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U.S. House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to notice, at 10:12 a.m., in room 2128, Rayburn House Office Building, Hon. Rick Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representatives Castle, Fox, Kennedy, Gutierrez, Hinchey, Jackson, Kelly, Weygand and Carson.

    Chairman LAZIO. Good morning. The hearing will come to order.

    I want to apologize at the outset. There is a Republican conference going on right now, so some of the Republicans Members will be strolling in. And I know on the Democratic side that there are a number of commitments that are delaying some of the Members, and they may be in here later. This should not reflect on the importance of the hearing nor the interest in hearing the testimony.

    Today we meet to hear testimony on the Federal Housing Administration Single Family Property Disposition Program. Since I first arrived as a Member of Congress in 1993, I have heard numerous success stories of families and individuals who have been served well by FHA which facilitated their path to homeownership.
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    Created during the Depression era, FHA has, in reality, created and stabilized what is now a full-financed, private mortgage finance market, including the secondary market and private mortgage insurance. And it probably bears to be noted that before FHA, mortgages were about 3-year balloon mortgages, and FHA has been an incredible impetus toward homeownership over the years, as the conventional market has also grown to deal with the demand.

    Just like any other product or idea almost three-quarters of a century-old, FHA is now showing its age. Just like the Model T Ford that spurred an entire automobile industry and evolved into new models and new manufacturing techniques, it now seems like the time that FHA must begin to prepare itself for the 21st century. None of us here have a definitive picture of what the mortgage finance system will look like or operate like 20 years from now. I can assure you, however, that just as the industry has changed significantly in the last 20 years, we will face those same changes in the future.

    Any discussion or proposal to modernize FHA must ask some fundamental, but common-sense questions. For example, who and what purpose will FHA serve? In other words, what will its mission be? Does FHA meet the needs of those families undeserved in the private market? Does FHA supplement, compliment, or encroach upon the private sector? Or more importantly, will FHA be prepared for the future if it continues along the same path it has taken over the last 64 years, a little change here, a little tinkering there?

    Just as we have heard success stories, there are some major disappoints as well. In particular, if we measured the performance by the level of defaults or insurance claims, FHA's recent history raises some serious questions. FHA delinquencies increased 23 percent since 1988, an increase three times higher than delinquencies in the VA program and completely opposite of that in the private conventional market. Defaults in the FHA program increased by 74 percent in just one year and are projected to go higher yet. FHA paid claims rose 18 percent from $4.2 billion to $5.3 billion from 1996 to 1997.
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    And perhaps even more alarming, which is the focus of our discussions here today, is that nearly 70,000 properties were disposed of during Fiscal Year 1997 with a constant stable inventory of 30,000 at any given time. However way you look at that, that's more than 70,000 neighbors and families who suffer every time HUD is called upon to dispose of a property—blighted neighborhoods, falling property values, criminal and drug activity, to mention only part of the negative impact in some cases.

    Today it is important that we hear from our distinguished witnesses to more clearly understand a key function of FHA—the disposition of foreclosed properties owned by FHA. HUD transmitted to the subcommittee a prepublication proposed rule that restructures FHA's disposition process. HUD is also proposing legislative changes in its budget request for Fiscal Year 1999. And I am aware of a March 18 meeting between FHA and a variety of real estate property managers to discuss what may be a third option. This flurry of activity coupled with high default and claim rates is sobering. What are the Administration's future plans? How will HUD 2020 address declining staff? Is FHA destroying neighborhoods in the process?

    I think the subcommittee would benefit from an open discussion and explanation of the current FHA disposition process and the Department's future goals, whether regulatory or statutory. The subcommittee will also benefit from testimony from our watchdog agency, the General Accounting Office, on HUD's performance in the disposition area and how private contracts are monitored. I wrote to GAO on February 4 requesting a study on FHA and, in particular, single family delinquencies. HUD's own watchdog, the Inspector General, can elucidate on questions even she has raised regarding HUD's disposition process and its contracting activity.

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    On panel two, Mr. Michael Quinn, Senior Vice President of Credit Loss Management at Fannie Mae, will describe Fannie Mae's disposition process and give us some information to compare and contrast FHA's proposed legislation. I think the most important witnesses today, however, are the community groups. Ms. Grace Jackson of Chicago, who we invited at the request of subcommittee Member Mr. Jesse Jackson, Jr.; Mr. Carl Edwards, invited at the request of subcommittee Member Julia Carson; and Ms. Cincotta, who has appeared before this subcommittee before. These witnesses will provide context about how Washington policy affects local neighborhoods and communities.

    While some prejudge this hearing, I want to assure everybody that we're simply seeking the facts. Before the subcommittee can make recommendations to this Congress in any issue relevant to FHA, we must get a handle on the status of FHA and why we are witnessing increased defaults and foreclosures despite the fact that the country has been in sustained economic prosperity since 1993. Unemployment is at record low levels. Mortgage interest rates are at historically low levels, and previous FHA reforms in the 1990 reconciliation process were supposed to decrease the likelihood of delinquencies and mortgage defaults.

    This hearing is a first step in what could be a collaborative way to attack increasing FHA foreclosures. But maybe even larger policy issues need to be confronted in this Congress.

    Once again, I want to welcome our distinguished witnesses. Your written testimony will be included in the hearing record. I ask that you limit your statements, your oral presentations, to no more than five minutes so that subcommittee Members will have an opportunity to discuss with you the issues before us. And I can assure you that the Members will read your written testimony. The Chair will now recognize other Members for opening statements.
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    Mr. Gutierrez.

    Mr. GUTIERREZ. Thank you, Mr. Chairman.

    Mr. Chairman, I want to, first of all, apologize for just showing up. We had a markup in the Veterans Affairs Committee, a construction markup for $20 million for medical facilities which went smoothly. It took five minutes, so I got here pretty quickly. But I wanted to apologize to you. And I wanted to thank you for calling this hearing. I'd spoken to you last year about this, as I know other Members have, and so I wanted to thank you very much for bringing this, because this is an important issue that I think we need to grapple with and especially—at least in my district, and I'm sure in districts across the country—so that we can get some solid homeownership out there that always helps communities and doesn't hurt communities.

    And so with that, Mr. Chairman, I just wanted to thank you and say let's proceed.

    Chairman LAZIO. I thank the gentleman.

    Mr. Hinchey.

    Mr. HINCHEY. Thank you very much, Mr. Chairman, and I want to thank you for calling this hearing to look into the Federal Housing Administration Single Family Property Disposition Program. Before I proceed with my brief opening statement, I would ask unanimous consent that two documents submitted by HUD be entered into the record. One is a critique of the NTIC study titled ''The Devil is in the Details,'' and the other is a series of answers to questions that have been raised about the operation of the FHA.
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    Chairman LAZIO. Without objection, it's so ordered.

    Mr. HINCHEY. Thank you very much, Mr. Chairman.

    I know your witnesses today will spend a considerable time talking about the problems with FHA programs. I do not think we should minimize these problems, but I also think that we should not overlook the progress that is being made at HUD and the FHA to reform single family housing programs.

    For more than 60 years, the Federal Housing Administration has helped many Americans purchase their first homes by providing mortgage insurance to borrowers who cannot afford a sizable downpayment and are unable to obtain mortgage insurance in the private market. Many of the borrowers who use the FHA to help finance their homes are, of course, low- and moderate-income individuals, often minorities, and residents of urban areas who have been left behind by the conventional mortgage market.

    To the critics who say that FHA has outlived its usefulness and should be replaced by the private market, I would point out that nearly one-third of all insured mortgages last year were insured by FHA. Most of these individuals would not have qualified for conventional mortgage insurance. This subcommittee has heard much testimony in the past about the conventional mortgage industry's high denial rate for minority borrowers. FHA fills that gap by making it possible for blacks, Hispanics, and other under-served groups to purchase homes.

    While I commend the FHA for doing an admirable job of serving low- and moderate-income, minority, and center city populations, I'm also concerned with the reports of weaknesses in the Single Family Property Disposition programs. I would like to point out that all of these reports note that FHA's mortgage insurance fund is financially sound and currently exceeds its reserve target. As with any lending program, there are bound to be defaults, especially in a program that takes on riskier borrowers. And while the default rate of FHA mortgages is slightly higher than the rest of the industry, the foreclosure rate is just above 1 percent. The Loss Mitigation Program helps two-thirds of borrowers in default become current on their payments again.
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    The GAO, outside auditors, and HUD's own Inspector General have all reported a number of problems with FHA that must be addressed if we hope to win support on Capitol Hill to expand. I personally think that the President's proposal to raise the maximum loan amount to $227,150 from $170,362 is a good idea. However, many of my colleagues on both sides of the aisle remain unconvinced, in part, because of reports of mismanagement, loose internal controls, lax oversight of private contractors, and the decentralization envisioned by HUD's 2020 Management Reform Plan.

    I understand that HUD is undergoing a top-to-bottom reorganization that is designed to streamline the department, make their operations more efficient, and bring some much needed accountability back to the Nation's housing programs.

    I support the Department in those efforts and am pleased that we are already seeing some of the results of this Administration's commitment to reform. I also understand that problems with the FHA program date back many years, in fact, decades, and will not be resolved overnight.

    I hope that the witnesses will outline how the Department and FHA will address the criticisms of the Inspector General and the General Accounting Office. In particular, I would like to hear how your organization in four homeownership centers will effectively oversee the many private contractors who will be necessary to manage the program in the wake of FHA's massive downsizing.

    And finally, Mr. Chairman, I would like unanimous consent to enter the statement of our colleague George Brown into the record. He had hoped to deliver the statement in person but asked that I include it in today's proceedings. His description of the city of San Bernardino, California's, efforts to work with HUD to develop innovative ways to bring foreclosed and repossessed homes back into the market is instructive, I believe, for the subcommittee.
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    Again, Mr. Chairman, I thank you for calling this hearing and I, as we all do, look forward to hearing from the witnesses.

    Chairman LAZIO. Thank you. I want to announce we had been contacted yesterday that Representative Brown wished to provide testimony, without objection, that is so ordered. That will be entered into the record. I just want to once again offer that we would be happy to have him personally deliver testimony before this subcommittee when we get back after April.

    Mr. HINCHEY. Mr. Chairman, one more thing if I may.

    Chairman LAZIO. Yes, sure. I would be happy to yield to the gentleman.

    Mr. HINCHEY. Our Ranking Member, Mr. Kennedy, is unfortunately at a funeral this morning, and he has asked me if I would request that we enter his statement into the record as well.

    Chairman LAZIO. Without objection, it is so ordered.

    Mr. HINCHEY. Thank you.

    Chairman LAZIO. My colleague, Mr. Jackson.

