolutely. Thank you very much.

REP. CAMPBELL: Thank you. I yield back.

REP. WATERS: Mr. Hinojosa.

REP. RUBEN HINOJOSA (D-TX): Thank you, Madame Chair.

Before I ask my questions of the witnesses, I want to say thank you to you and Chairman Frank for having this hearing to discuss FHA oversight of loan originators. I ask unanimous consent to include in today's record two documents -- a CRS report entitled "Housing and Economic Recovery Act of 2008," and secondly, an overview of the conference of state bank supervisors' supervision of the mortgage industry through collaboration and technology.

(Pause.)

Mr. Chairman, I ask for unanimous consent --

REP. FRANK: Oh, I'm sorry. I said earlier, and not everybody was here, since it's not a formal committee (we're not on rules ?), so we announced that anything anybody wants to be put into the record will be put into the record.

REP. HINOJOSA: Thank you very much.

REP. FRANK: We can't guarantee anybody will read it, but it will be in the record. (Laughter.)

REP. HINOJOSA: Thank you for that clarification.

By the end of the year, CSBS reportedly will have 33 states on the mortgage origination system. Only two states have not committed to be on the system, but they likely will join us in 2010, at the latest.

If not, it is my understanding that HUD will be doing the licensing in those states.

Mr. Murray, I'd like to ask you my first question. Would you like to comment on the performance of CSBS, considering what is required of the supervisors?

MR. MURRAY: Unfortunately, I can't answer that. That issue is not in my office. That's done in the office of consumer --

REP. HINOJOSA: Okay. Mr. Heist, would you like to comment on my question?

MR. HEIST: That's the licensing of lenders and brokers?

REP. HINOJOSA: Yes.

MR. HEIST: Only just to say that the states control the licensing, and that we have noted again, given -- in light of FHA's resources, there's minimal staff assigned to oversee that process. And it is a concern of ours that, you know, FHA's oversight of that and ensuring that the states are equipped to do the licensing that they need to do is adequate.

REP. HINOJOSA: Well, in listening to some of the questions that some of my colleagues have asked before me, I question why you have not requested an increase in funding for administrative staff.

MR. HEIST: Well, I can say that the Office of Inspector General has asked for additional resources. We, like FHA, are strained in our ability to audit and investigate single-family fraud cases.

REP. HINOJOSA: Mr. Murray, you said that you all were only examining 5 percent of the loan applications, and you thought that, if given the resources, you might be able to increase that to at least 10 percent of applications. How much money would it take to be able to -- and resources, would it take to be able to do that?

MR. MURRAY: I'm sorry, I couldn't answer that right here.

REP. HINOJOSA: Okay. I've been informed that there are a lot of claims and foreclosures to come before Federal Housing Administration. So Mr. Murray, in light of this, why has the FHA not taken the actions to adjust the underwriting requirements to reflect a changing environment?

MR. MURRAY: I think HUD's underwriting requirements are -- are very sufficient. They're well tested.

I think most of the foreclosures are doing to -- due to economic conditions. It has nothing to do with the quality of the loan; it's more like personal circumstance.

REP. HINOJOSA: Well, the reason I ask that question is that the area that I represent in south Texas -- deep south Texas, 80 percent of my constituents are Hispanic. And I find that the highest hurdle for Hispanics seeking to purchase loans is the down payment. And that, of course, is getting worse under the present changing environment that I'm talking about. So I think that FHA is the best path to homeownership for Hispanics, because they seem to be a little bit more lenient on that down payment.

And so I find that there needs to be some changes considered. And if not, I think that you just don't have a good pulse as to how difficult it is in regions of the country like the one that I represent.

MR. MURRAY: And I'm quite certain that is correct, what you're saying, but -- and it may be so in the conventional market, but what we find -- our default and claim rates are relatively low. Our default rates for '07 were 6.56 percent; in '08, 6.9. But that's default, because go in and out of default. But the claim rate, which is what costs the money, is 1.42 percent in '07 and 1.3 percent in '08. So that's a very, very low rate.

I think that evidence that we pretty much have our underwriting criteria pretty tightly triggered, but we could always, always look at more. As I said earlier, we have a(n) internal task force to look across our business, front end, back end, REO and the like, and we're looking at what can we seek, what can we fix, given today's current economic environment. So we're not just sitting still. So we'll make certain we'll take a look at -- in Texas.

REP. HINOJOSA: My time has run out and I have to yield back.

REP. FRANK: The gentleman from Illinois, Mr. Manzullo.

REP. DONALD MANZULLO (R-IL): Thank you, Mr. Chairman.

Mr. Murray, on page two of your testimony, the middle paragraph started with "FHA insured loans are neither high-cost nor high-risk for homeowners." Do you see that? It's actually the first page of your testimony.

MR. MURRAY: Yes, sir.

REP. MANZULLO: Okay. Has FHA always required written verification of a borrower's employment?

MR. MURRAY: Absolutely.

REP. MANZULLO: Has that always been standard.

MR. MURRAY: Absolutely, sir.

REP. MANZULLO: Okay.

And the -- that obviously goes to the borrower's capacity to meet the monthly mortgage obligation.

MR. MURRAY: Right.

REP. MANZULLO: And I guess what perplexes me and what bothers me is, July 17th, I believe, we had a hearing here with the Fed chairman, Bernanke, who said that the Fed had done a top-to-bottom review of all mortgage applications, et cetera. And they're now going to require written verification that somebody actually does make that amount of money, once it's put into the application.

However I believe that that requirement does not go into effect until October of 2009. And there was a gasp in the room, when I asked Mr. Bernanke, why are you waiting 13 months? He said, because we don't expect the housing market to recover, start recovering until then.

And I thought that was pretty cavalier on his part, because these are opinion-makers.

But what I don't understand is why the FHA has apparently always adopted very common-sense requirements for a loan, i.e., you have to be able to repay it before you can sign the note and get the property, but -- I know you can't speak on behalf of the Fed, but what happened here?

I mean, you're the good guy --

MR. MURRAY: Yeah, I don't know. I think since 1934, when someone decided that you needed a mortgage that lasted longer than five years, underwriting standards were put into place, and they've been continually refined. It is my understanding --

REP. MANZULLO: What year? 1994? You -- is that what you said?

MR. MURRAY: I'm sorry? I said 1934.

REP. MANZULLO: 1934! Okay.

MR. MURRAY: No, sir, I was not there. (Laughs.)

REP. MANZULLO: All right. Okay.

MR. MURRAY: But I just want to say the new federal rules will mimic the FHA's long-standing underwriting requirements. It's just good, basic business sense.

REP. MANZULLO: The -- you just answered an inquiry as to the default rate at FHA being 1.5, something like that -- under 1.5?

MR. MURRAY: Yeah, the claim rate was, this past fiscal year, 1.3 percent.

REP. MANZULLO: Now, is that of dollar volume, or of actual numbers of mortgages?

MR. MURRAY: That's a percentage of loans.

REP. MANZULLO: Pardon?

MR. MURRAY: Percentage of loans.

REP. MANZULLO: Okay, so that would be -- what was it --

MR. MURRAY: So 1.3 percent of the loans went to claim.

REP. MANZULLO: Meaning that the FHA insurance had to be used.

MR. MURRAY: Yes, sir.

REP. MANZULLO: Okay. That's pretty low, isn't it.

MR. MURRAY: Absolutely.

REP. MANZULLO: Do you have any problems with the -- of course, it's now just the end of the FHASecure, that allowed people who had loans that they could not afford -- not because of employment problems but because of balloons and teasers -- and were allowed to bring those into the FHA umbrellas; about 350,000. The program ended the end of last year. Do you have any problem -- that any of those loans could exceed the normal rate of default to which you just testified?

MR. MURRAY: Absolutely not, sir. We subject those loans to the same underwriting requirements. And if they don't match, they don't come in.

