Let me just simply state my response that I'm not going to be able to stay for the entire hearing.

Mr. Weicher, the view that you've expressed here is certainly not a view that's shared by those who have talked to me. Reforms have not had an impact on availability. Everyone that I've talked to in the mortgage banking community, the real estate community, all have reached a conclusion to the contrary.

So I would be very interested in hearing their comments, as well, as to whether or not the view that you've expressed is shared by anyone other than the Department.

[The prepared statement of Senator Bryan follows:]

PREPARED STATEMENT OF SENATOR RICHARD BRYAN

Mr. Chairman, I commend you for holding this hearing today on the FHA mortgage insurance program. The Federal Housing Administration program, created in 1934, has been instrumental in helping young families buy their first home. In Nevada, FHA has played a major role in helping first-time homebuyers obtain the American dream of owning a home.

Young families starting out still have a rough time getting that first down payment payment together. Throughout the 1970's and 1980's, housing prices have consistently risen faster than family incomes. Home ownership has declined in every year since 1980, by over 13 percent among families headed by those aged 25-34. Nationwide, 2 million more households would own homes today if home ownership rates had remained at 1980 levels.

FHA can continue to be a major force in housing, but it must remain financially solvent. This was a problem we addressed in the National Affordable Housing Act in 1990. We instituted a number of reforms to contribute capital to the fund. However, the legislative process is fluid and it is important to evaluate the reforms implemented in the Act. We must be able to strike a balance between maintaining solvency and continuing to promote the program's original mandate.

I believe it is important for the Federal Government to encourage home ownership. What can be more significant than the realization of the American dream to own one's home? The public deserves no less than is sensible or fair. To most Americans, a house is their most imortant, costly, and valuable investment. Thank you, Senator Cranston.

Senator CRANSTON. Thank you very much.

I have a statement from Senator Riegle that shall be inserted in the record.

PREPARED STATEMENT OF SENATOR DONALD W. RIEGLE, JR. Senator RIEGLE. I would like to commend my colleagues, Senator Cranston, Chairman of the Housing Subcommittee, and Senator D'Amato, the ranking Republican member, for conducting this hearing on the mission and financial stability of the Federal Housing Administration [FHA]. I would also like to welcome Jim Logue, executive director of the Michigan State Housing Development Authority, to this morning's hearing. This is a very important issue as we grapple with the housing crisis confronting this nation.

The Federal Housing Administration single family mortgage insurance program was created to encourage lenders to make loans to low- and moderate-income individuals and to first time homebuyers. The program has been successful in fulfilling this objective. In 1990 several reforms were undertaken to assure the fiscal soundness of the FHA. However, some very serious concerns has been raised regarding the ability of the program to continue to serve low- and moderate-income homebuyers in light of the 1990 FHA reforms.

This morning I look forward to hearing our panelists' view on these concerns and their overall assessment of the impact of the 1990 FHA reforms.

The need for affordable rental hosuing is undeniable. Yet, the problems in multifamily housing finance compound the shortage of safe, decent and affordable housing. Accordingly, I look forward to hearing the findings and recommendations of the National Task Force on Financing Afforadable Housing and the GAO on the state of multifamily housing finance. I am particularly interested in hearing their assessments of HUD's new delegated processing program.

All Americans deserve a decent place to live and the opportunity to own their home. The FHA programs are an essential element in the effort to assure that low- and moderate-income Americans, in particular, have the opportunity to achieve homeownership. The FHA must remain financially sound. Yet, we must also remain mindful of its mission.

We must begin to carefully consider the issues raised in today's hearing. If refinements to the programs are needed, they must be analyzed and considered in order to craft long term strategies to assure the FHA program fulfills its mission and remains sound. I look forward to working closely with the Housing Subcommittee to achieve appropriate solutions.

Thank you, Mr. Chairman.

Senator CRANSTON. Secretary Hill.

Mr. HILL. Mr. Chairman, the statement that was read by Mr. Weicher was a joint statement of us, representing the administration.

