Statement of John C. Weicher
Assistant Secretary for Housing-Federal Housing Commissioner
before the Special Committee on Aging
U.S. Senate
February 24, 2004
Good
morning, Chairman Craig, Ranking Member Breaux and distinguished
Members of the Special Committee. Thank you for the opportunity
to testify on the efforts of the Department of Housing and Urban
Development to combat predatory lending and protect senior citizens
and indeed all Americans against unfair and deceptive practices.
Meeting the housing needs of senior citizens while protecting them
from predatory lending practices is a high priority at the Department.
I
would like to provide you with an overview of HUD's initiatives
and describe what HUD, particularly through the Federal Housing
Administration (FHA) is currently doing to address this problem.
FHA
has made significant efforts through consumer education, enforcement
actions and regulatory reforms to combat abusive and deceptive lending
practices. Before I discuss the full range of these efforts across
all our insurance programs, I would like to describe FHA's mortgage
insurance activity to the Committee, to place our efforts in context.
FHA insures mortgages for homebuyers who do not qualify for conventional
mortgage loans. Our typical borrower is a young, first-time homebuyer,
often a minority household. In FY 2003, FHA insured 600,000 home
purchase mortgages. Of these, 80 percent were to first-time homebuyers,
and 40 percent of those were to minority households.
Of
special interest to this committee, about one percent of FHA's borrowers
are elderly (65 or over) and another one percent are between the
ages of 60 to 64. About 20 percent of FHA-insured elderly homebuyers
purchase manufactured homes, compared to less than two percent of
young homebuyers. Over 4.4 percent of FHA borrowers who bought manufactured
homes were 60 and over.
Home
Equity Conversion Mortgages
FHA
does have one important insurance program that specifically serves
the elderly. This is the Home Equity Conversion Mortgage Program.
At HUD, we refer it as HECM for short. The HECM program, commonly
referred to by consumers as a reverse mortgage program, is designed
to enable elderly homeowners to convert the equity in their homes
into income that can be used to pay for home improvements, medical
costs, living expenses, or other expenses. FHA accounts for about
95% of the reverse mortgage market.
The
HECM program started as a demonstration program in 1990 and was
seen as a true innovation in the mortgage industry, a way of helping
elderly people who were house rich but cash poor. The program became
permanent in 1993. In the last two years -2002 and 2003 - the program
has been growing at a rapid rate. We set records in both of these
years. We endorsed over 13,000 loans in 2002 and then set another
record in 2003 with over 18,000 loans.
According
to demographic data on new borrowers in the HECM program over the
last three years, 50 percent are between 70 and 79. Another 25 percent
are 80 or over, so three quarters of the borrowers are 70 or over.
There are even some borrowers older than 90: they comprise 3.2 percent
of the total.
Housing
Counseling
We
recognize that seniors with considerable equity in their homes can
be prime targets for predatory lending. We require that seniors
considering a HECM loan receive counseling, and we have worked hard
to ensure that the counseling they receive before applying is of
high quality.
HUD
believes that our frontline of protection against predatory lending
is an informed consumer. Housing counseling has proven to be an
extremely important activity to educate consumers on how to avoid
abusive lending practices. Housing counseling agencies help educate
borrowers, so they have the financial literacy they need to protect
themselves. Counselors assist individuals with making intelligent
decisions, helping unwary borrowers avoid inflated appraisals, unreasonably
high interest rates, unaffordable repayment terms, and other conditions
with can result in a loss of equity, increased debt, default, and
even foreclosure.
During
the housing counseling session the senior learns how a HECM works,
how much equity he or she would receive through a HECM, how much
the transaction will cost, what are the financial alternatives to
a HECM and what are the tax and estate consequences, among other
things.
One
of HUD's major partners in our effort to educate seniors about reverse
mortagages is the AARP Foundation. The AARP Foundation sponsors
the Reverse Mortgage Education Project which is designed to help
older homeowners make informed decisions about converting the equity
in their homes into cash - without having to sell their homes, or
make monthly loan repayments. This project has been the leading
consumer voice in the reverse mortgage market for over a decade,
providing in-depth, objective consumer information, and promoting
high-quality, independent consumer counseling on reverse mortgages
and other alternatives.
