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(Washington, D.C.) – Today, U.S. Senator Patty Murray questioned David Stevens, Commissioner of the Federal Housing Administration (FHA), at a hearing of the Senate Appropriations Subcommittee on Transportation, Housing, and Urban Development, which Murray chairs.

Murray questioned Stevens on the  the slow pace of the Administration’s Home Affordable Modification Program (HAMP) and called on the Administration to do more to compel lenders to modify mortgages to allow struggling families to stay in their homes. Murray also pushed Stevens hard to make sure that taxpayers are protected from additional losses in the housing markets, and specifically asked him about the Administration’s plans to deal with Fannie Mae and Freddie Mac.

Key excerpts:

“As we sit here today, millions of Americans are out of work and many more are struggling with unaffordable mortgage payments negative home equity, or foreclosure During the housing boom, millions of Americans achieved the dream of homeownership.  But for far too many Americans, these dreams were based on false promises and fueled by investors and lenders that were chasing profit while ignoring risk.”

“The consequences of these risky behaviors have rippled through the national and global economies. With mounting foreclosures, a crippled housing market and a financial sector in turmoil, we continue to clean up the mess created by predatory lenders and Wall Street greed.”

“I am pleased that FHA is increasingly using its authority to investigate lenders that aren’t playing by the rules.  It must be absolutely clear to lenders engaging in fraudulent and risky practices that they are not welcome in FHA programs, and will not be supported by taxpayer dollars.”

“Americans trying to get assistance are frustrated, and rightfully so.  They watch as banks have received billions of dollars in taxpayer assistance, and yet many of these same banks are unwilling to assist homeowners facing foreclosure.  This cannot be tolerated.  Servicers must be held accountable.  At the very least, servicers must communicate with those trying to receive assistance, and provide an explanation if borrowers aren’t approved.”

“I remain concerned that since this program [HAMP] is voluntary it will still fail to meet its goal.  So, I expect the Administration to compel lenders to provide real aid to families that want to, and with a fair deal could stay in their homes.”

“It is also clear that we must address the future role of Fannie Mae and Freddie Mac in the housing market.  There is no doubt that the GSEs had a hand in exacerbating the housing crisis.  And just as there needs to be consequences for Wall Street, there must also be consequences for the GSEs.  The spigot of taxpayer dollars flowing into the GSEs cannot stay on indefinitely. As the Administration debates the future of the GSEs, I, like most Americans, am growing impatient.  And my impatience only increases as the cost to the American taxpayers grows with no end in sight. The Administration must put forward a real plan on how to reform the GSEs.”

“As we try and tackle the complex set of challenges facing the housing market today, the federal government must play a role in supporting the market, but it must also protect the taxpayers.”

The full text of Senator Murray’s opening statement follows

“The Subcommittee will come to order.

“This morning we welcome Commissioner Stevens to his first appearance before the Subcommittee as we examine the Federal Housing Administration and its role in the housing market. 

“As we sit here today, millions of Americans are out of work and many more are struggling with unaffordable mortgage payments negative home equity, or foreclosure

“During the housing boom, millions of Americans achieved the dream of homeownership.  But for far too many Americans, these dreams were based on false promises and fueled by investors and lenders that were chasing profit while ignoring risk. 

“The consequences of these risky behaviors have rippled through the national and global economies.

“With mounting foreclosures, a crippled housing market and a financial sector in turmoil, we continue to clean up the mess created by predatory lenders and Wall Street greed. 

The Role of FHA

“Fulfilling the same role as it did when it was created during the Great Depression, the FHA has stepped forward to help provide liquidity and restore stability to the housing market.

“FHA’s increased role in the housing market is as critical as it is daunting.  As recently as 2007, when this Subcommittee held the first in a series of annual hearings on FHA, its share of the market was only 3 percent.  Today, FHA represents nearly 30 percent of all new homes sales.

“FHA has played a critical role supporting the housing market while private financing has been nearly frozen.

“However, FHA has been plagued by long-standing management challenges; challenges that continue to raise concerns about its ability to manage its outsized role in stabilizing the market.