REP. MANZULLO: Okay. The HOPE for Homeowners has been less than successful. I never liked it in the first place, because it's called a common-law composition, which lenders could do at any time with the borrowers, especially in light of the fact that this Congress at least did something wise when we said that any forgiveness of principal as to your principal residence would not be considered to be imputed income under the income tax.

But let me ask you an open-ended question. Aside from asking for more manpower, et cetera, what do you think FHA can do to even further improve your performance?

MR. MURRAY: I think I answered earlier to the gentleman over here that what we can do is put together some thoughts on that. I'm not just prepared, top of my head, to go for that --

REP. MANZULLO: Okay.

MR. MURRAY: -- because I think that's a very deep subject and there's an array of things that we could consider. And that's also part of our task force that we're working on now.

REP. MANZULLO: Oh, I appreciate that, because we always like to look at models, some government programs that have worked, and it's apparent that there's a model going here, especially helping out people that don't have the full amount of down payment that could qualify under a convention -- conventional mortgage.

Thank you, Mr. Chairman.

REP. FRANK: The gentleman from California.

REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. At this critical time it's important that we prevent the precipitous decline of home prices in all neighborhoods, including those of us who represent high-cost areas. The FHA loan limit and the Fannie and Freddie limits as well have declined with the new year. It's my understanding that FHA actually makes a profit on its larger conforming loans, as does Fannie and Freddie. And I hope that Congress passes soon legislation so that the limits for Fannie and Freddie, and especially FHA, are no lower in 2009 in each area --

REP. FRANK: Would the gentleman yield?

REP. SHERMAN: Yes, I will.

REP. FRANK: That will be in the economic recovery package as a result of the conversations yesterday. We got the approval from the Obama administration. Obviously, it's something near and dear to the heart of the speaker. And keeping loan limits at last year's levels for this year so we can then think about what we do going forward will be in the economic recovery program for FHA, Fannie Mae and Freddie Mac, because the gentleman is accurate that they're moneymakers.

REP. SHERMAN: I thank the chairman not just for those comments, but for his work in achieving a legislative result that's so important to so many areas of this country and the country as a whole.

Now shifting to FHA operations, every mortgage broker's required to submit an audit financial statement showing a net worth of a quarter million dollars for a sum and for the non-supervised loan correspondents, a $63,000 net worth. The thing is that net worths of that level can evaporate very, very quickly. They're not very large. We've seen 313 mortgage bankers, lenders and Wall Street firms go out of business, their net worth of much, much larger amounts evaporated very quickly.

And so we see that the thousands of dollars spent on audit fees every year are not available for consumers. Instead, they go to my old home boys in the accounting profession. So I would hope that the FHA would take seriously either proposals to require a surety bond in lieu of an audit financial statement or the creation of a recovery fund, so those thousands of dollars that are going to audit fees are instead going to a fund that will be available for consumers.

I hope to be able to ask a formal question on that issue, but I want to shift Mr. Murray to another issue. The National Association of Realtors has expressed serious concerns about the shortcomings of FHA technology. As they note in their statements submitted for the record, currently FHA operates technology which is an average age of 18 years. And Brian Montgomery, FHA commissioner, has stated that the software programs are often older than the staff maintaining them. You've still got a COBOL system that's 30 years old. It's estimated that $65 million is required to upgrade FHA systems, this according to the National Association of Realtors. And that would not only upgrade the system, but provide for appropriate staffing.

What is the status of your current technology initiatives?

When and at what cost do you expect to bring the agency into the 21st century?

MR. MURRAY: Well, the status, I guess, is sitting on the statement. It's -- we're managing it. We're using it. We've managed to do some tweaks here and there through maintenance.

Candidly every one of our 35 systems; for less than the cost of maintenance, one year's worth of maintenance, we can turn that to a Web-based system that will work fantastically for us. We can't do it because we don't have working capital funds to do it.

Our systems are adequate at this juncture. But it will not sustain itself, as our business continues to increase. So we absolutely need additional funding. Our technology people estimate somewhere between $20 million a year for us to segment these 35 systems into 1.

REP. SHERMAN: So you feel you need $20 million a year over a period of how many years?

MR. MURRAY: Five years.

REP. SHERMAN: Five years, $20 million in order to upgrade your technology. I don't know whether all we can do is work with the Appropriations Committee, on that, or whether there's a way to change legislation, through this committee, that would achieve that goal. But I can't imagine a better use of funds, given the new mission or expanded mission of the FHA.

If -- actually I believe my time has expired.

REP. FRANK: The gentlewoman from West Virginia.

REPRESENTATIVE SHELLEY CAPITO (D-WV): Thank you, Mr. Chairman. I would like to thank the witnesses too for sharing information.

First of all, I would like to ask unanimous consent to submit my opening statement into the record. I think that was already going to be done. But I wanted to make sure that was all right.

A question: In 2008, Congress shut down the avenue of the seller-funded or the down payment assistance avenue for FHA borrowers. And I would like to know what percentage of your portfolio that you have right now still has those seller-funded down payment assistance. And what effect do you think that that might have on your future portfolio moving forward, and what you're finding now that that avenue now has been shut down.

MR. MURRAY: We don't -- I don't have -- sorry, I don't have those numbers of what they have, but I would guess that there is a pipeline of loans that are there. We do know that 30 percent of those would generally go to default.

REP. CAPITO: Wait, let me just clarify that. Thirty percent of the seller-funded, down payment assistance loans go to default?

MR. MURRAY: Yeah. Yes. Yes. And, well, we do know we have significant amounts of new volume coming in. So hopefully, that would tend to offset that.

REP. CAPITO: Okay. So hopefully, that will have the intended effect to steady that down payment issue. I notice -- and we also raised the down payment requirements from 3 percent to 3.5 percent. What effect did that have? If we're having more volume of FHA loans, where do you speculate, or how do you document where people are getting their down payment and they're able to meet that requirement?

MR. MURRAY: Yeah, my staff has just confirmed what I was thinking. What we're seeing, it's going back to where it was before, before the down payment assistance program came into being, and that is from family and relatives and the like.

REP. CAPITO: All right. Thank you. I would like to say, as the volume of FHA loans has increased, I know a lot of financial institutions that have, you know, put in applications to become loan originators. And I share the concern of my colleagues that those that have been in maybe the subprime and less than maybe above-board practices can then migrate into becoming a large vendor, so to speak, for FHA loans.

But I would say that while we don't want to cast -- I think we want to be careful not to cast a broad brush here, because having been in one of my lending institutions, community bank in my own community, they have an application before the FHA right now to become a lender. They're a terrific institution that has, I think, a wonderful reputation for providing great community services, financial services, to our local communities. And I would hate to see a situation where, as we cast a brush to try to cast out the bad actors, that we then unintentionally begin to harm the folks that are there doing the right thing, have their applications in order and intend to fulfill that dream of helping folks achieve home ownership.

So I would just throw that cautionary flag before you, having been in several of these institutions in my state of West Virginia, and knowing they're doing it the right way and want to be able to be -- offer FHA as a possibility for homebuyers.

MR. MURRAY: As part of our vetting process, to the extent that we have the legal authority to prevent someone, a so-called bad actor -- however that may be defined, both from a personal perspective as well as a legal perspective -- if there are bad actors, we -- our process is to -- not to allow you to come in.

But having said that, absent us having that, then we approve them.

Now, if they are so inclined to engage in mischief, we have so many checks and balances and electronic surveillance in our operation, they could not prevail for a long period of time, because you will be caught.

REP. CAPITO: Right.

MR. MURRAY: Very quickly.