During 2003, the Reverse Mortgage Education Project doubled the
size of its counseling network, handled 10,000 consumer inquiries
and counseled 3,400 households. The Project recently received a
150% increase in funding from HUD - from $750,000 in 2003 to $1.9
million in 2004. The increase will enable the project to add more
counselors and nearly triple the number of households it counsels.
It will also pay for upgrading the project's online reverse mortgage
calculators, developing a formal counseling quality assurance program,
and strengthening the project's client screening and appointment
scheduling systems.
HUD
funds AARP through its Housing Counseling Grant Program. This grant
program funds housing counseling agencies across the country. In
FY 2003, HUD awarded $37.6 million in grants, $2.7 million being
awarded specifically to combat predatory lending. These grants will
assist more than 430,000 people to either become first-time homeowners
or remain homeowners after their purchase. The grants were awarded
to 17 national and regional organizations and approximately 350
state and local housing counseling agencies. President Bush is proposing
to increase HUD's Housing Counseling grant program to $45 million
next year - another 12.5 percent increase. We know that housing
counseling works. Families who receive counseling are better able
to select the best mortgage for their needs and better able to manage
their finances so they can remain in their homes.
HECM
Regulatory Changes
In
addition to pursuing our housing counseling efforts, HUD has undertaken
several regulatory reforms in recent years to protect seniors participating
in the HECM Program from predatory practices. These rules include:
- A final rule that would implement statutory changes to the
HECM Program under Section 201 of the American Homeownership and
Economic Opportunity Act of 2000. This legislation authorized
FHA to offer mortgage insurance for the refinancing of existing
HECM loans and established a set of consumer safeguards for these
HECM refinancing transaction. The statute requires an anti-churning
disclosure to inform the borrower of the total cost of the refinancing
and the new principal limit. The Department submitted this rule
to OMB on February 3.
- A
final rule was published in 1999 requiring that seniors receive
a full disclosure of all costs, including estate planning, financial
advice and other services that are related to the mortgage, but
are not required to obtain a HECM loan. This rule was designed
to protect senior homeowners in the HECM program from becoming
liable for payment of excessive fees for third party services
that may have little or no value and are not necessary.
Combating Predatory Lending
In
addition to the reforms that HUD has pursued in the HECM program,
the Department has developed new requirements specifically targeting
lending practices to protect all FHA borrowers and set an example
for the rest of the housing industry. These reforms benefit all
of FHA's homebuyers, including the elderly.
In
particular, there are several new, more stringent procedures for
participating in FHA insured programs that have been implemented
as final rules. They include:
- An Anti-Flipping Rule that was made effective in June 2003.
This
rule prohibits FHA insurance on a property resold within 90
days of the previous sale and also prohibits sale of a property
by anyone other than the owner of record.
- An Appraiser Qualifications Rule for Placement on FHA Single
Family Appraiser Roster that was made effective in June 2003.
This rule establishes stronger professional credentials
for FHA-approved appraisers.
- A rule establishing Section 203(k) Consultant Placement
and Removal Procedures that was made effective in September
2002. The rule establishes placement and removal procedures
for HUD's roster of 203(k) consultants to better ensure the
consultants meet HUD requirements. The 203(k) program insures
mortgages for home purchases that include the costs of repairs
as well as the purchase price.
- A rule allowing Electronic Submission of Audited Financial
Statements that was made effective in September 2002. This
rule allows HUD to accept electronic submissions of lenders'
financial audits to identify and remove noncompliant lenders
more quickly.
- A rule establishing Placement and Removal Procedures for
HUD's Nonprofit Organization Roster that was made effective
in July 2002. This rule better insures that nonprofits meet
HUD requirements.
