STATEMENT OF WILLIAM SIMPSON, PRESIDENT AND CEO, REPUBLIC MORTGAGE INSURANCE CO., WINSTON-SALEM, NC Mr. SIMPSON. Mr. Chairman, I am CEO of a private mortgage insurance company, and I'm in virtually similar business to the FHA.

In 1985, our industry was broken and needed to be fixed. We fixed it with increased underwriting and increased premiums. And we went through many actions, years, when we thought we'd be able to select, as I'm sure we were talking about, the possibility of FHA being able to select it, but we were not.

The books of the business were improved and we slowly and gradually brought ourselves back to life. Five or 6 years later, we are beginning to show positive bottom lines. The moral of the story is that the only way to fix this business is tighten the underwriting and increase the premium.

The second moral is that it takes time.

I can't see how in the world you can back out of reform for FHA so early in the game, or even consider it, when it takes years to change and turn things around and get the numbers to work more positively.

We talk about adverse selection, and the only folks that really can measure that are FHA, themselves. And they're testifying that a good business is still the same business it was a year ago.

Second, you talk about people not being able to get financing. What about those who did? They are better risks because they have more invested in a house. Study after study shows, the less the downpayment, the more defaults.

We talked about fixing_the_underwriting. Actually, the only thing substantially changed for FHA is that people have had to put up a little more money. The $800 that we're talking about, when they buy their home. And that will make FHA sounder, so there's a positive selection in the entire book of business now being put on FHA.

Finally, when we talk about price, most markets, most situations or most mortgage transactions, price is really measured simply by a downpayment and monthly payments. The FHA is still the best game in town, certainly a better game than the private mortgage insurance counterpart.

Every loan to value scale of FHA requires less downpayment to move in-house. That's what borrowers are responding to and that's why we still see very adequate volume in FHA.

Senator CRANSTON. Thank you.

Mr. Buchert?

STATEMENT OF JAMES BUCHERT, PRESIDENT, NATIONAL
ASSOCIATION OF HOMEBUILDERS, CINCINATTI, OH

Mr. BUCHERT. Mr. Chairman, I think a reflection of the problem is really found in Secretary Weicher's testimony.

The Secretary testified and said this morning that they're going to be some revisions in the area of modifications in the up-front premium on refinancing. He also stated that the reasoning behind that was is that they do not want to lose those good loans to the conventional mortgage market or to the competition.

I don't think you can have it both ways. I think when you look at new loans, and you say, well, the new loans are down, not because of competition, but because of the economy, I think you also have to realize that that is also competition in the market place. The market place views the programs as not a function of the realtors and builders and the mortgage brokers, it's a function of the market, itself, where the buyer looks to see what program is the best program.

And if there is a more competitive program in the market place, they're going to turn that way. That's the reason you have modification in the refinance with the up front premium with FHA, because they did not want to lose those loans to the market place. New loans have to be looked at the exact same way. You'll lose them in the market place if you're not competitive. So I don't think he can have that argument both ways, that you make a modification in one area and that you blame it on the economy in the other.

Senator CRANSTON. Does anyone else want to get into this particular discussion?

Ms. CINCOTTA. Could I add one thing, sir?

I think, on the lower income end of buyers, I think there's something that's been going on that hasn't maybe been recognized deeply enough between programs, like the Affordable Housing Program of the Federal Home Loan Bank and Fannie Mae, with Gemeco, etcetera, with State Treasurer's office. There are a lot of different opportunities with full counseling for people.

A few neighborhoods in Chicago, 350 FHA vacant homes are going to be financed conventionally. Some on lease-to-purchase. With Gemeco, it's a $1 billion program. And I think those changes are starting to help the lower end of the market get people into homes, but stay in the homes. I don't think that's really been counted or looked at close enough, so that you do have a blend, so that there aren't folks with low incomes that can't buy homes.

There are vehicles now for them, but not only can they buy the home, they can stay in the home and own it. That's what we think is important.

Mr. LASKO. Senator, if I could just make one additional point, before we move on.

On a different dimension of the scaling back of FHA, I'd just like to mention, briefly, the HMDA data that's getting a lot of attention, the Home Mortgage Disclosure Act data, which have been widely reported, and show that minority applicants for a mortgage, by and large, get turned down about twice as often as nonminority borrowers.

The lending community is concerned about that. The lending community doesn't make money when it doesn't make loans. And we would hope it's not discrimination.

But, in particular, I wanted to note a study that we came across that took place in Chicago last year. It was a study of mortgage lending activity in Chicago. It compared various lender groups and how they performed in terms of minority and nonminority loan applicants.

Interestingly enough, they concluded that mortgage bankers, compared with other lender groups, had relatively favorable acceptance rates for minority loan applicants.

They went on to say that this was because of the existence of FHA, that because mortgage bankers did FHA loans and FHA loans were more accessible to minority borrowers, that the mortgage bankers came out pretty well in this study.

We are seriously concerned, Senator, that the scaling back of FHA, particularly the new hurdles to the lowest income segment, often times the minority segment, are going to make it very difficult for the lending community to keep up a record, much less improve on its record, of lending to minority borrowers.

The finger has to point to HUD in that, and it's going to put a greater burden on the totally private market and on the private mortgage insurers to meet that need.

And there are programs, as Gale says, to help meet that need, but we don't think it's the time to start taking away vehicles to bring homes to minority borrowers, when there's a vehicle there in the way of FHA.

Senator CRANSTON. Thank you very much.

Mr. HILL. Senator, just one point.

In 1989, I think we all should think back to where we were in 1989 before Price Waterhouse came in to do this actuarial analysis, and before we had our first audited financial statement in I guess maybe 10 or 15 years.