REP. CAPITO: And the taxpayer's going to be on the hook once again for the unscrupulous actions of certain folks. Whether it was the subprime lenders or it's somebody moving to FHA and putting forward unscrupulous practices, it's going to be -- not only that individual homeowner's going to be hurt in some form or fashion, but all of us, as a general constituency, are going to be hurt as well.

MR. MURRAY: Right. Invariably, you have that, no matter what. Across the country, I would argue -- and I think the IG would even agree with me -- there's less than 2 percent of people who probably stretch out to engage in mischief or wrong activities. The vast, vast majority of lenders are very good. They have exercised with extreme integrity.

I do want to point out, though, we have a process called Credit Watch that no one else in the entire industry has. And that will do electronic surveillance on a quarterly basis. At a press of a button, we can examine the default and claim rate of every approved branch of every approved FHA lender. That's 44,000 views, in the combinations of places they can do business across the country.

And every quarter, any lender who exceeds the default and claim rate by 200 percent for the local jurisdiction, in comparison with other lenders doing business, we will send them a proposed termination notice of their branch. And within that 90-day period, we'll send them that notice, we'll have a hearing and we'll make a determination whether or not to terminate them or have them -- to make some corrections and to stay in place.

REP. CAPITO: Okay. Could I just make one clarification, for me, on the seller-funded downpayment assistance programs? You mentioned that 30 percent of those were in default. Would that mean that 30 percent of the mortgages that are in default are seller funded, or that, of the seller-funded programs, 30 percent are those in default?

MR. MURRAY: Okay. Compared to our standard book business, seller-funded down-payment assistance as an entity is 30 percent -- I'm sorry, their loans perform two to three times worse.

REP. CAPITO: Okay. Thank you.

REP. FRANK: The gentlewoman from New York, Ms. McCarthy.

REPRESENTATIVE CAROLYN MCCARTHY (D-NY): Thank you, Mr. Chairman.

Mr. Murray, you just talked about credit watch. Is that in place now, or has that been in place for a while?

MR. MURRAY: Yes, ma'am. We launched it in March -- May 1999.

REP. C. MCCARTHY: So the way -- if you could clarify it for me, the way you were explaining it, why didn't we see all these subprime loaners during these years being picked up a little bit faster?

MR. MURRAY: Because we don't take subprime lenders into FHA, so --

REP. C. MCCARTHY: So you're only looking at the loaners that you have.

MR. MURRAY: Yeah, we only do FHA.

REP. C. MCCARTHY: Okay.

MR. MURRAY: And that's what I was saying; even if those folks who were doing -- the bad actors were doing subprime and they now come to FHA, they couldn't fit their square peg into our round hole. They would be caught.

REP. C. MCCARTHY: Maybe it's something we should be looking at to expand, then, being that we're not going to be able to do that much.

One of the things I wanted to ask you, with your FHA loans -- I work a lot with the Long Island Housing Partnership in Long Island, New York. We basically -- or I should say they basically work with low-income families, obviously trying to allow them to buy their first home. Financial literacy has been a big thing on my -- on my part here on this committee. And I know we worked on helping these different groups on educating people on how to buy a home, to see if they could buy a home.

But with your loans -- even with your loans, even though they're lower, do you educate them that it's not just the mortgage; it's the insurance; it's the electric bill; it's the taxes in the area that they live? Because obviously, a lot of people could buy a home. That doesn't mean they can keep up with what it costs to keep that home going. To me, that's something that I personally believe should be mandatory on every single housing loan.

MR. MURRAY: Yes. Our -- we have 2,300 housing counselors that we fund, and their services are free or at very low cost. And part of their pre-purchase counseling, that is exactly what they do, to help them establish budgets; to understand they have to make a payment -- you know, you can't put that of; you know, you put something else off.

In terms of mandatory counseling, that may be somewhat problematic. There have been tests of that back in the '90s and the like. There are just not enough housing counselors to go around. And if you have it mandatory, you may have a segment of the population who may not be served readily or soon enough to enter into a real estate deal.

REP. C. MCCARTHY: The thing of it is, with the housing authority on Long Island have no defaults.

MR. MURRAY: Right.

REP. C. MCCARTHY: So if you're looking at a cost basis, who is coming out ahead? Even though it -- I know it's not mandatory. Nobody on this committee likes the word mandatory. But I often wonder if we wouldn't be in the problem that we're in today, if things had been done differently that we've been fighting for, for years, on this committee.

With obviously your increased responsibility and we've heard constantly over and over again that you need more staff, you need higher technology to work into, to do what you're doing. Could you give me an idea on the flow of work that you've had, in the last 10 years? And what is the growth then on having staff, keeping staff?

We heard you talk about the computers and what kind of money you need for that. But obviously that's going to be a tough sell, on every issue, because basically every branch is saying they need more help in that particular organization.

So if you could, give me an idea of how much more work you're doing, over the last couple of years, with maybe the same amount of staff coming back from the '90s.

MR. MURRAY: Well, our volume has pretty much tripled. The first two weeks in December, we have seen the largest volume we've ever had, in the history of FHA.

Now, our staffing levels have been pretty much the same, over the last four or five years, which is slightly less than 900 employees. But also during that process, we have been embracing technology to the extent that we can.

For example, we had an entire staff -- I'm sorry, we had a contractor and some staff doing the annual financial audit. We completely automated that process and where a system will run through the audits, find deficiencies. And we maximized our staff resources by just hiring five accountants to help look for the deficiencies.

So we have been embracing technologies to the extent that we can and that we have the monies made available to do that. Not only do we want to fix the technology that we have; we want to embrace new technologies. There's a lot of things that we want to do that is out there, that would be state of the art, that we want to embrace.

REP. C. MCCARTHY: I can't see the -- all right. I'm sorry. My time's up.

REP. FRANK: The gentleman from New Jersey, Mr. Lance.

REPRESENTATIVE LEONARD LANCE (R-NJ): Thank you very much, Mr. Chairman.

To Mr. Heist, about a year ago, an audit was conducted of HUD's quality assurance division. And the audit determined that it did not consistently require FHA-approved lenders to indemnify loans with similar material deficiencies, and did not always resolve material- deficient or potentially fraudulent loans in a consistent fashion.

Sir, could you update the committee as to what has occurred in the last year and what steps the department has taken to ensure that uniform resolutions to loan underwriting deficiencies are handled in an appropriate fashion?

MR. HEIST: I believe that -- I mean, our recommendations both to -- among the various homeownership centers ensuring that they're referring things on an equal footing, making decisions about whether a particular case was so egregious that it should be indemnified by the lender. And we spoke to headquarters, improving their oversight of the field just to make sure that things are being done consistently and that when they do have fraudulent loans, they're referred to the IG.

REP. LANCE: Thank you. Mr. Murray, could -- would you like to comment on that, sir?

MR. MURRAY: Yes, I'd be -- we both strive for consistency. But with respect to looking at asking someone to indemnify a loan, it must be material. And these things are not one-size-fit-all. You can have two lenders, two different parts of the country perhaps having the same violations, but there are also mitigating circumstances and factors that led to that. And so that is a discussion in resolving those issues.

So you will not have it a hundred percent from homeownership center to homeownership center, or even within a homeownership center, because you cannot just say, "You did this, therefore you pay that." You just cannot do that. It's not that absolute.

REP. LANCE: And Mr. Murray, would it depend based upon the region of the country and the cost of housing in the country, or would there be other factors?

MR. MURRAY: No, it would be -- it would be mitigating factors: what led to that or did you subsequently find supporting documentation that would -- that would allow us to say, "Okay, we will do something differently"?

REP. LANCE: Thank you. And as a follow-up to the questioning from the gentlelady from West Virginia, Mr. Murray, what percentage of the FHA portfolio is in the now banned seller-funded down-payment program?

I'm not sure I heard the --

MR. MURRAY: The FHA does not allow seller-funded down payments.