Challenges at FHA

“Commissioner Stevens, you have acknowledged the challenges you inherited when you took over the agency, and have moved quickly to assess and seek solutions to the problems facing FHA.

“The most glaring of these are antiquated information technology systems and an inadequate workforce, both of which are critical to equipping the agency to meet the challenges it faces.  A well-functioning FHA is vital to maintaining the solvency of the Mutual Mortgage Insurance (MMI) Fund and protecting the American taxpayers from having to pay for risky or fraudulent mortgages.

“This subcommittee provided additional resources to help FHA address its shortcomings.  Both in 2009 and 2010, we provided funding to help FHA modernize its IT systems and hire additional staff to better manage and oversee a growing portfolio. 

Focusing on Risk

“Equally important to these new tools is fostering a culture at FHA focused on risk.  Commissioner Stevens, one of your first actions after taking office was to appoint FHA’s first Chief Risk Officer.  This position was long overdue and sends an important signal to lenders, borrowers and taxpayers that FHA understands the risks it faces and is working to mitigate them.

“I am pleased that FHA is increasingly using its authority to investigate lenders that aren’t playing by the rules. 

“It must be absolutely clear to lenders engaging in fraudulent and risky practices that they are not welcome in FHA programs, and will not be supported by taxpayer dollars.

Proposed FHA Reforms

“Despite some important progress, FHA still faces significant challenges.  Foreclosures have taken their toll on FHA’s finances, leaving the capital reserve fund below the two percent required by Congress.  This is a cause for concern, since any significant setbacks in the housing market could result in additional and possibly unaffordable losses to the fund.

“In an effort to strengthen the agency’s finances and protect itself from future risk, HUD has proposed a series of reforms, including:

  • Increasing premiums:
  • Setting minimum FICO scores;
  • Increasing downpayment requirements for riskier borrowers; and
  • Expanding enforcement authorities.

“Some of these changes are already underway, but others will require legislation.  Today, I will have questions about these reforms—what they mean for fulfilling FHA’s mission to provide access to affordable mortgages, as well as how they impact the solvency of the MMI Fund as we look to the future.

“It is clear that the solvency of the MMI Fund and the strength of FHA depends on the recovery of the housing market.  This is evident by CBO’s re-estimate of receipts that FHA is expected to generate in 2011. 

“Continued uncertainty about the housing market, as well as lingering doubts about FHA’s ability to realistically assess its risks, resulted in CBO’s much more conservative estimate of $1.9 billion in receipts instead of the $5.8 billion projected by the Administration. 

Continued Challenges in the Housing Market

“The concerns expressed by CBO are real.  Relatively stable home prices and increasing home sales suggest that the market is stabilizing.  Yet large segments of the housing market remain fragile, and there are looming problems that could undermine the progress we have made.

“Over 2 million homes are currently in foreclosure and that number is only expected to grow throughout 2010.

“To date, the Administration’s Home Affordable Modification Program has had limited success in stemming the tide of foreclosures.   There have only been 230,000 permanent modifications made under this program—far short of the 3-4 million homeowners expected.

“And as banks and servicers determine whether a modification is in their best interest, many families are left waiting as they face the agonizing prospect of losing their homes.  I continue to hear that servicers are unresponsive to borrowers, and in some cases unwilling to explain why modifications are denied.

“Americans trying to get assistance are frustrated—and rightfully so.  They watch as banks have received billions of dollars in taxpayer assistance, and yet many of these same banks are unwilling to assist homeowners facing foreclosure.

“This cannot be tolerated.  Servicers must be held accountable.  At the very least, servicers must communicate with those trying to receive assistance, and provide an explanation if borrowers aren’t approved.

Addressing Unemployed and Underwater Borrowers

“The success of HAMP was also limited because it failed to address two of the major problems facing troubled borrowers today—unemployment and negative equity.

“I have seen this tragic combination devastating families first hand in communities across my state.

“In Clark, Snohomish and Pierce Counties, communities are struggling with both unemployment and foreclosure.