Coming into an environment that was very much in disarray, very much under scrutiny by the Congress as well, and obviously the losses that we were incurring. That was the starting point. We in effect had looked at a fund, if you will, that had a capital ratio of 5.3 percent, starting in 1980.

Now, today, it's down, based on Price Waterhouse's economic assessment of the fund, we're now at .88 negative.

That is a substantial decline and erosion of the capital base of FHA.

A couple of things happened. Obviously, there were economic considerations, and also the way we're doing business. We were not bringing in a revenue stream fast enough to accommodate the losses that we were incurring. We were, by statute, required to be a profitable fund, unlike the high risk funds that we deal with on the multifamily side.

We all pretty much understood the debate. We all agreed with NAHA, the National Affordable Housing Act, as it related to the reform of FHA. We've all had an opportunity to hammer out what it would take to bring the fund back to 1.2 percent, or 1.25 percent, as required by the Statute in 1992, and also where we'll be in the year 2000.

No one anticipated, I would venture to say even those of us in this room, the severity of the recession that we're just now coming out of.

Obviously, to recapitalize and to strengthen the base of the fund, you've got to do two things, and I think Mr. Simpson pointed them out quite adequately.

You've got to re-price the way you're doing the business. If you're taking a high risk, then you have to price it in such a way that you can accommodate the losses in future years.

Second, you have to tighten up the way that you underwrite and do transactions. That's the fundamental point that we were trying to address in the National Affordable Housing Act reform, as it relates to FHA.

I think all of us agree that we want to have a safe and healthy fund to perpetuate the expectancy of doing more mortgages in the long term.

It's a very challenging and tough position that we find ourselves in. It's only been 9 months since we instituted the new reform. There has not been enough time, coupled with the fact that we're going through a very soft economic period.

So, you know, to try to reverse the position that we all agreed on back in 1990 and not give the reforms an opportunity to work, I think is perhaps a disservice to try to manage a healthy fund longterm.

Senator CRANSTON. Yes?

Mr. WEICHER. Mr. Chairman, could I say one thing, in response to comments made by several of the previous witnesses?

The Fund is not imploding, as my good friend and former colleague, Warren Lasko, has suggested, nor is the Fund losing its good business. We have information, we track very closely. Commissioner Hill's staff tracks very closely data on the characteristics of the mortgages that we get, that we insure from month to month. The good business, the business with more than a 10 percent downpayment, has remained at 20 percent of FHA's mortgages from month to month, since the reform went into effect. Our overall volume in the business is down because the economy is down because of the recession, and our overall volume of business is beginning to pick up as the recession winds down, and the economy begins to recover.

We would be happy to provide you with our data which will show you the basis for our statements, and we'll be happy to see data from anyone else, suggesting that we're losing our good business. Senator CRANSTON. Thank you very much.

We've sort of focused on the short-term impact of the1990 FHA reforms.

A number of witnesses have very serious concerns, in written statements that you gave us, about the long-term health of the Mutual Mortgage Insurance Fund.

They site an alarming trend toward diminished diversification of FHA's business, caused both by the exodus of low risk borrowers and the withdrawal of FHA from particular markets.

I'd like to get some comments on a few aspects of all of that. To what extent is the long-term health of the Mutual Mortgage Insurance Fund jeopardized by a continuing decline in the income and geographical diversity of its single family portfolio?

What measures can and should be taken to address the diversification issue?

What impact would those changes have on the Fund's capital ratio?

What's the level of risk that the Government should expect to bear in the single family FHA program?

How effective has HUD been in balancing the need to expand the homeownership opportunities of low- and moderate-income families with the need to ensure the safety and soundness of the Fund?

Who'd like to take a crack at all that?

Mr. ADAMS. Mr. Chairman, I know from the realtors organization, we would accept Mr. Weicher's offer of providing that information to us. We would welcome that because it will certainly help us in formulating our opinions, and I know we have always been willing to share the same data as that.

So we will accept that invitation graciously.

And I wish Senator Bryan was here because one of the thingsand again, it was in our written statement that was submitted-is that in the 62 major metropolitan areas that we looked at in the realtor's organization, when it was compared to FHA business during the first 6 months of 1991 as compared to the second 6 months of 1991, I think it is important to note that in every market, every one of those 62 major metropolitan markets saw a significant decline in those percentages.

And the distinction of this data was that it was proportional market share for the two time periods.

So it shows that we have seen that.

And again, Mr. Hill mentioned, of course, we certainly have to balance. We have to have that income, the solvency of the funds to pay off the claims that are anticipated.

But again, our contention is that we see a continued exodus of participants. What we have seen—and I think what Senator Bryan confirmed-is that where the rubber meets the road at the grassroots level, we are seeing virtually everyone reinforcing that, is that we are very concerned about the maintenance of the solvency of the funds, given that exodus, both the lowest borrowers and the borrowers that are moving out there for other reasons.

So that's the point I wanted to make with that statement.
Senator CRANSTON. Who else has a comment on this area?
Mr. SIMPSON. I would like to speak to this.

Reading the Price Waterhouse study, the actuaries estimate that the 1990 book of business under the new premium rate and the new underwriting would project an economic value of $900 million. That's a $900 million contribution to the Fund over the life of that book of business.

Where's the beef? I don't understand the problem. Because the rocket scientists, if you will, are saying that the reforms are going to produce very profitable books of business which will restore the Fund to health.

The only question is will the mix of business be as they estimate it to be. And the folks that have the data are saying yes, it's the same book of business.

Finally, we keep forgetting the fact that that book is tighter underwritten than previous books with a better price. So it's only logical it is going to perform better. And even though you might have some slippage, which I doubt, in the mix of the business, it's still all better business than it used to be.