REP. LANCE: Yes, sir, I know that's been banned since October of 2008, but there must be still those -- what percentage is in the portfolio now?

MR. MURRAY: Well -- well, before the ban, it constituted 30 percent.

REP. LANCE: Thirty percent.

MR. MURRAY: And so I would assume it's decreasing.

REP. LANCE: And --

MR. MURRAY: It's now decreasing with the influx of new loans.

REP. LANCE: Presumably, it is decreasing because of the influx of new loans.

MR. MURRAY: Yes.

REP. LANCE: But it was 30 percent when it was banned on October 1st of 2008. And what effect will these types of loans have on the capital reserve ratio?

MR. MURRAY: That's one of those questions -- I have to defer to my Office of Evaluation for that, but we're glad to get an answer for you.

REP. LANCE: And thank you very much. I would appreciate that, through the chair.

Thank you, Mr. Chairman. I yield the balance of my time.

REP. FRANK: The gentleman from California, Mr. Baca.

REP. JOE BACA (D-CA): Thank you very much, Mr. Chairman.

Mr. Murray, many of the foreclosure consultants work in the best interest of their clients to modify troubled mortgages so homeowners may avoid foreclosure. However, as the foreclosure rate has gone up, communities across the country, including my district, have seen a rise in fraudulent actors to provide legitimate foreclosure prevention services.

Many of these predatory actors have taken money in advance -- I say taken money in advance -- while not performing any service at all, leaving many homeowners on the streets with home foreclosures upon them. You probably have seen false flyers on cars and on homes and on TV. Just as with any real estate transaction, those assisting with loan modification should not -- should only receive payment once a transaction is complete.

In California, a foreclosure consultant must be certified -- and I state, must be certified under the new real estate laws, or pay a penalty. Is this something that FHA might be willing to consider?

MR. MURRAY: I think in FHA there's not that problem, because a part of our process is -- is we require loss mitigation of our lenders, and that's early on in the process. From the first time they become 45 days behind, there's a little (package ?) goes out. So at least FHA borrowers are informed, or should be informed, that there -- these are resources here to assist you in that.

And let me just add that the -- last year we did over a hundred thousand loan modifications with FHA borrowers, and 65 percent of those folks retained their homeownership as a result of that.

Now, the broader picture about these individuals who are -- and there are many, many schemes, and as we go to conferences we try to warn people -- but that's totally beyond the purview of HUD. We certainly cannot do what Justice and the FBI themselves cannot do. Poor little FHA certainly can't do anything about that. But to the extent where we might find our own servicers, FHA-approved servicers, not offering loss mitigation, yes, we will take immediate action against those guys, yes.

REP. BACA: We talked earlier, too, as well, about new rules that are needed. And as we look at new rules, we can come up with all of the new rules, but we need the enforcement, which is -- goes back to what the chairman indicated at the beginning. Having the appropriate staff to make sure that the enforcement is done there, because all the regulations, the oversight, the accountability, can be there, but if you don't enforce those laws, then, you know, we have the same predators continuing to do what they're doing right now.

And I know you talked a little bit about that Credit Watch -- a little bit -- but that's something that's not in place. And then my question would be --

MR. MURRAY: Yes, it is in place.

REP. BACA: Is in place, okay. Then my question would be, what legal authority would you need -- because that's one thing that you said earlier, you need legal authority. So what do you need to -- what do we need to do to make sure that you do have the legal authority, that we can go after some of these individuals?

MR. MURRAY: Well, we're going to propose the rules. I don't know if we need -- perhaps with respect to the Mortgagee Review Board we may need some statutory changes -- maybe some statutory changes. But I think for the most part, just through rulemaking, we can enhance and tighten our requirements.

As Ms. Walters (sp) was saying, I, too, am bothered by principals of an entity who got into trouble, dissolving themselves and recreating themselves again. I do not have the authority, absent these people being debarred or convicted, from stopping that individual from forming another company.

Now, we have that on the table right now, to do that. And what we're trying to do is to say that if you have unfinished business, unresolved issues, and we're looking -- that if you have received a letter from either my monitoring staff or from the inspector general's office, and if you shut business -- shut down business once receiving that letter, that we can then hold the individuals accountable. Because we often -- my monitors as well as Mr. Heist's folks, when they go out, oftentimes by the time you send the findings letter to the lenders, they're gone.

REP. BACA: Okay.

MR. MURRAY: And we wanted to be able to hold the principals accountable. That's rulemaking for us.

REP. BACA: Okay.

One final question.

Did you want to answer?

MR. HEIST: Well, on one front, the Congress has acted. Part of the Housing and Economic Recovery Act provided for increased penalties, makes a criminal offense against FHA equivalent to that against a financial institution.

So we're hopeful that that will give some more motivation for prosecutors to go after some of the cases. We also agree that going after the principals is an excellent idea that prevents having to -- being able to set up shop as another company.

REP. BACA: My final question -- I know my time has run up. But in reference to the regulations that were not in place, when did this actually start occurring? Because I know that the chairman, over the last two years, has tried to put in regulations and enforcement. But the regulations were lacking. And that was part of the problem.

When did this all occur in the regulations of the enforcement aspect? Because apparently you know, there's been statements that have said, we're overregulated; we don't want government intervention. And yet government needs to be intervening and needs to have those kind of regulations, to hold accountability and oversight in the enforcement.

When did this all start happening?

MR. MURRAY: Well, I don't know if it -- I mean, people and miscreants engaging in wrongdoing has always existed. I think what happens is, as situations evolve, we need to evolve with them.

You know, there's always the next mortgage fraud scheme. And so I think what we are finding ourselves is that we all agree that we're in a particular difficult situation now.

There may be more and more people who have been engaged in wrongdoing maybe looking to come to HUD, not knowing that they probably cannot get away with what they were doing. But nonetheless we still need to be able to hold folks accountable. And believe me, my staff; we have 120 monitors who actually go out on site and get into your books and your business. They're very, very aggressive individuals.

What we need to have as well, as Mr. Heist was saying, the authority to hold people accountable, to do the things that we really need to do to make an example.

REP. BACA: Let us know how we can help you.

REP. FRANK: I'll also note that starting in 2002, there was a precipitous drop in FHA guarantees. And it dropped very severely. It's gone back up again. And I think what's happened is that staffing hasn't tracked the increase in the activity.

It went down in the 200,000 range. It's back up to where it's getting to where it should be. It dropped by about two-thirds. And I think part of the problem was a lag there in staffing up as there was an increase.

Gentleman from Massachusetts. Oh, I'm sorry. Gentleman from Texas, I keep ignoring, but he's staring at me, so I can't do that.

REP. RANDY NEUGEBAUER (R-TX): I thank the chairman.

Mr. Heist, I think it's been alluded to a couple of times that there's a model that determines what the current reserve requirement is and whether -- based on actuarially and portfolio condition and, I heard you say, maybe economic conditions that are being projected, I guess, forward. Is there a third-party validation on that formula and how it's being calculated to -- because, you know, some companies got in trouble coming up with their own models and leading someone to believe that in fact, you know, the reserves were sufficient when it turned out they were not. So is there third-party validation by your --

MR. HEIST: Well, the actuarial study itself is by law required to be conducted by an independent actuarial firm. I mean, that's actually beyond the auditing realm that I deal with. So there is some degree of third-party, at least with respect to the assumptions used. I know that -- and again, this isn't under my purview, but in addition to just coming up with a bottom-line best estimate, they report what would happen if certain things happened, other -- if you were more pessimistic in your assumption, here's what the impact would be. And that's a concern because if things turn out worse than it was projected back in September, the value of the fund will be determined to be less.