Senator CRANSTON. Thank you.

I'd like now to start our discussion with an opening set of questions for each of you to address and as you choose, and ask you again to have a real give and take in which agreements and disagreements are made clear, for the committee's guidance and for the administration's.

Mr. Weicher and Mr. Hill indicated, in their written testimony, that "the absolute need to adhere to the fundamental principles of the 1990 reforms, if we expect to restore FHA to actuarial soundness."

And they urge Congress "to resist proposals for premature changes of the 1990 reforms."

I'd like to get your view on these questions.

Do you agree with the administration's contention that the 1990 FHA reforms should not be altered?

What has been the impact of these reforms on the health of the Mutual Mortgage Insurance Fund?

And on the availability of housing credit for low and moderate income homebuyers?

And to what extent are the needs of low and moderate income homebuyers being increasingly met by the conventional market? And what is FHA's appropriate role in this changeable environment of affordable housing finance?

Who would like to start?

Mr. Lasko?

STATEMENT OF WARREN LASKO, EXECUTIVE VICE PRESIDENT, MORTGAGE BANKERS ASSOCIATION, WASHINGTON, DC

Mr. LASKO. I'm Warren Lasko with the Mortgage Bankers Association. I think mortgage bankers probably make the preponderant number of FHA loans.

And in direct response to your question, with all due respect to the HUD witnesses, we don't agree.

The mortgage banking industry is out there everyday dealing with the homebuying public. And I don't mean to speak for the realtors, but dealing with the realtors who bring homebuyers to the lender to get a loan.

And as I've traveled around the country this spring, I've had people tell me, in town and city after city, that they're turning away from FHA. And they're doing it for two very fundamental

reasons.

One, the amount of cash it takes to get an FHA mortgage is higher than it used to be; $500, $800, depending on loan amount. And that is a lot of money to the level of homebuyer and the level of house price that FHA is supposed to address. Cash requirements, number one.

Second is the complexity of the new procedure. HUD will say, with computers today, you can figure out the downpayments; no problem. It just isn't so. Lender after lender tells me-loan officers, not their bosses but the people taking loan applications—say it has just become so cumbersome to use that 57 percent rule. We call that HUD imposed. That's not in the statute. HUD imposed over and above what the Congress did, calculating 57 percent of closing costs, calculating 3 percent, 5 percent, 98.75 percent, 97.7 percent, all those ratios that are in the statute, in addition to HUD's 57 percent, have made it extremely cumbersome to go through the process of even finding out how much of an FHA loan you can qualify for.

So, the number of people willing and able to do business with FHA is down.

We would say, and I won't go on at great length at this point, but the fundamental points we want to make about the FHA Fund are that it's imploding on itself. It is imploding on itself for two

reasons.

One, streamlined refi. We've had a refi boom in this country. It's essentially over. HUD missed the boat.

Secretary Kemp is to be commended that, at a somewhat late date, he did decide to undo what he did on his own.

Again, it wasn't in the statute but was to charge FHA customers who wanted to refi with FHA loans, he decided to charge them more than they'd been charged previously. Those good borrowers went elsewhere. They went to the conventional market. People are rational. FHA is losing tens of thousands of its best borrowers from the Fund. You can't get them back, they're gone. The boom is over. Again, with all due respect to the HUD witnesses, over time, as you look forward as to the effect of the changes that were made in the FHA program, they're going to lose, we estimate, about 100,000 borrowers a year, who simply won't be able to buy a house. These

are people who most need FHA, if you will, at the low end of the market.

In addition, FHA is going to lose some, we estimate, 150,000 borrowers at the top end of the market.

Mr. Chairman, your opening remarks were right on the mark. They are losing the lower risk borrowers at the top end of the market, who, because they're rational, are going to the cheaper private insurance. That's their right, private mortgage insurance.

But FHA needs those borrowers to pay the premiums on relatively safe loans because it's still a cross subsidization program—it's not a full risk based premium system-to cover the risks inherent in the lower end of the market. Where, as I say, we estimate they've lost about 100,000. But that's where they are still doing, and will be doing their business, and that is, frankly, a higher risk market.

