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Testimony of
William Apgar
Assistant Secretary for Housing/Federal
Housing Commissioner
before the
Senate Committee on Governmental Affairs
Permanent Subcommittee on Investigations
June 30, 2000
Good Morning Chairman Collins
and members of the Subcommittee. My name is William Apgar, and
I am the Assistant Secretary for Housing/Federal Housing Commissioner
at the United States Department of Housing and Urban Development
(HUD). On behalf of HUD Secretary Andrew Cuomo, I want to thank
you for the opportunity to testify today on HUD's efforts to
protect FHA borrowers from abusive mortgage practices.
As you know, more than three
years ago Secretary Cuomo declared that HUD would have no tolerance
for waste, fraud and abuse. At the core of HUD's 2020 management
reforms are efforts to develop new technologies and new approaches
to identify and to deal with a type of abuse of the FHA system
known more generally as predatory lending practices. Today, HUD
and the FHA are recognized leaders in what is now a national
effort to crack down on predatory practices in all markets, including
the emerging sub-prime market, and the existing conventional
and government insured markets. Just last week, Secretary Cuomo
joined with Treasury Secretary Lawrence Summers to release a
comprehensive report on how best to stem predatory lending, particularly
in the subprime market, while in May Secretary Cuomo joined Senators
Barbara Mikulski and Paul Sarbanes in announcing a new set of
initiatives to provide relief to victims of predatory lending
linked to FHA insured loans.
Today's hearing focuses on abusive
practices aimed at FHA borrowers. Therefore I would like to describe
to you the aggressive measures we have put in place over the
past three years to protect FHA borrowers and hold FHA business
partners accountable for their actions. I also understand that
you heard testimony yesterday from several fraud victims, suggesting
that our work is not done. One victim, is one too many, so in
addition to detailing what we have already done, I will also
lay out a series of legislative efforts that will enable FHA
to expand its enforcement efforts, and promote consumers education
and counseling. In addition, I will briefly describe a series
of proposal that address predatory practices by some subprime
lenders. Predatory lending is a serious issue, and Congress has
the opportunity to join with HUD and the Administration in taking
serious action to stem abusive practices where ever they may
occur. I hope this hearing will serve as a catalyst for such
action.
THE FHA's RECORD OF SERVICE
In April of this year, the nation's
homeownership rate reached a record high with 67.1% of American
families owning their own homes. This meant that a total of 70.7
million families owned their homes, an increase of 8.3 million
since 1993. In addition to the overall increase, record high
levels of homeownership were also recorded for central city residents,
as well as among African American and Hispanic families.
FHA has played a key role in
helping families realize the dream of homeownership. Since 1934,
FHA has helped nearly 30 million American families to become
homeowners. We do this by insuring home mortgages, providing
valuable credit enhancement that encourages private lenders to
make home loans they otherwise would deem too risky. Last year
alone, FHA insured 1.3 million loans with an all time record
value of $125 billion. Perhaps most importantly, FHA provides
this valuable service to the American homebuying public at no
cost to the taxpayer. The insurance premiums we collect plus
recoveries on properties sold from the real estate owned (REO)
inventory exceed the cost of all claims and operations. Indeed,
over the next five years, FHA is projected to contribute nearly
20 billion dollars to the national budget surplus.
FHA IS THE STRONGEST IT HAS
EVER BEEN
Under the leadership of Secretary
Andrew Cuomo, HUD has been working hard to reform the Department
and the FHA. Nowhere is the turnaround more evident that in the
FHA's mortgage insurance programs. Despite a six-decade history
of providing access to mortgage capital - in all regions of the
country - in good times and bad - by the early 1990s the FHA
was broke. Years of mismanagement left the FHA with projected
losses from claims on mortgage insurance far in excess of projected
revenue. Absent radical restructuring, a costly federal bailout
seemed inevitable.
Yet today, the FHA and its Mutual
Mortgage Insurance (MMI) Fund are the healthiest they have been
in decades. The most recent actuarial study -- prepared by Deloitte
& Touche - provides detailed information on the financial
status of the MMI Fund for the fiscal year ending September 30,
1999, and presents projections of the Fund's performance over
the next five years. The Deloitte & Touche review focuses
on two key measures of the health of the fund: First, the economic
value of the MMI fund - defined as the sum of existing capital
plus the value of current books of business - and second, the
FHA's capital adequacy ratio - defined as the economic value
of the fund divided by the total unamortized insurance in force.