There are also proposed rules we have published:
- A proposed rule Limiting Nonprofit Organization Participation
in FHA Single Family Activities was just published on February
13. This rule proposes ways to reduce defaults by nonprofits
and create more reasonable conditions for their participation
in FHA programs. It would require nonprofits that obtain FHA
financing for10 or more properties in a fiscal year to prepay
at least 80 percent of that total number of mortgages within
two years after the fiscal year they were originated.
- A proposed Rule Regarding Lender Accountability for Appraisals
that was published in January 2003. This rule provides that
lenders and appraisers are held strictly accountable for the
quality of appraisals on properties securing FHA insured mortgages.
It proposes that lenders who submit appraisals to HUD that do
not meet FHA requirements are subject to the imposition of sanctions
by the Mortgagee Review Board. The final rule is expected to
be published in the second quarter of this calendar year.
- A proposed rule on the FHA Fee Panel Inspector Roster
that was published in October 2002. This rule creates
the FHA Fee Panel Inspector Roster for inspecting new construction
projects.
Monitoring and Enforcement
In addition to establishing more stringent procedures for participating
in FHA insured programs, the Department is taking aggressive action
concerning business partners that demonstrate poor performance
and abusive lending practices.
HUD has created the Credit Watch Program by which we track quarterly
the default rates for the 25,000 lender offices that originate
FHA loans and terminates those operations where the default rate
exceeds twice that of the local jurisdiction. Credit Watch protects
the integrity of the FHA insurance funds and sanctions those lenders
who demonstrate imprudent or possible abusive lending practices.
The default rates of these lenders are published on the Web and
thereby serve as a source of information by which other lenders
and interested parties can judge a lender's performance.
Since Credit Watch started in May 1999, we terminated 205 lender
branches and sent out another 19 sanction letters through December
2003. That is about one percent of FHA lender offices.
FHA also produces Neighborhood Watch, a web-based software application,
for HUD oversight of lenders and lender self-monitoring. Neighborhood
Watch complements the Credit Watch Termination initiative by providing
FHA approved lenders with statistical views of their performance.
As a self-policing tool it has enabled lenders to monitor their
performance in comparison to other lenders, take corrective actions
within their own organizations, and/or sever relationships with
poorly-performing business partners.
When FHA staff finds evidence of widespread abuse of HUD's program
requirements, lenders are referred to the Mortgagee Review Board.
(MRB) for action. I chair the MRB and other senior HUD officials
serve on the Board. Board cases generally involve the most serious
findings. The MRB is authorized to impose a range of administrative
sanctions from a letter of reprimand to withdrawal of a mortagee's
FHA approval. The MRB may also impose civil money penalties.
FHA monitors the activities of lenders down to the branch level.
Based on these reviews, over the past three years, the MRB took
action against 137 lenders, withdrew FHA approval of 36 of them,
and assessed $9.59 million in civil money penalties. Also, 8,980
indemnification agreements were executed for a potential total
savings of about $209 million. When we find loans that are improperly
originated or underwritten, we require indemnification- if the
loan goes bad, the lender pays, not our insurance fund. We made
over 1,100 referrals to the OIG for further investigations. We
have debarred 407 individuals and entities from participating
in FHA's Single-Family Programs.
FHA has also created a new risk management tool to target appraisers
for review, known as "Appraiser Watch." Appraiser Watch uses traditional
risk factors - such as loan volume, loan performance, and loan
type - to compare appraisers across peer groups and identify appraisers
for review. With Appraiser Watch, FHA can better identify appraisers
who either knowingly or unintentionally put homeowners at risk
for losing their homes to foreclosure because of inflated valuations
and sometimes the poor condition of the property.
Through Appraiser Watch, FHA has identified over 100 poorly performing
appraisers each year and removed them from the FHA Appraiser Roster.
The review versus removal rate under this new system is about
one percent. Appraiser Watch is a major improvement over the appraiser
monitoring system we inherited. Under that former appraiser monitoring
system, FHA field staff reviewed more than 30,000 appraisals annually
from October 1997 through September 2001, but identified only
20 poorly performing appraisers each year.
