Statement of Brian D. Montgomery Assistant Secretary for Housing – Federal Housing Commissioner U.S. Department of Housing and Urban Development Hearing before the Committee on Financial Services United States House of Representatives

Thank you, Mr. Chairman (Barney Frank). I appreciate the invitation from you and Ranking Member (Spencer) Bachus to testify this morning.

Mr. Chairman, we are aligned in our goals for addressing this mortgage crisis.

We agree that we must restore liquidity to the credit markets and stability to the real estate markets. We agree that there is an appropriate role for the government to play and that we must use government resources wisely. And we agree that we must help families in need, without transferring risks and costs from the private sector to taxpayers.

As you well know, for more than two years, the Administration has requested FHA Modernization legislation to help prevent the very circumstances in which we now find ourselves. I want to reiterate that it is even more critical now that this be enacted.

I'm grateful for the support that you, Ranking Member Bachus, and bipartisan majorities of this Committee have given to this important legislation. I would urge you to quickly reach an agreement with the Senate so that a final bill can be sent to the President's desk.

As you've heard previously, Mr. Chairman, there are two key components that must be part of the final FHA Modernization legislation.

To ensure the future solvency of the FHA fund, the legislation must: 1) permit risk-based premiums; and 2) prohibit seller-funded down-payment assistance. Foreclosures on these loans are three times as high as loans for borrowers who make their own downpayments.

We can no longer sustain the fund without an appropriation if we do not address this problem.

While FHA Modernization should be the highest legislative priority, expanding the FHASecure program administratively is the most appropriate and fastest means to help more families in need.

As you know, we've been exploring options and I'd like to share the Administration's plan. We believe is appropriately tailored to reach homeowners who have demonstrated their commitment to making on-time payments, even during times of financial stress. I want to emphasize that we believe that it is critically important to focus on those homeowners who are working hard to fulfill their obligations.

FHA will now back loans for borrowers who are financially capable, but who have a spotty credit record. To qualify for a standard 97 percent LTV loan, borrowers will still be eligible if they were late on two monthly mortgage payments, either consecutively or at two different times over the previous twelve months.

For borrowers who cannot meet this standard, FHA will permit up to three months of delinquency. BUT, FHA will limit the LTV ratio for these borrowers to 90 percent.

We will permit and encourage lenders to voluntarily write down outstanding principal. Lenders will also be allowed to make other arrangements, including new subordinate liens, to ";fill the gap" between an existing loan balance and the new loan amount, be it a 97 percent or a 90 percent LTV loan.

These underwriting changes will also be coupled with a new and more flexible pricing policy at FHA. As you know, the FHA program is funded through insurance premiums that homeowners pay themselves. We are rolling out a new pricing plan that will base new premiums on an individual's risk profile.

This new administrative change will ensure the integrity of the FHA insurance fund over the long-term, protect the taxpayer, and guarantee that FHA will be around to help struggling homeowners in the future.

We believe that, by year's end, this new expanded version of FHASecure will reach more than a half-million homeowners.

This figure represents a substantial portion of the total universe of homeowners with subprime ARMs who are owner-occupants, have documentation to demonstrate their ability to repay the loan, and are not already in foreclosure.

While I believe that these actions are consistent with parts of your proposal, I want to point out some areas where we disagree.

The mandatory write-downs, which remove any ability of a subordinate lien-holder to negotiate a short pay-off, would severely restrict the number of lenders and borrowers who would participate. A simpler approach, more aligned with existing market practices would be more effective.

Underwriting standards should also not be set in statute. And we don't believe the current proposal is sufficiently targeted. It mandates a loosening of underwriting criteria that could saddle FHA with too much risk.

For example, your proposal would have lenders disregard some underwriting criteria and allow borrowers with much higher debt-to-income ratios to be eligible.

Preserving FHA's administrative flexibility, to help homeowners and protect taxpayers, is important.

The Administration also strongly opposes the $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes. The principal beneficiaries of this type of plan would be private lenders, who are now the owners of the vacant or foreclosed properties.

Finally, we do not support proposals to create a system where lenders would have an opportunity to sell bad loans to FHA and the taxpayer through an auction process, clearinghouse, or some other wholesale mechanism.

We do not believe that it is necessary to encourage mortgage holders to sell portfolios at a discount to new investors. The market does not need a government entity to play this role.

Again, while we disagree with some components of the bill, other elements are similar to the expansion of FHASecure.

Mr. Chairman, these are my thoughts about the bill. I again stress that our common ground can be used to help FHA become a safe harbor for many more Americans. I look forward to working with you and the committee.

Thank you for inviting me to testify today.

NOTE: To read the press release, visit www.hud.gov/news/release.cfm?content=pr08-050.cfm.

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