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    Mr. JACKSON. Thank you, Mr. Chairman, let me before I begin, take this opportunity to ask unanimous consent that an analysis of FHA default concentration and lender performance in 20 U.S. cities, otherwise known as ''The Devil is in the Details'' be entered into the record.

    Chairman LAZIO. Without objection, it is so ordered.

    Mr. JACKSON. Thank you, Chairman Lazio, for allowing me the opportunity to speak. I want to thank you for holding this hearing on an important issue to all homeowners.

    First of all, I would like to welcome two individuals from my hometown of Chicago, Ms. Gale Cincotta and Ms. Grace Jackson. Ms. Cincotta is a nationally acclaimed community activist. And Ms. Jackson has spent the last 20 years addressing the specific issue we are discussing here today. Ms. Jackson and her organization have invited me on a tour of certain communities in my district where FHA foreclosures have had a devastating impact on their neighborhoods. After I take their tour, I, too, will be able to tell my colleagues first-hand about the urban blight these foreclosures have caused.

    Regrettably, Mr. Chairman, I have to leave this hearing before 11 o'clock, but Ms. Jackson has compelling, first-hand testimony about this important problem, and I encourage all of my colleagues to listen very carefully to her experience.

    Because of the quandary FHA's foreclosures present, the people who truly lose the most are the first-time homeowners. At the end of this process, they have nothing to show except a seven-year negative credit report with a foreclosed property. Mortgage bankers and brokers collect their fees, and lenders' loan losses are covered by the guarantee insurance they purchased from the FHA.
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    The FHA needs to be preserved at any cost because of the valuable needs that it meets. However, some structural changes must be made in the program or more low to moderate first-time homebuyers may suffer. Financial hardship is clearly not the intent or the mission of the FHA. Many opponents of FHA raise a valid point. The FHA needs to be preventative instead of reactive. I think FHA has made a good-faith effort in addressing some of these issues, and I applaud that. However, more ideas to prevent foreclosures in the first place need to be put forth. This hearing is a first step in addressing some of those problems.

    Again, I would like to thank the Chairman for holding this important hearing, and I would like to welcome Ms. Cincotta and Ms. Jackson to Washington.

    I yield back the balance of my time.

    Chairman LAZIO. I thank the gentleman.

    Well, again, I want to thank this distinguished panel for making time to once again assist this subcommittee and prepare testimony. And all of that's been included in the record as I mentioned earlier, and you can make your summary and comments.

    I want to acknowledge Mr. Paul Leonard. I don't know whether or not you were going to make the statement or Ms. Johnson was going to make the statement, but I want to acknowledge that Mr. Leonard is here, Deputy Assistant Secretary for Policy Development and Research, Department of Housing and Urban Development. I appreciate your presence before the subcommittee. And we look forward to hearing the testimony of Emelda Johnson. We appreciate seeing you as Deputy Assistant Secretary for Single Family Housing, and with that, I will turn the floor over to you.
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    Ms. JOHNSON. Thank you, Mr. Chairman.

    Mr. Chairman, Members of the subcommittee, my name is Emelda Johnson, and I am Deputy Assistant Secretary for Single Family Housing at the Department of Housing and Urban Development. I am pleased to be here on behalf of HUD Secretary Andrew Cuomo and want to thank you for the opportunity to testify on the Federal Housing Administration's Single Family Housing programs. I also want to thank the subcommittee for giving these important issues and the Administration's current legislative proposal thorough consideration.

    Mr. Chairman, you've indicated our written testimony is entered into the record, so I'd just like to summarize briefly a few points contained therein.

    Under the leadership of Secretary Cuomo, FHA is the strongest it has been in decades, and it is positioned to become even stronger. Secretary Cuomo's 2020 Management Reform effort is creating new and more effective ways for FHA to conduct its business.

    Instead of working out of 81 small and inefficient offices, FHA now delivers services through four state-of-the-art homeownership centers. HUD's 2020 Reform has three major policy aspects that pertain to the topic of today's hearing. Each of these initiatives builds on innovative demonstrated efforts and prior experience. They include our new Loan Loss Mitigation Program developed with Congress and implemented over the last few years, a proposed Real Estate Owned—we call it REO—rule that was sent to Congress in March for prepublication review. That represents a dramatic shift to large-scale privatization of FHA's property disposition program.
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    And three, HUD's Fiscal Year 1999 budget proposal which proposes new authority to allow FHA to pay claims and obtain mortgage notes prior to foreclosure. With this authority, FHA will be able to intervene earlier in the loan default cycle and transfer notes to private real estate professionals prior to foreclosure. OMB scored $525 million in savings from this initiative.

    Mr. Chairman, we recognize that FHA will be the focus of both debate and criticism today. However, it is my belief that many of the criticisms are focused on the past rather than the present and the future. So while we have and continue to welcome suggestions for improvement, I'd like to begin my testimony with the discussion of where FHA is today and our vision for the future.

    After several successful demonstration projects with private partners, HUD recognizes that private real estate professionals, including non-profit organizations, can often service loans, pursue loan loss mitigation, and if necessary manage foreclosure and property disposition more efficiently that FHA. Now we're acting on this belief by taking aggressive measures to privatize FHA's property disposition program.

    In March 1998, FHA sent a proposed REO rule to Congress that will streamline the property disposition process. Modeled after HUD's successful Single Family Notes Sales Program, the new procedures will permit FHA to sell blocks of foreclosed properties to private parties specializing in property disposition, a move that will speed the sale of these properties and result in substantial savings.

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    HUD also has used existing authority to create a new comprehensive set of loan loss mitigation tools. These efforts to keep borrowers in their homes, or if necessary encourage owners to sell prior to foreclosure, protect both the interest of the homeowners and FHA. HUD is working to increase use of loss mitigation tools by providing training to housing counselors and lenders, and by improving monitoring and enforcement of lender activities.

    Foremost amongst these efforts, HUD has pending before Congress new legislative authority that will give FHA the ability to pay claims prior to foreclosure and take back the mortgage note instead of the property. These notes then can be quickly sold to the private sector specialists in loan loss mitigation and in property disposition. This approach will enhance HUD's capacity to realize greater recovery against insurance claims, lead to quicker sales of foreclosed properties, and reduce any adverse impact foreclosures may have on surrounding neighborhoods.

    Furthermore, following acquisition of a mortgage note, the new note holder in many cases will actively pursue loss mitigation, since keeping the family in the home often makes financial sense for all parties.

    Chairman LAZIO. I would just ask you to summarize your comments, please.

    Ms. JOHNSON. Yes, thank you.

    Mr. Chairman, I'd hoped to talk a little bit more about our Loss Mitigation Program, but there are just two points that I'd like to make quickly about that. First, FHA is working hard to increase use of loss mitigation options and I hope to have the opportunity to tell you more about this in the question and answer period. And then, second, our early numbers on loss mitigation cases for the first few months of 1998 showed that our efforts are starting to pay off.
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    And then, I would just like to conclude by saying the results of several years of focused cooperative work by HUD and Congress to strengthen FHA's MMI fund are paying off. The fund has an economic value of $11.3 billion and its capital ratio is 2.8 percent, well above the congressionally-mandated target of 2 percent by the year 2000. We have come a long way toward restoring FHA to fiscal health.

    Mr. Chairman, today's discussion of new FHA initiatives has been somewhat technical, but these initiatives translate into a stronger FHA, an FHA which will allow more Americans to realize the dream of homeownership. As we help more people buy a home of their own, families come together to build strong neighborhoods and strong communities. That's what I believe this is all about.

    I do believe we can improve FHA's operations and enhance the fund's ability to serve borrowers not well served by the private sector. Secretary Cuomo is committed to fundamentally changing the way FHA does business. Under his leadership, FHA is aggressively using existing authority to increase the use of options to foreclosure included in the Loss Mitigation Program, and we have taken significant strides toward privatizing FHA's property disposition program through the proposed REO rule. And now if Congress approves our property disposition proposal, together, HUD and Congress can help more Americans buy a home, help build healthy communities throughout the country.

    Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you very much.
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    Now I want to introduce Judy England-Joseph who is Director of Housing and Community Development Issues for GAO. The General Accounting Office has been remarkably helpful to this subcommittee, to the full panel, and to the Congress in general, in a nonpartisan substantive policy-oriented way. I want to express my appreciation for the hard work that's been done by their rank and file professionals over at GAO, and particularly for you, Judy. I know you have Bob Procaccini next to you who has been—Bob Procaccini—I have a problem with these Italian names.


    Chairman LAZIO. But, Bob, we want to also express our appreciation for your hard work on a number of different initiatives, and now I'll turn it over to Judy.


    Ms. ENGLAND-JOSEPH. Thank you, Mr. Chairman, and Members of the subcommittee.

    FHA is a major player in the single family housing finance marketplace, and during the first half of 1997, three out of ten borrowers that received insured mortgages selected FHA mortgage insurance. Without FHA mortgage insurance, some of these borrowers might have had to delay or even forego the purchase of a home. Over time, and as you've just heard from Emelda, FHA's insurance premiums and other income have more than covered the cost that FHA has sustained as a result of defaults and foreclosures on the single family loans it insures. But notwithstanding the strong financial performance, both we and the HUD IG have identified the following areas in which FHA's management of its single family program could be improved.
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    Our work on HUD's oversight of real estate asset management contractors who are responsible for safeguarding foreclosed properties indicates that HUD does not have an adequate system in place to assess its field offices' oversight of these contractors. Our report on this work is being released today. The three HUD field offices we visited varied greatly in their efforts to monitor real estate asset management contractors' performance. And none of the offices adequately performed all of the functions needed to ensure that the contractors met their obligations to maintain and protect HUD-owned properties. Our fiscal inspections of properties for which the contractors in each of these locations were responsible, identified problems at the properties including vandalism, maintenance problems, and safety hazards which may decrease the marketability of HUD's properties, decrease the value of surrounding homes, increase HUD's holding costs, and in some cases threaten the health and safety of neighbors and potential buyers.

    Our inspection of the properties at one field location revealed that debris removal was a serious problem. And I've got a couple of photographs here on my right to indicate those problems. We've also provided them in your packages. The property that I'm talking about first is on your far left. This property had been shown by realtors eight times while it contained debris. In fact, a realtor noted that the only accessible entrance to this property was blocked by furniture and debris, which was also the case when we visited this property. During our August 1997 inspection of 24 properties at one field location, we found that most of the properties contained either internal or external debris.

    Consequently, prospective buyers were sometimes viewing properties littered with household trash, personal belongings, and other debris. Almost 71 percent of the properties we visited in one field location, and 37 percent in another, contained imminent hazards such as broken or rotting steps. Inspection reports submitted to HUD on the property you see on the right noted that the front steps were dangerous, a condition warranting immediate repair by the contractor.
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    But, nonetheless, when we inspected this property about three months after the contractor initially reported the problem, the stairs still had not been repaired. Other imminent hazards we saw included a refrigerator on a back porch with the door intact and properties containing household waste, food, soiled diapers, and paints and solvents. Failure to address imminent hazards endangers would-be buyers, as well as neighbors, and puts the Government at risk of litigation.