In specific, the report shows:
- At the end of FY99, the economic
value of the fund was an all time record high of $16.637 billion,
an increase of $5.277 billion from the economic value as reported
for FY98; and,
- Also for FY99, the capital adequacy
ratio stood at 3.66 percent, a dramatic increase over the FY98
capital ration of 2.71 percent, and well in excess of the Congressional
mandate to exceed a benchmark ratio of 2.00 percent by the year
2000.
As these data indicate, this
is a remarkable turnaround from just ten years ago, when the
FHA MMI fund had an economic value of negative $2.7 billion.
The Deloitte & Touche study also confirms that this improvement
is due to fundamental changes in the FHA, including improved
underwriting of loans, expanded lender and appraisal monitoring,
more effective use of loss mitigation, and streamlined procedures
for sale of foreclosed properties. As a result of this progress,
the Deloitte & Touche study report projects that the FHA
is sufficiently well capitalized to withstand future economic
downturns. Deloitte & Touche estimate that:
- Under the most likely economic
scenario which is a continued stable and strong performance,
the FHA capital ratio continues to rise steadily to 5.29 percent
in 2006; and,
- Even under pessimistic assumptions,
the capital ratio continues to rise - if some what slower - to
3.90 percent in 2006.
FHA SERVES ITS SOCIAL MISSION
BETTER THAN EVER
While the Actuarial report is
good news in and of itself, I am equally pleased to report that
the FHA has been able to dramatically improve its financial bottom
line, while simultaneously improving its record of service to
first-time homebuyers, minorities, and others not well served
by convention market:
- In FY 99, 80.8 percent of FHA
purchase money loans went to first time buyers, compared with
64.4 percent in FY92.
- Minority borrowers also increased
as a share of FHA homebuyers to 37.7 percent in FY99 compared
with 21.7 percent in FY92.
I am particularly proud of FHA's
record of serving African-American and Hispanic- American families:
- In FY99, FHA guaranteed an all
time record 170,193 African-American families, a more than three
fold increase over the number served in FY92
- For Hispanics, the numbers are
even more impressive - the record 222,822 loans guaranteed for
Hispanic borrowers in FY99 represents a four fold increase over
FY92 levels.
FHA REFORMS ARE WORKING
The health of the fund and the
solid record expanding access to homeownership are dramatic evidence
that HUD works. Secretary Cuomo's Management Reform plan has
brought to HUD new ways of doing business, new technology, and
new capacity to address the housing and community development
needs of the nation's low and moderate income families and communities.
Over the past three years, the FHA has initiated a comprehensive
approach to protect FHA borrowers from predatory lending practices.
a. Lender Monitoring and Enforcement
Over the last three years, HUD
has taken a number of steps to more clearly hold its lender partners
accountable for their actions. Although the vast majority of
our lender partners act responsibly, FHA recognizes that even
a small handful of irresponsible lenders can cause tremendous
harm to individual borrowers, and ultimately create losses for
the FHA insurance fund. Therefore, HUD has instituted a number
of initiatives designed to enhance FHA's lender enforcement activities,
including:
- Credit Watch, a new performance-based
lender monitoring and enforcement system: Under this system, launched in May, 1999, FHA reviews
all participating lenders' loan default and claim rates by geographic
area on a quarterly basis, and immediately moves to terminate
those with the most egregiously high default and claims rates.