REP. NEUGEBAUER: I think which brings me to the question, is that, you know, legislation has been introduced that would allow bankruptcy judges to cram down lenders, and obviously FHA would fall under that. Has anybody done any -- or thought about doing some calculations of what impact that legislation might have on the condition of the fund? Because one of the things that could happen here, we could actually pass this into law and the impacts of that on the fund could, in fact, cause the actuarial number to go down and in fact the fund could be then not meeting the statutorial requirement.

Is that -- I think that's important information for this committee to have.

MR. HEIST: I'm not aware of any study.

REP. NEUGEBAUER: Who would -- Mr. Murphy (sic), who would we request some evaluation of what impact this legislation would have on the fund?

MR. MURRAY: (Off mike.)

REP. NEUGEBAUER: Could you -- and could you put that on somebody's ASAP list? Because I have a feeling that that legislation is moving, you know, rather quickly. And I think that's an important answer, because the fund has lost half of its value in just one year. And so the trend is not good. And additional legislation in the form of a cram-down could, in fact, accelerate that. And I think if that is, in fact, going to happen, I think this committee needs to -- needs to know that.

MR. MURRAY: Yes, sir.

REP. NEUGEBAUER: Mr. Murphy (sic), the other question I have is, you know, you're doing a -- you feel like you're doing a good job on vetting the people that are direct endorsers and people that are able to participate in the FHA program. But while you don't have risk- based pricing authority, do you feel like you have the latitude on terms and conditions?

For example, have you thought about it -- or is there a policy in some areas where you've experienced high losses and you've seen major devaluation in real estate values? Have you -- do you have the authority or do you -- are you able to, say, increase the down payment requirement on some of those loans?

MR. MURRAY: No. FHA has never done its pricing regionally. It's always been a national --

REP. NEUGEBAUER: So, you never ask anybody to -- in other words, if somebody applies for a loan and they apply for a 3-1/2 percent down payment, you don't have any latitude or say, you know, this is an -- this is an area or this is a borrower where we don't feel that it's in the best interest to make a loan with a -- a 96.5 percent loan?

MR. MURRAY: I think the only two requirements -- and correct me if I'm wrong -- is that clearly, if it's in a declining market, we now require two appraisals. If the individual has a credit score of less than 500, we would require at least 10 percent down. And that's a due procedure we now have.

But otherwise, our underwriting criteria is consistent, nation- wide.

REP. NEUGEBAUER: So the credit score drives the down payment. Anything below 500 has to be a 10 percent loan?

MR. MURRAY: Yes. But that's the only credit score requirement we have.

REP. NEUGEBAUER: Yeah. But what is your minimum credit score?

MR. MURRAY: We don't use credit scores at all.

REP. NEUGEBAUER: On --

MR. MURRAY: The industry may impose credit scores on our borrowers, but FHA, as a policy, that's not part of our underwriting.

REP. NEUGEBAUER: But you do require additional down payment for below a 500 credit score. Is that what you said?

MR. MURRAY: Yeah. That is correct.

REP. NEUGEBAUER: Okay. And so that's really the only time that you would look at a lesser down payment, is just in a -- the credit score threshold?

MR. MURRAY: Oh, yes.

And if we do cash-out refinances, that also requires a higher so- called downpayment.

REP. NEUGEBAUER: Well, I'll look forward to hearing back from you on the impact of the cram-down on the --

MR. MURRAY: Yes.

REP. NEUGEBAUER: -- on the reserve fund.

MR. MURRAY: Okay.

REP. : I'd like to call on Congressman Minnick.

REP. STEPHEN LYNCH (D-MA): Mr. Chairman?

REP. : Yes?

REP. LYNCH: I believe I'm next.

Thank you, Mr. Chairman. And I want to thank the witnesses for their patience today.

Mr. Murray, a long, long time ago, in your opening statement, you said that, in your opinion, the sky is not falling. And while that should be reassuring to the committee, over the previous months we've had a parade of stellar witnesses that have given us the same expression. I call to mind Secretary Paulson and Chairman Bernanke, who sat in that very same chair -- at that very same table and said that -- first of all, they said we had no problem. Secondly, they said we've got it contained. We heard from Fannie Mae and Freddie Mac that they were fine, in good shape going forward. So please forgive me for my skepticism.

But while the sky is not falling, the balance in the FHA Mutual Mortgage Insurance Fund certainly is. Would you agree?

MR. MURRAY: No, sir. Not necessarily so. It's --

REP. LYNCH: Well, I have numbers here that say that last year we had a balance of $21.2 billion and today we have a balance of $12 billion, a drop of 40 percent. That would be -- that would constitute a falling balance. Are we cool with that?

MR. MURRAY: No, sir. It's in an unencumbered reserve account. It's an accounting --

REP. LYNCH: I understand how you calculate it. They calculate a total. You calculated a total last year, and you calculated a total this year. And I know you're projecting losses in the future. But last year you projected -- let's see, 40 percent higher -- let's say -- you projected a 40 percent greater drop this year than you projected last year, using your own numbers.

MR. MURRAY: I'd have to say what I said -- stated earlier, that the actuarial and those sort of things are done out of our Office of Evaluation. That's well beyond my purview.

REP. LYNCH: Okay. Okay, let's go to Mr. Heist, then.

Hello, Mr. Heist. How are you? You're the inspector general, right?

MR. HEIST: Yes.

REP. LYNCH: You're familiar with this accounting?

MR. HEIST: Yes.

REP. LYNCH: Okay.

MR. HEIST: In some limited way, yes.

REP. LYNCH: Okay. By statute, the Mortgage -- the Mutual Mortgage Insurance Fund has to maintain at least a minimum 2 percent ratio between the balance in the fund and -- the projected balance in the fund and the --

MR. HEIST: Insurance.

REP. LYNCH: -- amount of FHA loans out there.

They were at 6.4 percent last year. They're at 3 percent this year after a 40 percent drop. Correct?

MR. HEIST: That's correct.

REP. LYNCH: Okay. Now, the data forecast that was used to project that is based on June 2008. Is that correct, Mr. Heist?

MR. HEIST: That's correct.

REP. LYNCH: Okay. I just want to say June 2008 is a significant date for the following reason. It was before IndyMac, that failure, which was mortgage related. It was before the government takeover of Fannie and Freddie. It's before Lehman went under, the largest single bankruptcy in the country in our history; the failure of AIG as a private entity. It was before Washington Mutual went under, which was the biggest thrift failure ever in this country. It was before the Citigruop bailout. It was before Morgan Stanley and Gold Sachs -- Goldman Sachs went out of the investment bank business. It was before Merrill Lynch collapsed and also the collapse of Wachovia. And it was before the unemployment rate went to 6.5 percent.

Now, all that considered, with all that data in front of us, Mr. Heist, based on all the available data, it is -- I am concerned about this. I think they're going to drop below 2 percent, and I think they're going to need a bailout from Congress.

And you're somebody who has looked at these numbers. Could you give me your opinion on this?

MR. HEIST: Oh, and in fact, the independent auditors who work for us, who did FHA's financial statements which were published the middle of November, said the same thing and expressed the same concern, that the assumptions that were used may be optimistic; and expressed the concern that capital ratio may indeed decline, at least towards 2 percent. And that is a concern.

REP. LYNCH: Okay. Mr. Murray, have you got anything to add to that? I understand it's a different department within FHA and a different -- and a different team, but the numbers are what they are. Can you persuade me that we're not going to approach that 2 percent?

MR. MURRAY: No, sir. I'm sorry, I couldn't do that.

REP. LYNCH: Okay. All right.

Mr. Chairman, I yield back. Thank you.

REP. KANJORSKI (?): I'd like to call on the gentleman from Texas, Congressman Green.

REP. AL GREEN (D-TX): I thank you, Mr. Chairman. And I thank the witnesses for appearing.

Mr. Heist, because time is of the essence, I may not have an opportunity to ask you questions. I do want to assure you that this does not mean that I do not love you. (Laughter.) I'll have to show you some love on another occasion, possibly.