    Our recent work for you on appraisals for FHA insured single family loans has identified concerns about HUD's oversight of the appraisal process. Since December 1994, private mortgage insurers who make FHA insured loans have been able to select any licensed or certified appraiser listed on FHA's roster. Before that time, appraisals for FHA insured loans were conducted almost exclusively by a panel of fee appraisers which FHA assigned to the lenders on a rotational basis.

    Since implementing this new appraisal selection process, HUD has identified and begun to address problems related to its evaluation of completed appraisals and the number of minorities and women who were receiving appraisal assignments. But recent limited work we conducted in New Jersey and Ohio showed that some appraisals did not reflect conditions we observed that could adversely affect the structural soundness and continued marketability of the houses and the health and safety of their occupants.

    We visited only nine properties in New Jersey and Ohio. They were selected by fee appraisers who wanted to illustrate the problems that were in those locations. The appraisals for eight of the nine properties that we visited did not reflect any of the conditions that we observed.
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    Examples of conditions that we saw which were not reflected in the appraisals included termite damage, masonary and foundation damage, makeshift structural supports, rotted siding, and deteriorated roof shingles. In one instance, the appraisal report did not mention or call for repair or inspection of an approximately 30-inch wide, 4-inch deep notch that had been cut out of a major load-bearing beam running through the center of this home.

    And that photograph is to your right. We believe that that was cut out for ease in walking around in that crawl space. And the other photo shows similar examples of makeshift structural supports. We saw this at several of the properties that we visited.

    As of February 1998, five of these eight properties have been purchased with an FHA mortgage. For the remaining three properties, the mortgage lender had either not approved the mortgage or had not submitted the case to HUD for mortgage insurance.

    Our work at the HUD Camden, New Jersey, and Cleveland, Ohio, offices revealed apparent weaknesses in their oversight of appraisers. For example, a HUD contractor who performed the field reviews of the appraisals for three of the six New Jersey homes we visited concluded that the appraiser overlooked serious deficiencies and should have rejected those properties. At HUD's Cleveland office, we found that the appraiser for two of the three Ohio properties we visited had received four unacceptable ratings on field reviews conducted in Fiscal Year 1997, grounds for a possible removal from FHA's roster of appraisers.

    And finally, Mr. Chairman, under the HUD 2020 Management Reform Plan and related efforts, HUD is in the process of making significant changes in all of its single family operations from the initial step of making insurance endorsements to disposing of properties. These changes are motivated, in part, by HUD's goals to downsize the agency and address longstanding agency management weaknesses.
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    While the reforms being implemented appear to address longstanding problems, it is uncertain how effective they will be in eliminating the problems in the single family program because, in some cases, these changes are not fully designed. In other cases, they are not yet completed. And some of these approaches are untested.

    In addition, because FHA's planned staffing levels are not based upon systematic workload analysis to determine needs, it is uncertain whether HUD's single family program operations will have the capacity to carry out its responsibilities once these changes are in place.

    Thank you, Mr. Chairman, and we look forward to answering any questions you might have.

    Chairman LAZIO. Thank you very much, Judy.

    The last witness on this panel is another person who's been very helpful to the subcommittee and the full panel, the Inspector General of HUD, Susan Gaffney. We appreciate all of the fine work you've done. I also acknowledge Stan McLeod who is on your left, and look forward to your testimony.


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    Ms. GAFFNEY. I'd just like to take a minute and follow up on Judy's comments on 2020 so that you understand what the HUD reform effort is. Typically, I think, if you were going to undertake major reform—re-engineering—you'd start with defining the mission. You'd then go to, in light of the mission, defining the programs. Then, you'd look at your personnel resources. In light of those things, you'd look at your organization and—in light of those things—then you would make sure that you had your basic systems in place.

    HUD 2020 deliberately does not address the business mission of HUD. And that goes back to your point which is that, at some point, if you're going talk about the loan limits, you really have to start talking about what is the business mission of FHA. That is not a part of HUD 2020. There are also relatively few programmatic changes envisioned in HUD 2020, primarily because that would require legislation and the Secretary wanted HUD 2020 to move forward at a faster pace.

    HUD 2020 does address some aspects of personnel and it does address organizational changes. It largely does not address basic system improvements needed in HUD. So, out of the five ingredients you would expect in a typical reform plan, we see two partially addressed. In terms of the organizational changes that we're talking about in single family or FHA as a whole, they are attractive concepts on the face of it. When you talk about consolidating, everyone thinks inevitably that means greater efficiency and effectiveness. When you talk contracting out, there is also an unfortunate presumption that that means greater efficiency and effectiveness.

    In fact, what it seems to us has happened here is Secretary Cisneros established a downsizing goal of 7,500 FTE. That goal was based on no analysis at all. The Secretary has endorsed that downsizing goal. He used a buy-out window and HUD has, in fact, lost thousands of employees, particularly in the single family area. The downsizing has occurred. The new organizational structures to accommodate that downsizing largely do not exist.
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    So HUD is now in a situation of transition and great risk. We have to move forward because we now cannot move backward. As we move forward however, please keep in mind that contracting out is not an easy answer. Look at any of our work; look at GAO's work about the importance of being able to oversee contracting out or just being ripped off to a fare-thee-well.

    The basic systems in FHA were just looked at in our audit of the 1997 financial statements. We found material weaknesses in terms of staffing, expertise, allocation of staffing, and ability to estimate workload, material weakness in terms of loss prevention, material weakness in the underlying systems; and material weakness in the loss mitigation area.

    So, I'm trying to paint a picture for you that, given the high level lack of definition and the problems in the basic systems, we are now operating in the middle: we have created a situation where the staff has been severely downsized, and we aren't sure that we have replacement structures in place that can accommodate that downsized staffing and move FHA forward.

    Chairman LAZIO. Thank you very much.

    I just want to ask a few questions. As much as it is important to look to the future and take measure of the past, we need to deal with what we have in the present.

    Let me start off with the Inspector General's comments about the certain parts of the HUD 2020 plan that were not either fully designed or tested. The question is, what can we do? Can you identify what they are? And then, what could we do to enhance our faith that the objectives are going to be fulfilled?
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    I'd like to give that to Judy as well.

    Ms. GAFFNEY. I think you're doing something very important today. This is the first time that I have seen bodies outside HUD, particularly the Congress, expressing concern about what the basis is for certain directions in HUD 2020. And I think where that will lead is to a little more caution and a little more care.

    Ms. ENGLAND-JOSEPH. That probably would be the theme of my response as well. Caution, only because we really support HUD's desire to try to reform itself. Obviously, we have identified HUD as a high-risk department and we're very concerned about its fundamental infrastructure, its management systems, and organization structures. And so the attention that the current Secretary has given to try to reform HUD in a rather dramatic way, in many ways, I think should be lauded.

    Our concern is not to project this Management 2020 plan in terms of the claims of the results, the quantitative results of what will be achieved, and the concept that they will be able to do all of the things that they state in their 2020 plan in the timeframes they are talking about, and achieve the kinds of things that we're hoping for. Those are not supported fully, in terms of the documentation and analysis that we've seen.

    They have put together some ideas, some thoughts, some examples of best practices, some ideas from their staff that certainly warrant some opportunity for implementation. But I really wouldn't want to hang my hat on the fact that those things will, in fact, achieve what they have claimed that they will achieve.
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    And so we have to just go slowly, rather than ambitiously, and not say let's get everything done in a year. This is going to take awhile for implementation to truly be sustained. And over time that we see the improvements that they're hoping to make actually get made.

    Chairman LAZIO. Are there particular programs involving disposition that you have particular concern about or a higher concern about?

    Ms. GAFFNEY. I think the real estate owned property proposals are of particular concern because, you know, we talk about very boring things and we fail to mention that these Government programs aren't just to make money for the insurance fund. They are to help people and they are supposed to be helping communities. So when we design these programs, it shouldn't be just for the purpose of profit making. What is the impact on the communities? And that is undefined at this point.

    But I would like to just reiterate a point I made before and that is it's not so easy for HUD to be cautious at this point. The downsizing has happened. The single family staff has gone, so we can't sit around for a year or two and think.

    Mr. LEONARD. Mr. Chairman.

    Chairman LAZIO. Yes.

    Mr. LEONARD. If I may?
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    Chairman LAZIO. Yes, let me just also ask, and then I'll let you answer as well, because the whole idea of community was raised on the impact on neighborhoods. And, of course, these are dramatic photos and I want to get back to that later on. But is there a procedure? Do you have the procedure in place over at HUD that would facilitate a community complaint if a neighbor saw that one of these properties were in this kind of condition—a dangerous condition, a blight on the area, a magnet for problems? Is there a process in place that would allow us to expeditiously deal with that, and give confidence to the community that it was being dealt with in an effective way?

    Mr. LEONARD. Mr. Chairman, if I may, I'd like to have Deputy Assistant Secretary Johnson respond to that specific concern, but I wanted to respond to a couple of the comments of my colleagues on the panel first.

    With respect to our PD reforms, from top to bottom, we are proposing these reforms based on real-world, actual demonstrations and experiences that we've undertaken under FHA over the last several years. We've had extraordinary success with contract provisions for management and marketing of properties. We have, with Golden Feather Realty, in three states which have substantially enhanced our services in our property disposition services. We have had extraordinary success with note sales to dispose of properties in bulk that have yielded a billion dollars in savings and up to 90 percent return on unpaid principal balance. So these PD reforms, while it's impossible to have perfect evidence and perfect experience in moving forward in implementing the broad-ranging management reform plans that we have put forward, in this particular area we—these reforms are grounded in real-world successful demonstrations.

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    Mr. JACKSON. Will the Chairman yield to a question, just to briefly follow-up, if I may?

    Chairman LAZIO. Sure, yes. I just want to give Ms. England-Joseph and Ms. Gaffney an opportunity to respond to this. But let me before I do that, let me just yield for a question.

    Mr. JACKSON. Just a very quick question, because I am leaving once again at 11 o'clock. I'm interested in whether or not, Mr. Leonard, whether or not one of your reforms includes voiding a contract if, in fact, someone purchases a home and finds out they don't have a foundation in it? You mentioned several reforms that HUD is considering with respect to reforming the entire process. But if someone moves into a home that has been appraised well above what it's probably worth, and they subsequently find out that there is not foundation in the home like these pictures we're looking at here, does one of your reforms include possibly voiding a contract for the innocent purchaser of that home who subsequently is stuck with a home that is less than what it is worth?