In the first year of operation, FHA has terminated 48 lenders,
proposed termination of another 10 lenders and placed another
approximately 135 lenders on probationary lending status;
- Enhanced lender monitoring
activities: Over the
past three years, FHA has increased its lender monitoring staff
more than sevenfold, from just 23 monitors in 1997, to more than
140 today. Similarly, FHA has dramatically increased the number
of lender monitoring reviews from just 256 in FY1997, to more
than 900 in FY1999;
- Stepped-up lender enforcement
actions: The investment
in increased monitoring is beginning to pay off in the form of
more lender enforcement actions. HUD's Mortgagee Review Board
(MRB) imposed more than $1.7 million in civil money penalties
on more than 30 lenders last year, and received indemnifications
on a total of 1,025 loans, saving the Department an estimated
$32 million in avoided losses - nearly as many indemnifications
as the Department required over the preceding two years.
b. FHA's Appraisal Reform
Initiative
Property flipping -- the primary
focus of this subcommittee -- is most often associated with inflated
or fraudulent appraisals. Therefore, our initiatives to safeguard
the Fund began with the reform of the Federal Housing Administration's
(FHA) appraisal process. Under the Homebuyer Protection Plan,
FHA has developed the most comprehensive and thorough appraisal
procedures in the housing finance marketplace today. Our reform
package, which was developed during 1998 working in partnership
with the Mortgage Bankers Association, the National Association
of Realtors, the Appraisal Institute, the Appraisal Foundation
and several consumer advocacy groups, is intended to provide
the consumer with an unprecedented amount of information about
the physical condition of the home they are purchasing, and also
to create a more effective framework for FHA to hold appraisers
accountable for their work. The initiative includes the following
features:
- Mandatory appraiser testing: For the first time ever, all FHA appraisers
now are required to pass an exam testing their knowledge of FHA
appraisal requirements. This requirement was implemented on July
1, 1999, and is a mandatory requirement as of February 1, 2000;
- A new, more thorough Valuation
Condition (VC) form required for every FHA appraisal: FHA is now the only mortgage finance
organization in the country that requires every appraisal to
include completion of a four page form that captures comprehensive
information regarding the physical condition of the property.
This form was made mandatory in all FHA appraisals as of September
13, 1999;
- Homebuyer Summary Form: FHA also is requiring lenders to provide
every borrower with a summary of the results of the Valuation
Condition form. This summary highlights any property physical
conditions that do not meet HUD minimum property standards. This
form also was made a mandatory component of all FHA appraisals
as of September 13, 1999;
- New Homebuyer Protection
Form: FHA now requires
lenders to provide all borrowers this notice highlighting the
importance of getting a home inspection. Implemented on September
13, 1999;
- Enhanced appraiser enforcement
processes and authority: Working
with the consulting firm Arthur Andersen, FHA also has developed
a new method of using statistical indicators to target poor performing
appraisers for extra monitoring activity. As part of this initiative,
FHA also issued a new proposed federal regulation to clarify
existing authority to pursue enforcement sanctions against fraudulent
and poor performing appraisers in March, 2000.
Taken together, these reforms
create the most effective safeguards against mortgage fraud -
a well informed consumer and a clear and deliberate process for
monitoring appraisers' work and pursing enforcement actions when
warranted.
c. Aggressive Foreclosure
Avoidance
In 1996 Congress authorized and
FHA implemented a comprehensive new program of foreclosure avoidance,
or loan loss mitigation, that protects the interest of borrowers
and the financial integrity of the FHA Fund. This new program
replaced the ineffective Assignment Program, which often left
borrowers deeper in debt and was costly to the Fund. FHA's program
includes a new comprehensive set of loan loss mitigation tools
-- special forbearance periods, modification of loan payments,
balance and/or interest rate, as well as pre-foreclosure sales
to try to help borrowers in default avoid foreclosure and maintain
ownership of their home. This broader set of tools addresses
a far greater range of borrower problems than could be addressed
through the Assignment Program. Perhaps most importantly, the
Loss Mitigation Program shifts the emphasis to early intervention
in the default cycle, when there is the greatest potential for
the borrower to recover from default and remain in their home.
Through a combination of aggressive
outreach and training for servicers, and tough monitoring and
enforcement actions when necessary, FHA has grown this program
substantially over the last three years. After assisting just
approximately 5,800 borrowers in default in the first year of
the program FY 1997, FHA assisted nearly 10,800 borrowers in
FY 1998 and then more than doubled the program one year later
when it helped nearly 27,000 borrowers in FY1999 avoid foreclosure.