Interagency Enforcement Activities
HUD works closely with state and local governments to carry out
enforcements actions against business partners engaged in predatory
lending. On a national level, HUD's Office of Inspector General
continues to work closely with law enforcement in many states,
notably in New York, New Jersey, Pennsylvania, Illinois and Arizona,
to target unscrupulous lenders and better combat abusive lending
practices. In many of these areas HUD is working with coalitions
of community groups to provide relief to FHA insured borrowers
who have been victimized by predatory practices.
HUD has tripled its RESPA investigative staff from ten full
time staff to thirty full time, and has increased funding for
investigation and enforcement of fair housing and RESPA violations,
with a new $1.5 million investigation contract and an additional
$500,000 for Fair Housing investigations. Recent RESPA violation
settlements have led to more than $1.5 million in donations by
lenders to HUD-approved counseling services.
HUD also works closely with the Department of Justice, federal
financial regulators and the Federal Trade Commission to distinguish
between predatory practices of some lenders and others whose practices
are fairly serving the mortgage credit needs of those not qualified
for prime loans. In November 2003, HUD and the FTC jointly filed
a case against and reached settlement with a mortgage loan servicing
company charged with violations of the FTC Act, RESPA, and other
laws.
Public Education
HUD is committed to increasing awareness in the public about
predatory lending. HUD has developed literature about predatory
lending and distributes this information at homeownership fairs
and other public forums. HUD's website also includes information
on the subject.
In addition, HUD has partnered with other organizations in public
education campaigns about predatory lending. In early 2004, HUD
will launch a national advertising campaign to warn against the
dangers of predatory lending. The $1 million campaign consists
of print, radio, and television ads. The ads are being produced
under a contract with the National Fair Housing Alliance and the
Ad Council. HUD is also a member of the Interagency Task Force
on Fair Lending. HUD worked with the task force in drafting a
new brochure that alerts consumers to potential borrower pitfalls,
including high cost loans and provides tips for getting the best
financial deal possible.
Loss Mitigation
HUD also addresses predatory lending through its Loss Mitigation
Program, which is often able to help a victim of predatory lending
who has defaulted on the mortgage and faces possible foreclosure.
Under this program, lenders have options that may help homeowners
stay in their homes or may mitigate the financial consequences
of the default if the homeowner does not have the resources to
make that possible. FHA regulations require that lenders explore
all available loss mitigation options prior to proceeding to foreclosure.
The success of this program is clear. In the last two years, the
number of loss mitigation cases resolved by the borrower retaining
homeownership is nearly as large as the number of cases resolved
through foreclosure.
The
Baltimore Predatory Lending Task Force
In
early 2000 the Department initiated a wide-ranging inquiry into
the impact of predatory lending on loans insured by the FHA. The
Department established a "Flipping and Predatory Lending Task Force"
in Baltimore City to study predatory lending activity at a community
level over a long term. At the time substantial number so delinquent
and potentially predatory loans were originated in Baltimore by
multiple entities (of 595 case files reviewed, 100 were determined
to have predatory characteristics involving many different lenders,
investors, appraisers, closing agents, and straw buyers).
Today,
predatory lending in Baltimore is on the decline. Forty-eight criminals
have been indicted and jailed. A HELP program, funded in part by
a $1 million grant from HUD, has been established to provide victim's
assistance. Property flipping of FHA loans has been eliminated,
and homeownership counseling has helped home purchasers avoid the
pitfalls of predatory lending practices. These accomplishments have
been realized thanks to coordination with the Department of Justice,
the State of Maryland, the Baltimore City Government and local community
groups.
Conclusion
I
hope this discussion of our efforts and accomplishments has made
clear that the Administration and the Department are aggressively
policing its participants and imposing significant sanctions on
business partners found to be violating procedures or otherwise
engaged in abusive or deceptive behavior. The Administration and
the Department remain firmly committed to protecting seniors and
all consumers against predatory lending practices. We are happy
to have this opportunity to discuss our activities, and look forward
to working with you to strengthen consumer protections against predatory
lending.
This
concludes my statement, Mr. Chairman. I thank the Committee for
the opportunity to meet with you today to discuss this important
issue.
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