    Mr. LEONARD. We, through our programs, certainly encourage the buyers to get a full home inspection. As a matter of policy, we allow the borrowers to finance up to $200 of the expenses in their FHA loan for the purposes of a home inspection. However, we do not believe that it is a requirement and is a prudent requirement that we require all borrowers to, by necessity and by requirement, to get a home inspection.

    Mr. JACKSON. Would even allow an FHA contract to be processed if, in fact, you found out that a home had no foundation in it?
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    Ms. JOHNSON. We wouldn't allow it if we found out beforehand. The typical scenario when we've had problems is, an appraiser who appraises the property and indicates the conditions on which the loan is based, will either not detect it because of oversight or not indicate it. And the mortgagee processing the loan, who uses the appraisal document as the basis, will make the loan based on the document not indicating there is a problem.

    What we will do in our future plans to address these issues is become more stringent about: one, holding the appraiser accountable for the oversight; and two, holding the lender accountable for the actions of the appraiser since the lender selects the appraiser. Therefore, to answer your question, no we won't void FHA's transaction, but we would expect the lender to make the borrower whole.

    Mr. JACKSON. Fraud is a very serious offense in America, Mr. Chairman. That's exactly what it is and I hope we can constitute—when we have further hearings on this issues, we'll certainly take a hard look at false appraisals and loans based upon those appraisals that don't include the structural problems that we are looking at today.

    Chairman LAZIO. I appreciate the gentleman's comments.

    Mr. JACKSON. Thank you, Mr. Chairman.

    Chairman. LAZIO. And actually you have a valid point.

    If I could, I just want to ask one last question and I'm going to move off and unless anybody's got a really pressing time problem.
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    Mr. Weygand.

    Mr. WEYGAND. Mr. Chairman, if I could, I'd like to just follow up on that question by my colleague, Mr. Jackson.

    Chairman LAZIO. Let me just ask unanimous consent, if I can. I'll just recognize you for one minute.

    Mr. WEYGAND. Thank you. My background is that of engineering and architecture. I used to own an architectural firm and designed and developed many homes. It seems appalling to me that the Federal Government, after all the problems that we have heard this morning, does not require a home inspection because, as you know, appraisers do not necessarily have the expertise to do such things as structural determinations and determinations on electrical and plumbing. They are primarily looking at the market value and some of the aspects that would make the property generally acceptable to someone who is going to give a mortgage.

    But quite frankly, many of the issues that you've raised here today are also problems throughout this country. And people who are knowledgeable about how to go about getting the proper appraisal will also have an inspection. However, the Federal Government, particularly in a case like this, should mandate that there be an appraisal and a home inspection by people qualified to tell you exactly what is wrong before you ever sign a contract. I'm just amazed that this is actually going on right now.

    Thank you, Mr. Chairman.
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    Chairman LAZIO. I thank the gentleman.

    Let me just finish up with one question so I can get on to the other Members who have been very patient. I just want to ask Ms. England-Joseph and Ms. Gaffney to try and respond to some of the comments that were made by HUD. Obviously, you have, as I've said before, some dramatic photos over here. I just want to ask how your analysis and your work squares with the comments that were just made by HUD and also of this report. This is the HUD 2020 Implementation Plan Review by Booz Allen and Hamilton, and I just would like you to comment if you can, on this and in general, respond to the testimony that's just been given by HUD.

    Ms. GAFFNEY. Mr. Chairman, I want you to understand that I am not here to be negative about HUD 2020. I don't think there's any benefit to being negative or positive about HUD 2020. It has happened. We are in a situation that we all need to be concerned about getting out of. The Booz Allen report in my mind is troubling, because it makes a positive assessment based on very, very extensive assumptions about legislation, about new policies, procedures, and operations that have never been tried before. As Stan McLeod has said, it is a report that says, ''Guess what? If you win the lottery tomorrow, you're going to be wealthy.''

    In terms of what Mr. Leonard said about the success of the pilot projects that HUD has had, our audit work does not demonstrate that. It does not demonstrate that the pilots have been across the board successful. And the reasons go to basic problems in HUD, such as the inability to oversee contractors doing work, which is a big part of the pilots, and lack of data systems that HUD people can rely on to try to do loss prevention. So, we do not see the positive results.
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    Mr. LEONARD. Mr. Chairman.

    Chairman LAZIO. Let me just ask Judy if she's got a comment.

    Ms. ENGLAND-JOSEPH. Right. I would like to comment on a couple of things, and one is that I definitely agree with what Susan is saying about the pilots that have been conducted so far in HUD. What we are suggesting here is that many of the things that we identified through the work, looking at the appraisals and also looking at the oversight of the REAM contractors are problems that need to be fixed that would not be addressed by the 2020 Management Plan prior to the year 2002 or 2003. And there are a lot of if's, and's, or but's in terms of the assumptions about what will occur with the REO recommendations that the agency has put forward.

    The proposal that is with you now, the draft, the proposed rule for REO, is very general, very vague. It's not specific enough even for us to make a real clear assessment of what the REO proposal will actually do. It's very nonspecific. There are a number of questions that we have. So we would not want to suggest that what is being proposed by HUD is clearly thought through, firmly supported by a lot of evidence, and examples of pilot results and lessons learned. There's a lot of testing that's going to have to go on before we're really confident that what they are planning to do really will work.

    The other thing that I'd like to comment on regarding these photographs relates to what Ms. Johnson has just said. These are things that were, in some cases, reported to HUD. There is a formal system in place—even though it is ''buyer beware'' to encourage borrowers to get an inspection. There is still a process within HUD to ensure that the appraisal of that property is sound. And what we learned—again, it was limited. It's only eight of the nine properties where we saw this, and we're starting a further review under your request to do a much broader assessment of the appraisals at HUD.
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    But for the properties that we visited, the appraisals were done and they did not report what was obviously the condition of the houses. In some cases, we had difficulty finding the appraisal even though it had been completed. There are processes and systems in place at HUD to oversee and manage these programs and to ensure that when you require an action, somebody is doing something about it. Those are the things that we're talking about here that need to be fixed, and are at this point, not yet fixed.

    There's certainly great hope under the new reform measures through Management 2020 Homeownership Centers that these things will be addressed. But many of these things we've brought to HUD's attention are not necessarily things that HUD thoroughly understood and recognized as the basis for Management 2020.

    Chairman LAZIO. Great, let me thank you very much. Let me turn it over to Mr. Gutierrez, and I apologize for questioning so long.

    Mr. GUTIERREZ. That's OK, Mr. Chairman. They are very good questions.

    Well first of all, I'd like to just respond real quickly to Mr. Leonard who said—and I want to quote him, ''that it wouldn't be prudent to have an inspection of a home.'' They don't feel that it's prudent to have an inspection of a home. And I don't know, but I would be surprised if anybody sitting on this panel has bought a home without an inspection. I know I certainly have not bought a home without an inspection. I would doubt very much if any of the panelists sitting there have bought a home without an inspection. And when I speak about that inspection, I'm talking about independent of the appraisal. Everybody knows the appraiser works for the lender and goes out there—many times they just stay in their car. It's a three-room flat, vinyl roof; it's got a garage, and it's in this neighborhood, and they check against other things.
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    As a matter of fact, most people will tell you at community-based organizations to hire someone to watch the general contractor under new construction. So that it's the architect's responsibility to make sure that his plans and specifications are carried out. That's even under new construction.

    And I would hope that our Government is not just hiring people to build buildings without watching them build them and making sure that we have somebody watching our own interests, so, I mean, I think it is prudent, and I disagree with Mr.—I think it is prudent and wise, and maybe it is something that we should look at.

    And on the other hand, look, it's pretty clear that there are lenders who have higher default numbers than others. And they're pretty clear, and so I went to Mr. Lazio last October or last November on the elevator and I said, ''You know this group from Chicago came over and presented me with 'The Devil is in the Details,' an analysis of CHA default concentration and lenders and performance in 20 U.S. cities.'' And then I started looking at what this said about my own communities. And I went out there and so I think it is important that we do this because, look, there are real estate brokers who buy the property, some of it distressed property from HUD, say they have fixed it, turn around and put it on the market and have good relationship with lenders.

    This is nothing in America, that real estate brokers work with mortgage brokers who work with appraisers. I mean, they're all buddies, they're friends. And I'm not trying to make something sinister of it. It just happens that way, because I know that I can walk in and see my real estate broker and she says, ''I know somebody who can finance it for you''—and you know real estate brokers are very good—and ''I know somebody who can get insurance for it.'' That's kind of full service. They want to make the sell so they kind of help. So that's nothing. But it happens.
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    And so I think we have to look at what happens, and I think that's what Mr. Jackson was talking about. What happens is, they'll fix it. It will be appraised at a certain value; they know it's insured, and it's a continuing cycle. So, I would like to just ask a question. Can we do something about requiring inspections of the property and talking to the homeowners especially in certain areas? It seems to me to be prudent.

    Mr. LEONARD. Mr. Gutierrez, we will go back and take another look at this issue, but I also want to be clear that we do already go to sort of a great length to insure that homeowners—and to encourage homeowners to go and get inspections. And if I may have entered into the record here, an attachment to our mortgagee letter 9667, with a one-page requirement that the borrower must sign, actively check-off, whether or not they have chosen to get a home inspection, and laying out very clearly that, and I quote, ''As the purchaser, you should carefully examine the property or have it inspected by a qualified home inspection company to make sure that the condition is acceptable to you. You should do this before you sign the sales contract or make the contract contingent upon the inspection. If repairs are needed, you may negotiate with the owner about having the faults corrected. There is no requirement, but we certainly encourage you to do so.''

    Mr. GUTIERREZ. I guess my point is, that's nice. But given the number of defaults that are occurring, specifically in certain neighborhoods, and specifically the vulnerability of certain populations who have never entered into these kinds of transactions before. I mean, when you buy something the first—has anybody bought a car the first time, and they said—and you walk in and they said, ''How much do you want to pay a month?'' Remember? And then you say , ''Well, I've got like $150 a month.'' And then they give you a car for $150 a month. I mean, the first time you buy a car, I bet you we could all go back and think about how silly we were buying that first car. So, I mean, this happens to people. I mean, that's about, you know, consumer—I'm just trying to think of my own life experience. I remember I got suckered on that Toyota.
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    God, to this day, did I get suckered on it. And I know it now, because the next time, you know, I said, ''What's your interest rate?'' and ''How much is the car worth?'' And, you know, that kind of thing. No, but seriously, I think we have to think about these vulnerable communities of people who say, ''God, I want to buy that house.'' You know, you're all excited. Your adrenalin's flowing, you come with a piece of—you're checking it off, and you figure the real estate broker is there. Everybody is friendly; everybody is nice. They're getting you into your new home. And then it shows up without a foundation because you didn't check it out.