Mr. Murray, I do have questions for you. Without getting into statistical analysis or differential equations or vector analysis, let's talk for just a moment about this default rate that you referenced a while ago. And I'm talking about now with seller- assisted down payment. Do you agree, sir, that if the buyer provides his or her own down payment, the success rate for those loans with HUD is 97 percent?

MR. MURRAY: I -- I'm not aware of that statistic, but I guess, from a general theory, one would --

REP. GREEN: I believe it is correct. And if you need to confer with one of your colleagues with you, I'll honor that, if you'd like to.

MR. MURRAY: But they're not from the Office of Evaluation, so we --

REP. GREEN: Okay. Ninety-seven percent. The success rate for buyers who receive down payment assistance from relatives, from various programs, perhaps the program that a municipality is affording buyers, is 95 percent -- 95.

The success rate with seller-assisted down payment is 94 percent. If we subtract 94 from 97, we have a difference of 3. That is the 3 times the default rate that HUD has been referencing.

If that is -- if this is incorrect, provide me with your statistical information, so that I may have some degree of clarity, with reference to what I have called to your attention.

MR. MURRAY: Yes. Again I really cannot speak to that. That's an issue; I'd have to get that with the Office of --

REP. GREEN: Well, Mr. Murray, God bless you. You spoke to it earlier. That's the reason I'm back here. I had other business to attend to but I monitor these hearings.

You spoke to it earlier, sir, when you indicated that it was 3 times, I believe, the default rate. Did you not make that comment earlier?

MR. MURRAY: Yes. HUD has long been on record saying that the down payment --

REP. GREEN: Okay.

Mr. Murray, you really need to look into this statistical information, because it is entirely misleading, if what I have said is correct. Because what it causes one to conclude is that the 3 times is some large number, some large difference between, say, seller- assisted and the case wherein the buyer actually pays his or her own down payment. Because 94 from 97 gives us 3. And that is the 3 times that HUD has been referencing.

Again if you have specific information to the contrary, I beg that you give me the specific information to the contrary.

MR. MURRAY: Absolutely. We'll find it.

REP. GREEN: And when you provide this, if you would, sir, I would like to, for our purposes, have some timeline. How long do you think it will take you to provide me with this information?

MR. MURRAY: Well, my staff tells me we could possibly have our office do it today.

REP. GREEN: Today, okay. Well, I understand. Staff tells me most things too, so I appreciate what you're saying.

It is exceedingly important that we deal with this, because the seller-assisted down payment program is one that I support, Mr. Murray. I want to make my position very clear, conspicuously so.

I support it, Mr. Murray, because we have many persons who can make mortgage payments but who don't have a down payment. I support it, Mr. Murray, because many persons who receive down payments from relatives are still having that benefit with HUD but the persons who get the down payments from the seller do not.

And for those who would contend that this may create some sort of collusion, we can move to what's known as a blind pool appraisal process, something used by the VA. The VA utilizes a blind pool appraisal process such that you don't have collusion between the appraiser and any of the parties associated with the loan itself.

I will be -- I am honored to visit with you on any occasion to talk to you about this, because I will be moving in this next session of Congress, along with colleagues -- by the way, I don't like using the personal pronoun "I". Most things are done with other people. It's just that in this environment, if you don't say "I" sometimes you lose the opportunity to let people know that you're doing things. So I only use it for the purpose of letting people know that I'm involved. But I'd like to talk to you more about it.

I thank you for your testimony today. And I yield back the balance of my time.

MR. MURRAY: Thank you.

REP. : Thank you. I'd like to now call on Congresswoman Melissa Bean from Illinois.

REPRESENTATIVE MELISSA BEAN (D-IL): Thank you, Mr. Chairman. And thank you both for your testimony today.

I want to go back to something that Congresswoman Speier mentioned earlier. She had talked about some of these past convictions of individuals and firms who are now applying for FHA involvement and participation in their applications. Now, you've talked about lack of resources and an extensive increase in the number of applications that you're receiving, which makes it even harder to go through.

In the Newsweek -- or the BusinessWeek article that mentions some disturbing examples of those who are now participating in the new programs -- in the FHA programs that had been contributors to the subprime crisis that we're now all suffering through in their past practices -- there was an example of one individual who didn't include their criminal record in their application. In many cases, there are many firms and individuals being investigated who have not yet been convicted.

Is it -- my understanding, and you can correct me if I'm wrong -- that's it's only those who have been convicted that you have to consider?

And if that is the case, do you have suggestions on what you'd prefer to see as the criteria so that you can better weed out those individuals and firms who are contributing those types of practices as bad actors? In other words, should they have to report investigations or associations with, or past employment with, firms who have been under investigation or convicted?

MR. MURRAY: We have requirements where we do look at past criminal activities and behavior and the like. The article is kind of difficult to follow because, you know, there's the theory of present responsibility. So, when was one convicted? What did they do when they were convicted? How does that play into the action?

Yes, there are a lot of things that we want to do to tighten up the requirements, that will give us the ability to say, no, we don't want you to participate in FHA. But right now we don't have that authority. We are very limited in what we can and cannot do. And I mentioned earlier, clearly if we have an entity that has been sanctioned, we can act on that. Because the entity has been sanctioned and its principals chose to reestablish itself, I don't have a -- necessarily have a basis for going after that person unless someone took an action against that individual, like a debarment or a conviction or those sort of things.

So, yes, there are things we want to do. But let me just clarify one thing, though. Even though we have tripled the number of lenders trying to come back in, we have not lessened our requirements at all. It will take as long as it takes to go through a thorough investigation and review of the individual before we approve them coming in our program. So that's why it does take time. But long -- people complained about that, but so be it. We are very, very mindful with our gatekeeping, and not anyone will come into our program. And if -- as I said earlier -- and if people would come in and choose to make mischief, we have so many systems in place that you will get caught sooner as opposed to later.

We have a -- if I might -- we have a process that no one else in the industry has, whereas a lender -- or let's say a broker, for example; don't want to pick them out -- but if they wanted to do bad paper in the conventional market, they would send it through several different sponsors, and that sponsor would notice that, hey, this guy's sending me bad paper. When you come to FHA, you can do the same thing.

But I track the performance of your loans by you. I don't care where you send them; it's being tracked.

And so if they all start going up, I know that. And I can terminate your participation, at least for a six-month period, until you fix the problem.

So we have that, and no one else has that. So that's why --

REP. BEAN: Was that the credit watch that you were talking about?

MR. MURRAY: That's the credit watch.

REP. BEAN: Okay.

Well, I'm only going to interrupt you, because my time is running out. Just to clarify then, you are open to further suggestions and further restrictions from this body.

MR. MURRAY: Yes, absolutely but we never want to put too many restrictions on things, to make things where they just will not work.

REP. BEAN: Well, just eliminating bad actors.

MR. MURRAY: Yes.

REP. BEAN: Thank you.

I yield back.

MR. MURRAY: Thank you.

REP. KANJORSKI: I now call on Congressman Bill Foster from Illinois.

REPRESENTATIVE BILL FOSTER (D-IL): Thank you.

If our current -- this is for Mr. Murray. If the current trends continue, have you done an analysis of how your rates would have to change to preserve the 2 percent reserve fund? Are you in a situation where you can make a relatively modest change in your rates and have the reserve fund stay healthy?

MR. MURRAY: Yeah, I would not be in a position to speak to that. That's all done through our Office of Evaluations. And they're constantly doing these models.

REP. FOSTER: Okay. So I guess maybe this is a similar question. But have you done or are you aware of any analysis where if there is, as many people expect, a further 15 percent or 25 percent drop in real estate prices, what that would do to your -- the reserve fund?

MR. MURRAY: I'm not --

REP. FOSTER: Again same thing.

