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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.


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.


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.


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.


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.


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


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.


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

Content Archived: January 20, 2009

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