    I'm just going to make this last point, Mr. Chairman. I have not sold a home in the last ten years, nor bought a home in the last ten years where either the buyer of my home or I, as the buyer of the home, have not asked for an independent inspector to go in and inspect this property. And I think that is in America, as you social economically up the chain, I mean, and people are better-to-do and wealthier. I think it's 100 percent, you know.

    So, let's make sure that those that are poor and more vulnerable and less able have that same kind of benefit. And I understand that, you know, maybe sometimes Government has got to do things to protect people. And if you have people out there that are doing dastardly things—and it's clear in this report, Mr. Chairman, that it's happening across our country. You can go to any neighborhood. And in Chicago, there's a real estate broker—I'm not going to put his name on the record, but it's a real estate brokerage firm that keeps selling properties and then you have these mortgage brokers who just finance it. And its happening time and time again.
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    The other thing is, let me just say, there should be an office at HUD in Chicago and across this country, an office that says, ''Come here, we deal with this kind of situation.'' Because even as a Member of Congress, it is difficult to find out who is in charge. If you want a community meeting, who is in charge in the area office to deal with this and bring you all of the resources? And if I have that kind of a problem, you can imagine what a community organization or an individual might have in terms of bureaucracy.

    I love the folks over at HUD. We do a lot of great work together, but this has got to change and it's got to be fixed. And we should continue to evaluate it. And I thank the Chairman for extending the time.

    Chairman LAZIO. Congresswoman Kelly was here earlier, had a bit of an accident and wanted to deliver this testimony. She asked that, by unanimous consent, it be included in the record. And without objection, it's so ordered.

    Chairman LAZIO. Mr. Fox will you?

    Mr. FOX. Thank you, Mr. Chairman.

    Inspector General, we've been having a problem in the Philadelphia area on the home improvement program with a possible fraud situation. And I was wondering, instead of eliminating the repair program, why couldn't we reform it? Because I think there may be a need for the repair program, but not necessarily eliminating it.

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    Ms. GAFFNEY. Are we talking about Title I?

    Mr. FOX. Yes.

    Ms. GAFFNEY. Yes. Well, the percentage? Title I is what percentage of that market? Let me just check. Do you remember, Stan? About 3 percent of the home improvement market. Now, that doesn't mean that there isn't a niche that HUD should fill.

    The problem that I keep trying to talk about is there are lots of niches that it would be useful for HUD to fill, but HUD's capacity is now so limited that it seems to me that we should be focusing on the mainstream responsibilities and trying to get them straightened out. So, I don't know if that adequately answers your questions.

    Mr. FOX. Well, I mean, there are two ways to look at it. You can eliminate it or else you can reform it. I was suggesting for my neighbors in the fifth largest metropolitan area in the country, that they've benefited from the good works of HUD. And I want to see from our region if there's any way we could reform the program.

    We're going to be probably having a committee hearing, Mr. Chairman, on this highlighted problem that I brought to your attention, in Washington in the not too distant future. And I guess from my constituent's perspective and probably that of the Southeastern Pennsylvania, New Jersey, Delaware region—that tri-state region—there's a good number of people living in the urban community who'd benefited from the HUD home repair program. And I'd see us as a, collectable, as a Congress and the agency, work together toward reforming the program and making it better, where it's not as good you might—we might eventually have it be, as opposed to eliminating it which is obviously another option but not one I would ask us to consider moving forward on.
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    Mr. LEONARD. Mr. Fox, in responding to Ms. Gaffney, clearly there seems to be some basic disconnect here, because providing housing opportunities for low- and moderate-income Americans, whether that's homeownership opportunities through FHA, whether that's home repair and rehab opportunities through FHA, is clearly a core and critical part of our mission, and a mission that we believe we fulfill very effectively in providing homeownership and mortgage insurance for 800,000 homeowners a year. And so we absolutely agree with your direction on this and are looking at a variety of reform options now which we'd be happy to discuss with you further.

    Ms. GAFFNEY. Mr. Fox, could I just continue my comment?

    Mr. FOX. Can we meet afterwards to——


    Mr. LEONARD. Yes, Ms. Gaffney, absolutely.

    Ms. GAFFNEY. I would say to you that if we're going to reform something like Title I, and it clearly needs to be reformed or eliminated, let's try to do it in a way that we base it on some kind of market incentives rather than more oversight. That's what I'm trying to say to you. HUD oversight isn't there anymore. That staff isn't there. So we need to find other ways to change.

    Mr. LEONARD. And we agree. And we agree with that, and that's exactly what we're trying to do with our property disposition reforms. We are—the bulk, within just a few months, the bulk of our property disposition activities will be done through private, third, independent parties who have purchased the right to dispose of these properties. We won't be overseeing these contracts, and we believe that those kinds of reforms are absolutely critical. And that's the direction in which we're going.
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    Mr. FOX. I might ask Ms. England-Joseph if she could comment on this GAO perspective.

    Ms. ENGLAND-JOSEPH. The Title I issues?

    Mr. FOX. Yes.

    Ms. ENGLAND-JOSEPH. Well, we're actually doing some work for the Chairman and I think, largely, because of the concern and interest you've expressed to him and his staff, but our work isn't completed. And at this point I wouldn't say that we are in a position to say we would recommend eliminating the program. But certainly what we are seeing so far, there are some real serious issues in terms of our ability or your ability to say how well this program works, who it does serve, how well it provides service to the people that they are intending to serve.

    So there are some fundamental issues about this program and how it operates and how the Government understands, or can't understand, what's actually being achieved through the Title I program. That is separate from your interest which is, we need something out there to provide assistance to homeowners, particularly perhaps low-income homeowners, that don't have access to capital in the same way that others might have. And so that truly is a separate issue.

    It may be that we either have to figure out how we fundamentally reform the design and the management and oversight of Title I, or really start from scratch with something different. But those are the issues that I think you're going to find that we're reporting on because of the early indications that we have in looking at that program's management.
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    Mr. FOX. We're looking forward to those hearings. Thanks very much.

    Mr. PROCACCINI. I might add, Mr. Fox, that we're doing work for Chairman Lazio on that and Congressman Bentsen right now, and we hope to get a report this summer, a final report, and probably be in a position to brief the Chairman earlier than that.

    But one of the fundamental aspects of this program we're seeing is what the Inspector General of HUD mentions, Ms. Gaffney. You have a relatively small program by HUD's standards, $4 to $5 billion dollars worth of insurance in force compared to almost $500 billion dollars worth on the single family loan program.

    And the issue comes up, how many resources can you really devote to overseeing a relatively small program by HUD's standards which could be detrimental to some of the larger programs and larger issues of HUD? So I think this idea of incentives that Ms. Gaffney mentioned is pretty important in these kinds of programs.

    Mr. FOX. I hear what you're saying, but my bottom line is, I think we should reform the program, not eliminate it. Because there's too many people who are in the low income strata who are depending on it.

    Chairman LAZIO. I thank the gentleman.

    Mr. Hinchey.
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    Mr. HINCHEY. We thank you very much, Mr. Chairman. This has been very interesting, and I think you've provided a good service in calling this hearing. I've enjoyed listening to the testimony.

    And it seems to me that everyone at this table is committed to at least one thing, and that is to see that this agency operates much more effectively and efficiently, and that it serves the people who it was designed to service more effectively than it has done in the past.

    The FHA is an agency that is in a period of transition, and it is in many ways a difficult transition. I can recall just reading about all the problems of HUD a decade or so ago. And my assumption is that the reforms that are being proposed by the present Administration and by the present Secretary are designed in some measure to insure that those kinds of problems—which were characterized by fraud, abuse, gross misinterpretation of the mission of HUD, and diversion of the resources of HUD to benefit private individuals in very gross ways—don't happen again. That seems to be what is going on here. And I'm happy to see that the Inspector General and Ms. England-Joseph seem to agree with that, as well as the folks who work for HUD directly.

    Is it true, do you think, that some of the reforms that were proposed and begun by former Secretary Cisneros and now are being carried out by present Secretary Cuomo may have been too ambitious? Do you think that the downsizing may have occurred too quickly, too much, too soon? Is that possible? Let me ask Ms. Gaffney and Ms. England-Joseph that question.

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    Ms. GAFFNEY. Yes, as I said before, the downsizing target was based on absolutely no analysis. It was pulled out of thin air, and it became the driving force in this entire reform effort. And that was largely because the buy-out legislation expired at the end of December 1997 and HUD didn't want to do reductions in force, so HUD used the buy-out legislation. That became the driving force—ahead of everything else.

    Mr. HINCHEY. So the way the legislation was constructed and the time constraints within that legislation drove HUD to move more quickly than they might have if they had been provided more leisure?

    Ms. GAFFNEY. Yes. I am certain that that is correct.

    Mr. HINCHEY. So what they were trying to do then, within HUD internally, was to respond to their legislative mandate and doing it aggressively?

    Ms. ENGLAND-JOSEPH. Actually, there was nothing to stop HUD from asking for an extension in that legislation in order to have buy-out authority that could extend through the year 2000 or 2002, given the dramatic nature in which they were trying to reform the agency. So, even though I agree that maybe their actions were, in fact, tied in some respects to the buy-out process and schedule, there certainly was a great deal of flexibility. They could have come back to the Congress and asked for an extension for just that particular agency because the law she's talking about was for all Federal agencies as a part of the Federal Government's downsizing efforts. The 7,500 was something that Secretary Cisneros first identified as the target for where HUD should be. We had concerns back when that number was first reported, because we saw no evidence of any analysis to support that 7,500.
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    And while we agree that HUD really needed to become more efficient and try to streamline its operations and become perhaps more like the private sector, because in terms of some of its businesses HUD is very much like the private sector. However, downsizing in terms of people at the same time that we're criticizing them that they have some real problems with their capacity even when they had 10-, 12-, 13,000 people, raises concerns about their organizational structure and their skills and abilities of their staff to perform some of the functions in the agency.

    Mr. HINCHEY. Well, thank you.

    Mr. LEONARD. Mr. Hinchey, we are today—we have about 9,000 employees, down from about 10,500 when Secretary Cuomo took over. But what we believe is sort of critically important to understand is that those 9,000 employees that remain are deployed into fundamentally different ways than they were prior to these deployments. And that we have new capacities that we are developing and bringing online, but bringing online with the repetivity that we can be proud—we are certainly proud of—in which we think rival the kinds of changes that are occurring in the corporate sector in downsizing all the time.

    We have capacities and again, we are within a matter of months, will have new capacities in the area of property disposition. We have capacities to do assessment, comprehensive assessment, of our real estate portfolios, both public housing and multi-family assisted housing, and enforcement and to take real effective enforcement action against our service providers who are not living up to their contractual obligations.