Would you be able to get that information to us?

MR. MURRAY: Yes. We can get that from the Office of Evaluation.

REP. FOSTER: Okay.

Now, in regards to the credit watch termination initiative, you say that the lenders, with a relative compare ratio greater than 200 percent, are subject to proposed termination. And first off, is the 200 percent 200 percent of the nationwide average or some sort of local average?

MR. MURRAY: No. If they're, and we do this at the branch level because we're concerned about the effect on neighborhoods. So we do it at the branch level. So if a particular branch of a lender, if his relative default and claim rate is higher than that of the national rate and is also 200 percent or more of the local rate --

REP. FOSTER: Okay.

So you make an allowance for neighborhood conditions and so on of that.

MR. MURRAY: Yes because we're comparing it with other lenders who are doing business in the same jurisdiction.

REP. FOSTER: Right, okay, which is sensible.

The -- and what fraction of these are actually terminated, of the ones proposed for termination?

MR. MURRAY: That -- we've not put a number on it. I can tell you at one time, it was like 80 percent we sustained a termination.

REP. FOSTER: Okay.

MR. MURRAY: 80 percent, that was at one point in time, maybe three years ago.

That's not something we track deliberately, because we don't want the industry to believe that we have a quota and that we're trying to get the folks. We want them to understand it's a fully administrated proceeding. You can make your case, mitigating factors, and we will review the facts.

REP. FOSTER: Okay. And when an originator starts originating a large number of mortgages that default promptly, are there any other financial penalties that they suffer immediately?

MR. MURRAY: Well, first of all, we believe -- we -- from a monitoring standpoint, any loan that goes in default within the first two years, they're subject to monitoring. Those are the ones we target. Clearly, any loan that goes into default within the first six months, we assume that's more of a problem with the loan as opposed to borrower circumstance. And if --

REP. FOSTER: But does the originator -- my question is, does the originator suffer promptly when he starts shoveling out a bunch of things that default promptly?

MR. MURRAY: Promptly -- Credit Watch is both -- the quickest thing that one can do. But at six months, they are required to go back and to reassess why that loan went bad. Now, through our monitoring, as we go out to the field and we look at fact-based, to see what caused that, we then will request an indemnification if we find there's a material violation.

REP. FOSTER: What I'm fishing for is if, you know, there was some sort of deferred payment or a penalty that kicked in so that, you know, they wouldn't pay -- they wouldn't get paid the full amount or something like that, so if --

MR. MURRAY: That's what indemnification --

REP. FOSTER: -- if such a payment was ever --

MR. MURRAY: That's what indemnification would do.

REP. FOSTER: But that's sort of a retroactive thing. I was thinking if it was automatic, if they knew for sure that if this thing defaulted for any reason, that they simply wouldn't get their last payment, something like that.

MR. MURRAY: Look, we don't have the same authority that's done in the private sector, where, you bring bad paper, they make you buy it back.

REP. FOSTER: Okay.

MR. MURRAY: We cannot do that.

REP. FOSTER: Okay. And then my last question, what is the role of tax records in verification of income? And is there a useful legislative or technological initiative that might make them more useful or more immediately useful?

MR. MURRAY: For our borrowers or for our lenders?

REP. FOSTER: For borrowers, yeah.

MR. MURRAY: Yeah, that is what we use them for.

REP. FOSTER: Oh. So you take the Social Security number, and you ask the IRS, hey, is this income real?

STAFF: (Off mike.)

MR. MURRAY: Yeah. We don't currently do that today, but that's one of the things that we have in our proposal. We have a list of things --

REP. FOSTER: So it's on your technological road map --

MR. MURRAY: Yes.

REP. FOSTER: -- to just rapidly --

MR. MURRAY: Right.

REP. FOSTER: But you do access tax records by asking the IRS or --

MR. MURRAY: The lenders do that.

REP. FOSTER: The lenders get tax records, provide --

MR. MURRAY: It is up to the lenders to verify income and employment and the like. And they do verify the tax records.

REP. FOSTER: By going to the IRS, or does the --

MR. MURRAY: Yes, there's a --

REP. FOSTER: -- mortgage applicant, you know, provide them something that they call their tax return?

MR. MURRAY: No. There's an electronic process that they use, that they -- where they can go directly to the --

REP. FOSTER: So it doesn't represent a hole that fraud is leaking through.

MR. HEIST: No, a hole is -- and it would take a legislative change. But OIG has advocated making those sorts of income verification mechanisms available. You know, there's a whole host of privacy questions that have to be debated as part of that, but right now the lender has to verify the income through the borrower and through the employer that the borrower says he's employed with. It wouldn't necessarily catch all income, and it might not be the most administratively efficient way to do it.

REP. FOSTER: Yield back.

REP. HINOJOSA: Thank you. I'd like to advise everyone that in approximately 15 minutes or so, we expect that there will be some votes. And I have visited with the chairman, and if any member here would like to come back and ask questions, you may do so. So let me move forward and get as many as we possibly can. And work with me, and we'll give everybody an opportunity to ask their questions.

I'd like to ask the congressman from Illinois, Bill Foster, if you would like to ask your questions -- oh, I'm sorry, that was Bill. I meant to say Walt Minick, from Idaho.

REP. WALT MINICK (D-ID): I thank you, Mr. Chairman.

Mr. Murray, I gather from your opening statement that you think that Citibank is mistaken as a matter of public policy in now approving of the restoring of a bankruptcy court's authority to modify mortgages?

MR. MURRAY: No, no, sir. I'm only speaking about FHA.

REP. MINICK: You think that is -- that would be appropriate policy?

MR. MURRAY: No, no -- No, I'm only speaking in terms of how that affects FHA and Ginnie Mae. We don't have the authority or the financial wherewithal to pay the investors.

REP. MINICK: No, I know you don't, but as a matter of public policy -- in your opening statement you said you opposed any kind of cram-down authority to a bankruptcy judge.

MR. MURRAY: No, no, I was just talking to FHA. That was not a broad statement. It was only FHA. And I just wanted to bring that to this body's attention.

REP. MINICK: But even with respect to FHA, wouldn't giving a bankruptcy judge that authority keep more people in their homes and reduce the number of foreclosures, and ultimately the cost to FHA lenders?

MR. MURRAY: Yeah, I'm just not prepared to offer a personal opinion about that. That would be a personal opinion of mine.

REP. MINICK: So you have no view on the topic?

MR. MURRAY: No, sir.

REP. MINICK: Well, I would hope that your administration would see the wisdom of giving a bankruptcy judge that authority. And perhaps you could convey a message back that there are members of this committee who believe that if we're going to keep people in their homes, if we're going to make purchasers of credit-backed mortgage securities do a better job of due diligence, that we need to have that authority in the system.

Thank you very much, Mr. Chairman. I yield the balance of my time.

REP. KANJORSKI: At this time I'd like to call on Congresswoman Suzanne Kosmas from Florida.

REP. SUZANNE KOSMAS (D-FL): Thank you. I appreciate the opportunity to be here. Frankly, most of the questions that I had in mind during the course of the conversation have already been asked. But referencing back to those questions asked by Congresswoman Bean and to the Credit Watch, I too -- we've been full circle, starting with the BusinessWeek article and the difficulties described there, and then your very healthy confidence in FHA and its ability to control and maintain the processes as well as the requirements.

At the same time, it seems that the article -- that does refer specifically to one specific lender that had 9.2 percent, I think was the number, of its loans in default. And I heard you talk about a suspension or termination for some period of time.

I guess I'm more curious what enforcement measures you have beyond that for lenders who obviously are way outside the realm of normal in the numbers of loans that they are producing that go into default. I mean, that's significantly higher than your 1.3 percent that you described as the FHA number.