“And unfortunately, home prices have yet to stabilize in Washington State, so families are continuing to see the equity of their homes decline.  Nearly 16 percent of all Washington homeowners are underwater.  Sadly, they are not alone.

“Over 11 million families across the country are underwater on their mortgages today as a result of falling home prices and growing debt.  That represents nearly 1 out of every 4 mortgages.

 “Just a few months ago, the Administration announced plans to change HAMP in order to address these problems.  The plans include offering increased relief for unemployed borrowers as they look for work and get back on their feet, as well as incentives for lenders to permanently write down the principal of these mortgages instead of just addressing interest rates. 

“These changes were necessary to more effectively address the foreclosure crisis, but I remain concerned that since this program is voluntary it will still fail to meet its goal.  So, I expect the Administration to compel lenders to provide real aid to families that want to—and with a fair deal—could stay in their homes. 

“As part of these announcements, FHA’s refinance program is also set to be expanded.  This is an important tool that will assist homeowners get into a truly affordable mortgage through incentives and write downs of both first and second liens.  While these loans will be subject to FHA underwriting standards, there is still an increased risk associated with these loans.

“In order to mitigate the effects of these riskier loans on the health of FHA’s Insurance Fund, the Administration has set aside $14 billion in TARP funds. 

“However, many of the details surrounding this proposal are still being worked out, and I am concerned that this could result in additional losses to the MMI Fund—losses that the fund simply cannot absorb.

“So, I will have questions today about the design of this program, and how we can be assured that this program will not cost the American taxpayers anything more than what has already been set aside from the TARP funds.

Strategic Defaults and Shadow Inventory

“Amidst all of these efforts to modify mortgages so families can stay in their homes, there are a growing number of homeowners deciding to strategically default.  Many of these homeowners can afford their mortgage payments, but because of their severe negative equity they feel it is in their financial interest to simply walk away.

“The potential impact of this on home values and market stability could be devastating.

“There is also the very real concern about what is called “shadow inventory”.  These are the houses that are facing foreclosure or have already been reposed by the bank, but are not yet on the market.  Hopefully the impact of these will be lessened by an increase in permanent modifications.  But if a large number of these homes were to suddenly flood the market, all of our gains in home values could be erased.

“These issues demonstrate how fragile the housing market remains.  But we are beginning to test its stability.  The Federal Reserve ended its purchase of mortgage-backed securities at the end of March, and the homebuyer tax credit ended last month.   

“Even as we watch with some anxiety as these supports are withdrawn, it is clear that the government cannot continue to play the outsized role in the housing market that it has taken on over the past two years. The long-term health of the housing market and the economy depend on the return of the private market. 

The Need for GSE Reform

“It is also clear that we must address the future role of Fannie Mae and Freddie Mac in the housing market.  There is no doubt that the GSEs had a hand in exacerbating the housing crisis.  And just as there needs to be consequences for Wall Street, there must also be consequences for the GSEs.  The spigot of taxpayer dollars flowing into the GSEs cannot stay on indefinitely.

“As the Administration debates the future of the GSEs, I—like most Americans—am growing impatient.  And my impatience only increases as the cost to the American taxpayers grows with no end in sight. 

“The Administration must put forward a real plan on how to reform the GSEs.

“GSEs currently provide important support to the housing market, and so this plan must be thoughtfully done, with care not to reverse the hard-won progress made to date.  This plan must include a clear understanding of how any changes will impact the housing market and Americans’ ability to buy a home for their families.

“But it is simply not enough to say that it is complicated and we have a plan soon.  It is not easy, and so it deserves an honest and open dialogue about its future.  But there needs to be a sense of urgency that has thus far been lacking. 

Closing

“As we try and tackle the complex set of challenges facing the housing market today, the federal government must play a role in supporting the market, but it must also protect the taxpayers.

“Commissioner Stevens, this has been your task since taking over FHA.  And I want to commend your commitment to addressing the challenges at FHA while working to ease the recovery of the housing market.

“I look forward to hearing your testimony today, and with that, I turn to my partner and Ranking Member, Senator Bond.”