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    So while it is clear we are moving quickly, we heard the Congress, we heard the GAO, we heard our Inspector General and felt like we didn't have the opportunity to wait. We want to move quickly; we don't want to let this get bogged down, and we are continuing to work and refine our plans as we go.

    However, as the Chairman pointed out, we have recently completed an analysis that we contracted for with Booz Allen which has actually gone back, has reviewed our steps today. It indicates the significant progress that we made, generally a very favorable report, and acknowledges and reinforces the fact that if we make the critical assumptions of an acting legislation to streamline our program structure and we are successful in reducing the public portfolios of public housing authorities, multi-family portfolios, that by the year 2002 that we can effectively operate it at near the 7,500 target that we've set for ourselves.

    Mr. HINCHEY. Well, if I may, Mr. Chairman, I just want to say that the reforms that were initiated under Secretary Cisneros were further expanded and modified and improved by Secretary Cuomo and being carried out by him are to be applauded. I think that you're doing a very good job over there. Now, that is not to say that you are not going to run into glitches and problems along the way, and that at a hearing like this, somebody may point out something that you may have overlooked. I would be shocked and surprised if there weren't a great many things that you haven't overlooked. Obviously, you've overlooked a lot of things which would become more apparent as you move through this reform process.

    And to do this job in a much more efficient and tidier way than has been done in the past with fewer people is the objective. It's a worthy objective, and I hope that you continue to have the kind of success that you have demonstrated early-on in this process, recognizing of course that there are going to be glitches along the way.
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    Mr. LEONARD. Well, we have welcomed and sought out the constructive input of our colleagues on the panel here today, the GAO, and IG. We spent a lot of time with them trying to get their input and their review of our work to date, and have tried to incorporate and address as many of those concerns as we can. We've also been doing extensive outreach with our constituency groups from the public housing world, from the multi-family, from the single-family worlds so we are clearly anxious to move forward, but at the same time, we are trying to allow for and gather as much input into our plans as we do so.

    Mr. HINCHEY. Thank you very much.

    Thank you, Mr. Chairman.

    Chairman LAZIO. I thank the gentleman.

    Mr. Castle.

    Mr. CASTLE. Well, thank you, Mr. Chairman. I don't mean to throw cold water on all this, but HUD has been reforming itself ever since I've had anything to do with Government and almost, without exception, unsuccessfully. And I think I agree with everything that you basically have outlined, and I think there are some tremendous problems, and I wish you luck with it and would rather help than be critical of it, but I worry about—we're going to do this; we're going to do that. But, you know, will it really get done, type of thing? You don't have to answer that, but I just make the observation.

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    I do it because I have seen a lot of properties, a lot of which by the numbers of the FHA mortgages which are out there are FHA properties in which neighborhoods have really been tremendously adversely impacted by it. The owners will move out, will literally leave, and then you'll have a period of—what is it?—it was nine months or whatever the heck it was before the foreclosure would begin. The foreclosures would be delayed. There was a lot of paperwork problems. You might have a year-and-a-half, and by then, you have drug dealers living in these houses; you've had to board it up about four different times, and it's a huge degradation to the entire neighborhood. It's just a tremendous problem and something that, you know, we really need to do something about.

    So I think the things that you're talking about in terms of expediting the time of handling all of those things is very important. And I'd like to ask you one question about the bottom line of that. And only go back to the beginning, because I worry about a little bit of this happening at the inception at the time of acquisition, whether or not we're really focused as well as we should be there.

    But, how do you respond to the criticism which I read someplace in preparing for this hearing—which I didn't have a lot of time to do—but the criticism that FHA is again dumping properties irresponsibly by packaging them and by doing all the things you're talking about? And I understand that's sort of significant in terms of disposing of properties, and so forth, but are you moving too quickly with respect to that? Because that could be a problem to itself.

    Mr. LEONARD. Well, we are moving forward in aggressively implementing our loan loss mitigation plan, as you know. In 1996, at Congress' lead, we have transferred our system away from a mandatory mortgage assignment program to a new loan loss mitigation program, which is also a mandatory program I should point out. Each lender is required to do an evaluation for the implacability of the alternative loan loss mitigation strategies that are now made available. We are—we believe that—and we are, while there was some slow startup as we were actually administering both of those old systems, we are taking aggressive steps to enhance our loan loss mitigation efforts. We've trained 500 counselors to assist the homeowners in the process over loan loss mitigation for homeowners who have defaulted on their FHA loans. And we are now looking at roughly 10,000 families who are going to be participating in loan loss mitigation strategies in this Fiscal Year 1998 which is approaching the maximum level that we're participating in the Mortgage Assignment program.
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    So, in addition, we believe our reforms will actually enhance the Loan Loss Mitigation Program. That it will further strengthen the incentives the third parties will have, the financial incentives to work out and keep owners in their homes for two reasons. One, third parties have more flexibility and financial tools to refinance for owners and still do some——

    Mr. CASTLE. The third parties are the lenders, is that correct, when you say third parties?

    Mr. LEONARD. The third parties who will be in the end under our proposed legislative reform, they will actually be taking on the notes prior to foreclosure.

    Mr. CASTLE. OK.

    Mr. LEONARD. So these third parties will have financial incentives to work out these defaulted loans before foreclosure. Foreclosure is expensive for them. And in many cases, these third parties will have the resources available to refinance these loans and will have the incentives to keep them in their home because they will be making servicing fees out of this.

    Mr. CASTLE. So, let me just follow up with a very quick question because I do want to get to something else and my time is running out. But these third parties you are talking about are going to be in the business of making a profit?

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    Mr. LEONARD. Yes.

    Mr. CASTLE. And when you're in the business of making a profit, particularly when you're dealing with lower-income communities and the homes and that kind of thing, you know, not paying attention to it is often the best way to go, in other words, giving lesser services rather than more services because it costs you less to do that.

    Mr. LEONARD. Well, in this case——

    Mr. CASTLE. Well, I hope that—I mean I don't know what your incentives are to prevent that other than the inspections you may be doing, but I hope you're watching over that aspect of it and being extraordinarily careful.

    Mr. LEONARD. In this case, under our proposed legislative reforms, the third parties would be taking over defaulted notes. We will pay a claim prior to foreclosures, so they'll be taking over the notes. And they will have more financial incentive to keep a family in their home and work out the difficulty than they will to go through the more expensive course which is foreclosure and disposition.

    Mr. CASTLE. I know, but they are geniuses at working around that for the sake of making money. That's all I will say. I mean, I'm not suggesting that's wrong; that's all I will say. Let me ask you quickly, if I may, one further question. And that is, the problems at the inception—and I heard something when I first walked in that I had not read before that I did not know about. But we all know that we're dealing in many instances with—Mr. Gutierrez made the case quite well. When you're dealing with people who are low income, often first-time homebuyers, often buying in—extremist to some degree in terms of their living circumstances, or whatever it may be, and they're not paying a lot of attention to what is going on. I have seen from where I'm from which is Delaware—I have seen sweat equity programs; I have seen pure equity program where people are made to save a certain amount before they get into it or they aren't helped so much that they don't think they have anything in the property at all which is difficult, because we want to help people in low income circumstances. But it does give them a sense of ownership when you do these kinds of things that they might not previously have had.
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    And I'm always amazed at the number of people who get into FHA properties who walk away from it without even giving a second thought to it. I mean, that really bothers me. And I'd like to make sure that we are addressing that up-front, because obviously if we can address that up-front, you're going to have fewer problems down the road. So that's one fault that I have.

    The other question, since I'm running out of time, I'd like to put on the table was the whole business of inspections. I mean, appraisals really aren't inspections, but I guess what you're saying is inspections are not mandated. They are permissive. Why couldn't we make all contracts contingent upon an inspection, if you're going to get a FHA mortgage for example. Would that improve the circumstances of people getting in homes? Because so often with this kind of homeownership, you find people coming back to you two months later saying, ''I had no idea this house was in that kind of condition.'' You know, in some cases, they just closed their eyes, obviously.

    Mr. LEONARD. Right.

    Mr. CASTLE. But in instances, they really did not. So, if you could handle this particular question.

    Mr. LEONARD. Just to comment on the inspection question, again. No other lender requires an inspection. No other lender would.

    Mr. CASTLE. But I don't think any other lenders have the extent of the problems that your lower income FHA purchasers are going to have, in lack of sophistication, buying homes of less value, and so forth.
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    Mr. LEONARD. We have gone to great lengths to encourage home inspections. No private lenders are requiring them. But let's be clear. If the Congress—and we've made a decision ultimately that also because the inspection industry is not a regulated industry and there are clearly some bad inspectors out there just as there may be some bad appraisers out there. But, look, if Congress wants us to require an inspection in this process, we can do that. That is not a problem. Certainly, you know, we have made a decision until now, and we'll go back and look at it further. But we have gone as far as we possibly can to encourage that, but we have not gone the last step to say——

    Mr. CASTLE. But it's a worthwhile discussion to have. I'm not saying Congress should mandate it. I'm just trying to provoke you into an answer, you know, rather than say what we should do. But I just was curious as to your position on that. And I agree with you, there are some bad inspectors but, you know, that's part of you weed those out. There's some good inspectors, too.

    Ms. JOHNSON. May I add just one thing to that? As Paul indicated, we can look at that if the Congress would want us to. But I just want to point out something Susan Gaffney mentioned. And that is our diminished capacity to oversee directly a lot of things. So as long as there is understanding that we could require an inspection and the check-off would be an inspection was done. And the presumption would be the potential homeowner has been informed.

    Our experience is that it usually doesn't go there as a governmental burden. After awhile we will be held accountable for anything that was wrong with that inspection, anything that was wrong with the quality of the inspector, and so forth. And that all requires resources to oversee. So, you know, it's not just——
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    Mr. CASTLE. Let me follow up on that, if I may. And I again, just for discussion purposes, I'm not trying to be antagonistic on this. I'll bet you if you had mandated—first of all, if you had mandated inspections, to me it would mostly between the lender, the lending bank, and the owners to some degree. And I'll bet you if it's a condition of the contract that you have them, you might see your workload reduced a great deal. Instead of having to go to whatever you're trying to get to with 7,500 people or whatever, you might be able to go to 6,000 people, because I think the real issue is going to be that a lot of these transactions aren't going to go through. I mean those kinds of transactions aren't going to go through. I've seen a lot of them, frankly, that aren't going to go through.

    We all know that there are a whole of people who deal in these kinds of properties. There are lending agencies, there are realtors, there are builders—whatever. And a lot of them are cutting a heck of a lot of corners. And if you had true inspections going on, you might find yourself dealing with a lot fewer problems and a lot fewer properties.