MR. MURRAY: Yeah. The -- for the article, that -- I mean, we have to look at that 9.2 percent in context. And I think that was a national number. And I think when we look at where they performed their business, there were only, like, 218 percent.

If I -- not picking anybody in particular, what I can say, two of those lenders we have absolutely zero problems with, that we've done of -- an array of look-sees at. We've -- have absolutely no problems.

There's another three, I believe, we've also looked at prior to this article, and they're already -- they were already on our radar. We have reviewed them, we have taken certain actions, we've made certain recommendations and referrals to the Office of the Inspector General by law, as we're required to do. So that just helps to support that even if you come in, you will get caught if you continue your practices.

But Credit Watch is just that tool to do that. We have no other authority to deal with people. It's not a violation to have a high default (and ?) claim rate. That's not a violation of our program. But Credit Watch is a tool that we use to put you in check, that if you do, we'll put you -- we'll give you a time out.

REP. KOSMAS: Well, I certainly appreciate that, although it appears minimal. As you can understand, the reason for the hearing and the reason that we're here is the fear that the explosive number of FHA applications and mortgages that have occurred during this time when the public, our taxpayers, have lost their confidence in the processes in the financial sector applies also to FHA. And while, as I said, I respect your confidence in what you do and your ability to defend FHA's programs, and I certainly -- having been in the real estate business for 30 years, I think much of what you say is entirely accurate, but we are in a new ball game, so to speak.

My question to you would be, specifically, if there were greater opportunities for you to enforce some stricter standards, if there are consistent situations in which the numbers are higher than what you deem to be an acceptable amount for any company -- I'm not trying to single out any company, I'm just trying to put you in a position where you have the opportunity -- we've talked about ways in which you can prevent; now I'm talking about ways in which you can, you know, stop the hemorrhaging if you do have actors, bad actors that are causing this problem to be exacerbated.

MR. MURRAY: Absolutely. I have never been accused of being shy about going after people. And we're standing at the doorway very diligently. We are very interested in any additional tools that we can use, any different process. As a matter of fact, in Credit Watch, we're expanding that and we're actually going to monitor the performance of the underwriting lenders, as well. Currently we do the origination, but now we're going to do underwriting. But we are tightly tightening it up.

REP. KOSMAS: Well, I guess what we're all saying is, tell us what you need in order to fill your toolbox so that we can not wake up one day and say we saw it coming but we didn't do anything to prevent it. So we would appreciate being partners with you in making that happen.

MR. MURRAY: Thank you.

REP. KOSMAS: Thank you, Mr. Chairman.

MR. MURRAY: Thank you.

I want to give ample time to Congressman from Florida Alan Grayson to have his questions heard.

REP. ALAN GRAYSON (D-FL): Thank you very much, Mr. Chairman.

Mr. Heist, how many FHA mortgages are outstanding today?

MR. HEIST: I'm sorry, I don't have that information. I would have to get it for you.

REP. GRAYSON: Mr. Murray?

MR. MURRAY: Approximately 4.5 million.

REP. GRAYSON: Okay.

Mr. Murray, any idea how many Fannie Mae and Freddie Mac loans are outstanding today?

MR. MURRAY: No, sir.

REP. GRAYSON: And since the housing crisis began, two years ago, how many of those 4.5 million loans have gone to foreclosure claims?

MR. MURRAY: Oh, claims; our claim rate in '07 is 1.42; in '08, 1.3; the claim rate.

REP. GRAYSON: So if there were 4 million, can you help with the math here? That's a cumulative of --

MR. MURRAY: Four million. Well, let me look from -- (inaudible) -- standpoint. We have approximately like 38,000 homes in our inventory. Typically the last two years, we've probably -- I'm sorry, we have about 50,000 homes in our inventory. We sell about 38,000 a year for the last two years. That's a better way of looking at it. Those are the ones that have gone to claim.

REP. GRAYSON: So cumulatively somewhere approaching 100,000 homes, since the housing crisis began, is that correct?

MR. MURRAY: Well, I guess. Yeah.

REP. GRAYSON: That's the number of houses that have gone into foreclosure, during that time, that are FHA loan houses, correct?

MR. MURRAY: (Off mike.)

REP. GRAYSON: All right.

Now, how many people have actually been convicted of mortgage fraud since the housing crisis began two years ago?

MR. MURRAY: I have no idea. That's probably something the Office of Inspector --

Now, if you're talking very specifically to FHA, any instances of fraud, because we make hundreds of referrals to the IG every year. We're required by law to do so. I think we did 700 last year. So any instance of fraud; we refer it to the IG's Office of Investigation for further review. They have to take it from there.

REP. GRAYSON: Right, but my question is, how many people have actually been convicted of mortgage fraud since the housing crisis began?

MR. MURRAY: Oh, I don't know. That moves beyond the realm of what we do.

REP. GRAYSON: Well, let's explore that a little bit.

You said you've made 700 referrals. Of those 700 referrals, I think you said, each year, how many of those resulted in a criminal conviction?

MR. MURRAY: That -- once it leaves us, because of our agreement with the Office of the Inspector General, once we make a referral, that is their domain. We are no longer involved, with our hands off. So I do not track that data. I have no knowledge of that data.

REP. GRAYSON: Mr. Murray, aren't you a little bit curious to know what happens after you make a referral like that?

You're accusing people of criminal fraud, and you seem to lose track of it.

MR. MURRAY: Not the ones that we take action against. No, I know fully well what happens to those. We refer those to the office of inspector -- they have their own reports and audits, though.

REP. GRAYSON: All right. Mr. Heist, would you like to try to answer my question?

MR. HEIST: Well, we have -- I mean, I have the statistics right here, but that's for the entire department. We would have to break that out for you and submit it to you for the record.

REP. GRAYSON: All right. My question specifically is how many people have been convicted of criminal fraud since the housing crisis began? I'm talking of mortgage criminal fraud. How many?

MR. HEIST: That's the number we'd have to get for you. We'll be happy to do that.

REP. GRAYSON: Any idea? Is it a thousand?

MR. HEIST: And then one thing to keep in mind, criminal cases take a period of time to get to us. So I would -- I would suspect that the number would appear fairly small, because we're seeing cases now that were in the pipeline when FHA's volume was low. As the volume increases, we will expect more cases to come in, but very few of those would have likely to have been criminally convicted at this stage.

REP. GRAYSON: Statute of limitations, five years, Mr. Heist. How many people have been convicted of mortgage fraud in the past five years? How many?

MR. HEIST: I don't have that information. I'd be happy to provide it.

REP. GRAYSON: A rough order of magnitude, please.

(Pause.)

MR. HEIST: We don't know at this point.

REP. GRAYSON: Will you please provide the information?

MR. HEIST: Be happy to.

REP. GRAYSON: I think the American people would like to know.

Now, you provided us information that said that 6.5 percent of FHA loans are in default, and you said that you use Credit Watch and Appraisal Watch to try to keep that amount in check and to keep the foreclosure claims in check. How many lenders actually have been terminated from the FHA program since the mortgage crisis began? I'm not talking about branches; I'm talking about lenders. How many?

MR. MURRAY: I may have -- I may have that here -- look at the board activities.

REP. GRAYSON: Well, I see my time is up, so maybe you can provide that separately. But I will point out to you that, given the increase in approved lenders in the past two years from 692 to over 3,300, it seems that this would be a good time to do some culling. Maybe you could make sure that lenders who have three times the default rate are excluded from the program because, after all, inclusion in the program is not a right; it's a privilege.

Thank you.

REP. KANJORSKI: Thank you, Congressman Grayson.

At this time I want to thank the two witnesses for taking the time to testify before our committee.

We all appreciate your appearance.

This panel is now dismissed. The chairman will bring up the second panel following the last three votes that we are now in the House -- that is taking place now. And I declare this portion in recess.

(Sounds gavel.)

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