Moreover, more than 80 percent of all loss mitigation actions
last year helped the borrower not only avoid foreclosure, but
also maintain ownership of their home through a special forbearance,
mortgage modification or a partial payment of claim. So far this
year, FHA has helped nearly 23,000 borrowers in default avoid
foreclosure and keep their homes - a pace that should result
in more than 32,000 actions by the end of the fiscal year.
FHA FRAUD PREVENTION PLAN:
PROTECTING FHA HOMEOWNERS FROM PREDATORY LENDING
Building on these successful
initiatives, in May FHA announced a series of initiatives to
provide relief to those FHA borrowers already in distress, especially
those who have been victimized by abusive lending practices and
to intensively focus enforcement activities in areas with an
unusually high number of foreclosures, so called "hot zones."
Specific initiatives include:
- Counseling Borrowers in Default.
HUD's network of more
than 1,200 approved counseling agencies nationwide help thousands
of families every year make well-informed home purchase decisions.
But due to insufficient Congressional funding for HUD certified
counseling agencies, the availability of counseling services
is uneven across geographic areas, and there are far too few
agencies with the capacity to provide specialized foreclosure
avoidance counseling to borrowers in default. Therefore, FHA
is launching a new initiative to directly fund default counseling
in select "Hot Zones". Through this program, FHA will
offer borrowers in default a voucher for counseling services,
redeemable at their local HUD-approved counseling agency. Once
completed, the counseling provider agency can redeem the voucher
with HUD to receive payment. As an eligible effort under the
loss mitigation, this initiative will be funded from FHA's mortgage
insurance fund.
- Restructuring Inflated Mortgages.
Once FHA identifies a
mortgage based on a fraudulent appraisal, FHA will move to force
the lender to write the mortgage down to a level consistent with
true market value. In the case of a recalcitrant lender, FHA
loss mitigation specialists will intervene directly, cancel the
insurance, take possession of the deed, and resell the property
with FHA insurance to the family for the fair market price.
- Repairing Credit of Abused
Borrowers. In cases of
default or foreclosure linked to fraudulent appraisals or underwriting,
FHA will instruct the lender to issue a "credit repair letter"
to the borrower and notify the credit reporting agencies of this
action.
- Approving New Software to
Empower Default Counselors.
Working in cooperation with national vendors, FHA has developed
guidance on new computer software which assists default counselors
in examining FHA foreclosure avoidance options and advising clients
as to the best course of action. The first software package approved
for use under this new initiative, "BackInTheBlack"
loss mitigation application, was developed by a Baltimore based
company, and is available free of charge to local housing counseling
agencies. FHA is also currently reviewing additional software
programs at the request of other developers. FHA is pleased to
participate in the development of these foreclosure avoidance
software packages which, when used properly, promote effective
early response and appropriate use of FHA's foreclosure avoidance
actions.
- Focusing Resources on Loss
Mitigation Assistance.
In "Hot Zone" areas with high default and foreclosure
rates, FHA will establish teams of loss mitigation specialists
to work with lenders and borrowers to ensure that every effort
is made to help families remain in their homes.
- Using "SWAT" Teams
to Identify Unscrupulous Appraisers and Predatory Lenders in
Hot Zones. In Baltimore,
FHA sent a SWAT team to review all initial petitions to foreclose
taking place from January through March of 2000. Based on this
review, FHA identified a number of apparently fraudulent practices
on the part of FHA appraisers and lenders. These individuals
and firms will be referred to FHA's Quality Assurance Division
for further action, and if appropriate, to HUD's Enforcement
Center or Office of Inspector General. By immediately stopping
such bad actors in their tracks, communities can begin to recover.