    There's a down side to that. And that's a lot of people who want to own a first home and need to get started who are not getting into it, a lot of whom are good people. And I will be the first to recognize that as well. But I'm not exactly sure, I mean, I'm not sure it would be quite as great a burden, added burden, as you might think. I think it might discourage some.

    Ms. JOHNSON. It's what has been our experience with the appraisal process. It's turned out to be more work and obligation on us than we sort of expected because—and that profession is professional. I mean, even they are requiring a lot of oversight and checking, and so forth. So I was sort of making the analogy there.
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    Mr. LEONARD. If I could go back to the first part of your question which was impacts on neighborhoods and the actual experience with bad loans, I would just like to point out that last year——

    Mr. CASTLE. The essence of it being to be careful going into it to prevent those things from happening.

    Mr. LEONARD. Correct, but I also want to sort of go back and——

    Chairman LAZIO. If I could ask you to keep your comment focused because I do want to get to the next panel, and we're trying to get out. This room is committed by 12:30; we'll never make that.

    Mr. LEONARD. But just to put this in perspective, last year our total claim rate of the number of loans that we made that went to a claim was one percent of the volume of 800,000 loans. So, and we are a mortgage insurance company, we are, you know, we are not perfect and we believe that is given the riskier borrowers who we are serving that that is a rate that we are actually proud of. And so, we should keep in mind that while we continue to focus on this we're developing new technological tools, early warning systems, to identify problem lenders and problem neighborhoods, at the census track level that we'll have operational in the next couple of months that—let's not lose the forest for the trees here that while we want to fix any problems that come to our attention. We also want to remember that we are doing a real good job in the basic business of what we are trying to do.
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    Mr. CASTLE. Thank you, and I stand properly chastised by the Chairman, because those comments were really aimed at me and not at you, because it was my questions that provoked the problem, not your answers. I yield back, sir.

    Chairman LAZIO. Thank you, sir.

    The gentlelady from Indiana, Ms. Carson.

    Ms. CARSON. I want to request, in the absence of Jesse Jackson, that a statement of the National Association of Real Estate Brokers, an organization that has serious concerns regarding the FHA's property disposition program, be included in the record.

    Mr. LAZIO. Without objection, that will be included in the record.

    Ms. CARSON. I also want to thank you very much for allowing a representative from the Organization for a New Eastside, a group located in Indianapolis, my district, to be a part of this subsequent panel today.

    Chairman LAZIO. I thank the gentlelady. I want to thank the panel for some very provocative testimony. We'll be working together to try and resolve some of these problems and, again, thank the panel for their written testimony and for their oral testimony. Have a wonderful day.

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    I would just tell the first panel, we may have some more questions particularly from Members who were not able to be here, and they'll be submitted in writing. And if you'd be able to respond to that, that would be much appreciated by the subcommittee.

    I want to welcome the second panel. We have a vote that's just been called, but why don't we at least get started and go for a few minutes.

    With our distinguished panel, I want to just reiterate the fact that your written testimony will be included in the record and that it will be read. And if I could ask that you please summarize those comments.

    Let me first introduce Michael Quinn who is the Senior Vice President of Credit Loss Management, in Fannie Mae. He's also a Long Island, New York, native. I'm happy to see a neighbor and someone who has obviously been very successful in terms of working for one of the most significant American corporations in America with a public mission.

    I'll turn it over to you, Michael.


    Mr. QUINN. Thank you, Mr. Chairman, and Members of the subcommittee. Thank you for giving me the opportunity to appear before the subcommittee today to discuss Fannie Mae's loss management practices.

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    Fannie Mae is the largest source of home mortgages with over 10 million loans currently guaranteed. Our goal is to make homeownership a success. We don't want to set up anyone to fail. Some borrowers unfortunately do encounter financial difficulties. The three primary reasons are job loss, disability, and divorce. In those cases, we devote much time and many resources toward two objectives. First is to do everything possible to keep the people in the home. But if that's not possible, to foreclose in the quickest amount of time resulting in a minimum of losses.

    We've given loss mitigation special emphasis since 1994 when we asked every one of our servicers to try to attempt to work out every single delinquent loan before they send it to foreclosure. What we ask them to do is to just walk through three steps.

    The first step is a repayment plan. Will people be able to get current again by making a little extra payment every month? We have found this works for people who have had a temporary loss of job or a disability. A case that we just completed recently was for someone who was out on disability and missed three months of work, went back to work, and could now make their payment plus a little bit. And they stayed in their house.

    The second step—if people can't do that, because they don't have the extra money every month to make a payment—is to try a modification where maybe we can extend the term or reduce the rate to keep the people in the home. An example of a modification which we had just recently completed was for a young couple—both were working and their child was diagnosed with cancer. The wife quit her job to take care of the child full time, and what we were able to do was to extend the term and reduce the rate. And it enabled them to keep their house and not worry about a foreclosure, and they could focus on their child.
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    If neither of those work, where the people can stay in the house, what we try to do is a pre-foreclosure sale where we work with the borrower to put the house up for sale in an orderly manner. Normally what happens is that you don't have to worry about foreclosure proceedings.

    We pay our servicers incentives to do workouts. We've paid out over $20 million to them to do these workouts—incent them to do it, and we've been very successful. We have found that over the last four years, over 10,000 borrowers have been able to stay in their home because of these workout plans. And we've reduced our losses by about $100 million annually.

    Now while we have accomplished a great deal over the last four years, we think there's a lot more that can be done. And what we are actually doing is we're putting Fannie Mae's people on site at the servicer to make sure that they know exactly what our guidelines are. We can instruct their staff and then we can give immediate approval to loan workouts. And we have found that as soon as we put Fannie Mae staff in there, that the number of workouts have increased dramatically. And that's why we believe there will be many more workouts in the future.

    Now, unfortunately, there are instances where foreclosure is just unavoidable. It's either because the borrower is unwilling to work with you or because there are other liens on the home. And what is very important in these instances for the community and the investor, is to complete the foreclosure in a minimum amount of time, because someone who is not paying their mortgage is also not keeping up the house. The value of the property drops and it depresses all the values. So, what we try to do is foreclose as quickly as possible. The house must be secured, maintained, and sold as quickly as possible. But the key is you must maximize the sales price. Because if you don't, when you sell your home for below sales price, it sets the value for every home in that neighborhood for at least six months to come.
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    Because if any of us buy a house, we look at what the last house in the neighborhood sold for, and that's all we are willing to pay for it. And we basically take this approach on every house we sell—and we sell about 22,000 a year; we sell it just as any of us would. We interview the broker and pick the best broker. We set the price; we do repairs, based on what we think is needed to maximize that price. And we are active in the negotiations. We agree on every price, ourselves, as to whether we are going to accept it or not. So we do just as any of us would.

    Our results have been very good. We are listed as having one of the highest prices received on foreclosed properties of any major seller of foreclosure properties in the country. We've reduced our loss per case from $21,000 to $13,000 in just two years. And we've saved over $100 million annually this way, also.

    While we are convinced our approach is the best, we do realize that other investors choose the bulk sale method. And we do not believe in selling that way, because it's not appropriate for organizations as large as Fannie Mae. We have a responsibility to the communities where we conduct business. We have mortgages, probably on the house right next door, and we take that responsibility very seriously. Properties that are sold in bulk usually are resold at a discount, thereby, depressing all the values in the neighborhood.

    So, in summary, there is a lot you can do for people who are delinquent to keep them in the house. As long as the effort is made and we're trying to do that. But if they can't stay in the house, the thing to do is foreclose as quickly as possible and to sell it at market, as close to market as possible. That keeps more people in homes, keeps the values up, and also it will reduce the whole cost to the system in the future and lower future financing costs.
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    Thank you.

    Chairman LAZIO. Thank you very much, Michael.

    We have a vote on right now. There are about 8 minutes remaining, but before we leave and recess—and we'll be back in about 15 or 20 minutes—I want to turn to Ms. Carson who may have a conflict afterward because she had asked to introduce one of our panelists, and I now turn and yield to Ms. Carson.

    Ms. CARSON. Thank you very, very much, Mr. Chairman. Again, I am very pleased that you are allowing Mr. Carl Edwards, from my congressional district in Indianapolis, to appear before the subcommittee today. He's with the Organization for a New Eastside and is President of the Fletcher-Lippencott Neighborhood Association, both of those organizations are located in Indianapolis. In addition, he's been involved in several committees, but having come to Washington to appear on this panel, I'm sure he wouldn't want me to extol his virtues at length. But I want to welcome him here on behalf of the subcommittee and tell you how very happy I am that he has an opportunity to testify. Finally, I would like to reiterate my gratitude to the Chairman for allowing it to occur.

    Chairman LAZIO. It certainly is my pleasure. I'm going to hold this hearing in recess until about noon, maybe 12:05. As soon as I can get back, we'll begin again.

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    Chairman LAZIO. The hearing will be back in order.

    Before we left I apologized to Mr. Quinn who'd completed his testimony. And we were about to move on to Gale Cincotta who has been of assistance to this subcommittee and this Chairman before. One of our Nation's premier advocates, Gale Cincotta is a Cofounder and Executive Director of the National Training and Information Center, a resource center on urban issues that has brought national attention to mortgage and insurance red-lining, HUD FHA abuses, and community-level drug prevention. She is currently serving as Chairperson of the National Peoples Action, a coalition of over 300 community organizations throughout the country, and on Fannie Mae's Housing Impact Advisory Council. President Carter appointed Ms. Cincotta to the National Commission on Neighborhoods where she chaired the Reinvestment Task Force. She has also served on HUD's National Commission on Regulatory Barriers to Affordable Housing and the Community Investment Advisory Council of the Federal Home Loan Bank of Chicago. I welcome you back.


    Ms. CINCOTTA. Thank you. I liked the last panel; they almost sounded like us on laying out the problems.


    I know we don't have a lot of time, but looking at last year's foreclosures, Mr. Cuomo said they were going to reform HUD, but we had almost 72,000 foreclosures again, which meant 72,000 families hit the bricks at a tune of $5.3 billion. To me, instead of HUD—I absolutely am opposed to HUD raising their limits to $227,000 and cutting into the conventional market. This is a capitalistic society, I think.
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    We helped push the PSE legislation through, I sat on the oversight meetings that HUD does of the GSC—I'm going to one tomorrow—and we want the market to work. If it means leading demonstrations as we have or whatever we have to do. Mr. Cuomo hasn't talked to me for a year and he called when we had demonstrations in the eight cities on Groundhog Day. Our premise was even the groundhog comes out once a year, so Andrew, how about you coming out once a year to talk to us? It didn't work, but he did call up.

    And evidently, if you don't know it, there is an agreement where HUD has lowered the GSC's goals to way below what Fannie and Freddie were doing before. And I was saying to Cuomo, why don't you tear it up? He said, ''No.'' He said, ''It is binding to the year 2000.''