And FHA is doing that, as Mr. Weicher suggested, and we're concerned that those are going to lead to higher losses in the future. And that seems to be confirmed by the Price Waterhouse study.

We're concerned that the long-run is rather grim for FHA as it implodes on itself.

Senator CRANSTON. Thank you very much.

Yes?

STATEMENT OF RICK ADAMS, VICE CHAIRMAN, REAL ESTATE FINANCE COMMITTEE, NATIONAL ASSOCIATION OF REALTORS, WASHINGTON, DC

Mr. ADAMS. Rick Adams, National Association of Realtors. Again, I concur with all the points I think that Mr. Lasko made. A couple of additional points I'd like to touch on real briefly.

First off, I don't think we'll receive any argument from anyone here that we've got to balance the soundness of the MMI Fund with the mission of FHA, which is to provide affordable available housing.

The one thing I think that we in the realtor organization have a little bit of a problem with are some of the assumptions and the modeling assumptions, first off, that the Price Waterhouse model utilizes.

Again, we go from a $2.6 billion surplus to a negative $2.7 billion. Again, I think, at least in our opinion, several of the reasons for that dramatic shift were the excessively pessimistic view of house appreciation.

Secretary Kemp made several comments. Again, one is that this is not a time for overreaction, and also in commenting we resist proposals for unsound and premature changes.

One of the things that I think we need to also realize is, as we came down from the double digit inflation days, we saw changes in the economy and the demographics of the buying, the homebuyers. Changes were made to the FHA that were set in place to provide perhaps a higher quality type product, a higher quality loan, and to actually slow down what we have now seen as a decrease in the value of the MMI Fund.

We have already put in place some changes that were not ever given an opportunity to correct part of the problem. And in fact

then, I think the overreaction was, to some of the changes that were made in the FHA program.

I just wanted to touch on those items.

Senator CRANSTON. Is there anybody who disagrees with the two gentlemen who just spoke?

Yes?

STATEMENT OF GALE CINCOTTA, NATIONAL TRAINING AND
INFORMATION CENTER, CHICAGO, IL

Ms. CINCOTTA. Well, it seems to me, first of all, here are some of the things. Woe is me. The private market is serving homebuyers in neighborhoods and across the country. That's what I thought the CRA battle was about, to have the option of having conventional, FHA, VA, etcetera.

My reading of the Price Waterhouse studies, I concur with what John Weicher said. The problem I see is that the industry, mortgage bankers, realtors, etcetera, moved immediately, after the reforms came in, without letting the reforms take place, letting them have a couple of years' experience and seeing what's happened, and seeing how that balances out.

When I looked at the data of the foreclosures last year, there still were 83,000 foreclosures, which translates into 40,000, at any given time, vacant buildings in neighborhoods of the constituency I represent.

And we're here today to throw out everything immediately, without looking at it deeper. And maybe even looking at a part of the reforms where there would be data by census tract on where the foreclosures were coming, who were the players in it, what procedures did they use or not, so we can take a better look, besides the MMI Fund, at what is creating the foreclosures, what is creating a part of the hit to the Fund and the abandonment.

I heard mortgage bankers say, earlier, 15,000 families didn't get a home last year. When I look at the foreclosure data, I see 83,000 families who bought the American dream and were put out on the

street.

What is the balance on that, and what does it do to those families. Even with the reforms, the all over LTV on a $50,000 mortgage, people have a mortgage of 103 percent. And if you're into neighborhoods that aren't gentrifying and aren't going up year after year in value, you're going against, right there, all sound practices about lending, not owing more than what you bought is worth.

Our sense is, very much, let the reforms stay in. Let's see how the Fund goes. Let's see how the foreclosures come down. And to really look closely, because I don't know if anybody-I don't know of HUD is—we're starting to look at the census data to track down which mortgage bankers, what real estate companies, what practices, what builders, who is creating that problem that would make the Fund deficient.