HUD plans to immediately extend the SWAT team approach to assess
potential fraudulent activities in other cities now experiencing
high numbers of FHA defaults and foreclosure
HUD's LEGISLATIVE AGENDA
Over the past three years, HUD
has taken aggressive action to stem waste, fraud and abuse in
FHA programs, as well as the broader mortgage market. To build
on these efforts, Congress should move quickly to enact legislation
to protect consumers from predatory practices. In particular,
Congress should:
- Support Legislative Initiatives
Presented in the HUD/Treasury Report
A comprehensive assault on predatory practices must focus on
the growing abuses in the subprime market. In their recent report
on the topic, HUD and Treasury outlined a series of legislative
initiatives targeted to protecting consumers from these abusive
practices. These recommendations closely parallel the legislative
proposals already introduced by Senators Sarbanes and Schumer,
and Representatives LaFalce and Schakowsky. Congress should work
to resolve the differences remaining among these proposals and
enact comprehensive legislation this year to protect consumers
from predatory practices
- Support Administration Requests
to Fund Homebuyer Education
Homeownership education
and counseling is widely recognized as one of the best ways to
help consumers avoid becoming victims of predatory practices.
Despite this, last year, Congress cut HUD's counseling budget.
Even more dramatic cuts are contained in the appropriation bill
just passed by the House. Congress should fully fund the $24
million Administration request to fund these vital consumer education
and counseling services.
- Credit Watch Termination
Codification: The National
Housing Act requires HUD to operate the FHA Mutual Mortgage Insurance
Fund (which backs the majority of FHA-insured single family mortgages)
in an actuarially sound manner. To accomplish this, FHA needs
the ability to stop doing business quickly with a mortgagee whose
high level of early defaults and claims presents an unacceptable
risk to the insurance fund.
Just this week , Senators Mikulski and Sarbanes introduced legislation
to amend section 533 of the National Housing Act to confirm the
Department's existing authority to terminate the mortgagee approval
when the mortgagee has an unacceptably high level of early defaults
and claims for such mortgages in the area covered by a HUD field
office, in comparison to other mortgagees lending in the same
area. This would not affect a mortgagee's ability to continue
to service, hold, or invest in FHA-insured mortgages.
FHA's termination regulation supplements, and performs a different
purpose than, the regulations of the Mortgagee Review Board (MRB).
The MRB is the only entity with authority to withdraw FHA approval
from a mortgagee completely and, in essence, stop the mortgagee
from doing any further business with FHA. The MRB takes this
action if FHA proves that the mortgagee has engaged in fraudulent
or other significantly deficient practices. This procedure does
not address the situation of a demonstrably poor performer that
has not engaged in provable violations or fraud.
If FHA is to operate in a more efficient and business-like manner,
it needs to focus on outcome and performance, not process. Mortgagees
whose loans perform so poorly that many default in their early
months present a clearly unacceptable risk to the FHA insurance
fund that, ultimately, may impair FHA's ability to continue to
serve the low- and moderate-income borrowers who depend on FHA.
FHA needs to continue to have a business mechanism to prevent
these mortgagees from originating or underwriting new FHA-insured
loans (and consequently from increasing the risks to the insurance
funds and affecting FHA's ability to serve borrowers) without
having to prove that the mortgagee is engaging in fraud or other
irregularities. This proposed legislation would provide a more
explicit statutory foundation for such a mechanism.
Despite the fact that FHA has clear, general statutory authority
to administer the Credit Watch Termination program, two Baltimore
area lenders have been successful in fighting proposed termination
of their authority to originate FHA-insured loans in the Baltimore
Federal District Court. HUD along with the Department of Justice
(DOJ) is appealing both of these adverse decisions. To date,
FHA has successfully terminated approximately fifty lenders trough
the Credit Watch Termination program, with just these two Baltimore
cases, brought by Capitol Mortgage and American Skycorp Mortgage,
successfully fighting termination in court. Still, the Department
seeks a legislative amendment to Section 533 of the National
Housing Act, to more clearly codify the Credit Watch Termination
program into HUD's statutory authority. The proposed legislation
would mitigate the likelihood of future successful litigation
against the Department.
CONCLUSION
Under the leadership of Secretary
Andrew Cuomo, HUD has a demonstrated track record of rooting
out waste fraud and abuse. Predatory lending is a serious problem,
and FHA has taken serious actions to hold our business partners
to high standards of performance. There will always be some who
will attempt to defraud the FHA and the millions of families
that rely on the FHA to purchase their first home. For more than
three years, FHA has aggressively expanded its fraud protection
tool kit. The results are evident - FHA is in the soundest financial
shape ever and well positioned to meet the future homebuying
needs of the nation's low- and moderate-income families
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