    Now I think that's something if somebody at FHA or HUD has made an agreement with Fannie and Freddie to lower their goals after this Congress put in past legislation to monitor them to raise their goals. And a lot of us pay money to go to those oversight hearings and are shown how the goals have been lowered. It doesn't make sense.

    But instead of making the market work, they continually want to raise the FHA limits. We know what works in our neighborhoods. We know when we got 518(b) and (d) passed where people who bought a home from FHA that had defaults in it—for the first year, anything wrong with the systems, the roofs, their porches, they could get reimbursed. The FHA foreclosures after that went down to a little over 19,000. Now HUD never has extended that program. It was a 4-year appropriation by Congress.

    What we have been proposing is that we do several things: that Congress mandate that HUD FHA; that every single FHA older existing home have a full inspection, warranty on it for a year. And that if you can't afford an appropriation, what we suggested is that the seller, the realtor, the mortgage banker, and the buyer share in the expense toward that. An appropriation would be nice like we had in 518(b) and (d), but if we can't get it, let's do it that way.
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    The other thing that I think that's important is since we've lost some of our other legislation is the assignment program which did work, except HUD handled it and it's never very good to get the fox to watch the chicken coop. So, what we're suggesting is pick up what the State of Pennsylvania has. It's something called HEMAP, and then if it's a protection for the purchaser and a workout and it seemed to work in Pennsylvania. So, again, it's another way of doing something without an appropriation. Figuring out how to do it, how does the State of Pennsylvania do it?

    Is there something that the Congress could mandate Cuomo and FHA to do? And, again, I have no idea why CRA isn't pushed more to get the conventional lenders in, the GSC stuff isn't pushed more to get Fannie and Freddie in, and to work the Government out of the business of what the private market should be doing. Again, it would be nice for them to be at risk as well as the people in the community. And they've heard me say it, you know, before.

    But, if Cuomo gets his way, and some of the things he's saying are good—especially in addition to what I've said—is this new property disposition. He'll get rid of his problem and it'll look like FHA is OK, while the neighborhoods and the people are still being screwed by the same people who did it in the first place. I know I have a red light, so maybe I'll stop there.

    This just off the press from the prepared Chicago area Fair Housing Alliance Policy paper and it was research-supported by a grant from the McArthur Foundation. ''The Two Faces of FHA,'' a case supported discrimination against minorities and racially changing communities. And I want submit it for the record.
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    Chairman LAZIO. Without objection, that will be included in the record.

    Ms. CINCOTTA. Thank you.

    Chairman LAZIO. Thank you very much.

    Mr. Edwards, I know we had an introduction earlier by Congresswoman Carson, but I appreciate you taking the time to be here, preparing your remarks, and all that you went through to make this presentation. I now want to welcome you to the subcommittee.


    Mr. EDWARDS. And I'd like to thank you for letting me have the opportunity to address this subcommittee. I'll keep my testimony brief. I'm coming to you with a unique point of view that you've not heard today. I not only have been a foreclosed homebuyer, but I also have a HUD home in my neighborhood that's been a nuisance for three years.

    I purchased a home, first-time homebuyer, all excited—just like the gentleman said, you know. You go in and you got a new home and you're all in awe, and you're very naive and very dumb about how the process works. The realtor suggested using an inspector that she could hook me up with. The house was inspected; he said the house was fine. I bought the house. Within one year, had major mechanical problems—new furnace, new roof, new plumbing, central air went out, hot water heater went out. It was at a point where you either have heat in your house or you make your mortgage payment. Well, I chose heat.
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    I lost my home, because there was just no way of trying to repair the problems that I had to repair and make my mortgage payment. I was never offered an alternative from the mortgage company. They were very cut and dry, ''Make your payment or we take your house, one or the other.'' I would have liked to have had a federally-funded program that I thought should be working for me—work for me, not against. And I felt that that was the case.

    Now as a resident in the same neighborhood, I bought my home that I grew up in from my parents on contract, because my credit is so screwed from this event, that the house that I lost is now an absentee landlord rental. So that's just one example of how this process begins to destroy neighborhoods.

    I also have directly behind me a house that once again is a victim of the failed FHA program.


    This house is a burnt-down house that we've been—had in our neighborhood for three years—empty, abandoned, unsecured. It's attracted drugs, crime, gangs, and now fire. I've had to look at this for three years. You know, they talk about, they've got a plan—that's in the past; well, this is today. This is from the past, but this is today. And we need to look at fixing the system so people don't lose their homes. Mandatory inspections by an independent inspector, I think, are crucial—very, very important.

    Let's be proactive and not reactive to the event. I think that the system is set up right now to react to the situations as they come out. They're not looking at them, looking at the problems that people are having that's causing these homes to become empty. I lost my home due to what we are talking about here today. This person—I don't know the details of what happened—all I know is that I have a burnt-out home that I have look at every day, day-in and day-out. I have to go home and look out my back window and see this home.
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    So, in closing I think that inspections, independent inspections, should be mandatory. I think it's ludicrous to think that we have a Federal program that's in place to help homebuyers that, in a lot of ways, is hurting homebuyers.

    Thank you.

    Chairman LAZIO. Thank you, Mr. Edwards.

    The last person we'll be hearing from—but by no means, the least—is Grace Jackson. Representative Jessie Jackson had made a request and I know he was not able to make this because of a conflict that arose earlier in his schedule. Grace Jackson is a Board Member and past President of the Roseland Homeownership Center of Roseland Neighborhood Housing Services, which is located in Chicago, Illinois. She has been an active member of the organization since its inception in 1986. Throughout the 1970's and 1980's, Ms. Jackson was a neighborhood leader for the greater Roseland organization and played an important role in the fight against insurance red-lining and FHA lending abuses. I welcome you to the subcommittee and look forward to your testimony.


    Ms. JACKSON. Thank you, Mr. Chairman, and your subcommittee Members. And I also thanked Congressman Jackson before he left. It's an honor and a pleasure for me to be here today. I've been running up and down these halls, these hollow halls more—I don't even want to discuss it. I'm getting a little too young for that. But I'm a resident of the Roseland community, and for many years we had the distinction—and I hate this word—of having the highest foreclosure rate of any neighborhood in this entire country. We have—we've given that to somebody else now and I hate to say that. Now we are 18 percent on the Upper Eastside alone, which is default rate.
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    You have my testimony and I only had—since we're pressed for time—I had a couple of things, as I'll bullet-point these things for you. I live next door to a house that has been sold nine times over 22 years. And I was kind of like the landlord to this house because HUD, FHA—whoever, didn't have the time to keep it boarded up, didn't have the—I'm sorry—didn't have the time to keep it boarded up, not the grass cut, not the snow shoveled, or nothing else. Nine families had nine American dreams, winded up having nine nightmares. They are gone. The house has been sold now to the neighborhood housing service, and it has now been rehabbed completely. I hope that I would get a beautiful neighbor that would stay this time because everything—I have watched that house, too, as they was putting it together.

    We need to focus on the root cause of foreclosure. I believe, sir, for the simple reason it's too many foreclosures that can alter the neighborhood, not only in mine. And all of this is taxpayers' money. Any two-time real estate broker or banker or what have you, buys it and he can get his money back at 100 percent from FHA is getting a little—I'm getting a little fed up, and I think all of us should.

    We need to focus on the root cause of this foreclosure. One of these is the fact that they have required no inspection on FHA loans. This fact coupled with 100 percent insurance leads to families being sold homes that have had cosmetic rehab covering up major structural problems. Then we move into the houses only to later find out the roof leaks, the pipes have busted, there are holes in the wall covered by wallpaper. I think I was here in October and I told at one of the meetings that I had with—I think it was—I don't know one of the Senators—that a lady had just—her daughter fell through the wall. She was playing and the child leaned against the wall. She just bought the house. And the child leaned against the wall and fell through because the contractor had put some pasteboard and put up nice wallpaper. And the child was seven years old, and kids are kids. So you play in the house; it's cold outside, and fell through the wall into this empty space. This is horrible.
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    We need to require really, and I hope and pray that you and your subcommittee will require pre-purchase inspection on all homes sold with FHA loans from this time on. Because it's about time for us really, sir, to stop beating this same horse. I heard one day, they said that they was criticizing—with critics, and this and that—naturally, if you do the same thing over and over and over again if it's never fixed. And I'm getting a little too tired and a little bit too old—I mean, young—to keep fighting this same battle.

    Mr. Chairman, and other subcommittee Members, I would like to close by urging you to develop legislation to help us do this and help yourselves, too. Because when you help yourself, you help me and you help me—we help the children. You know, they got a slang going on now, ''The children are our future.'' And we won't have any if they go to falling through walls. And all of them sitting outdoors and we're homeless.

    Thank you very much.

    Chairman LAZIO. Thank you for some excellent testimony.

    I want to begin asking the question of both Ms. Jackson and Mr. Edwards, but I'm happy to hear from anybody else on this. There was clearly the suggestion, I thought, that some of these problems, like the photograph you showed Mr. Edwards, were sort of anecdotal; they don't really happen all that often. I'm wondering if you could speak to that. How rare is it that you have a HUD home become a blight in a neighborhood? And what does that do to the community? Does it really affect home values? And I guess, lastly, do you think FHA properties are much more of a problem than other defaulted properties that are non-FHA insured?
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    Mr. EDWARDS. Well, as far as the last question, I really couldn't answer that. I don't have a clue as to that question. I can tell you that there should be a safeguard in the system if there is a trend to catch that trend. I think that with inspections, that would be one way of doing that. As far as addressing the issue of the homes, and are there a lot of them in area, and do they affect the property value? Most definitely.

    One of the neighborhood association groups that I work with on the New Eastside of Indianapolis, has 16 abandoned homes within a two-block radius or two-block stretch on their street. As far as knowing how many are actually HUD homes, I'm not sure. I can tell you I know that there is a few that I've checked on.

    And even if just those few are the HUD homes and they happen to be the first ones in the group that became abandoned and boarded, that to me tells me that starts a trend. It's like a domino effect. I've seen it time and time again. You have one boarded up home that becomes a blight, and then you have another and then another. And then you end up with absentee landlords left and right, property values that are low, and rents that are high. And that's not what FHA is about, but unfortunately that's what FHA is doing in my opinion. So, in my community, yeah, it has affected the property values.

    Ms. JACKSON. I think I can answer that, Mr. Chairman, for this reason. And I think I can answer real well, and I get upset every time I have to answer it. When the lady said this morning when she was testifying and she said, ''We'll go back.'' I will go back to 1979 up to 1987, we had 900 just in Roseland alone. That's on the far southside of Chicago. Coupled with 900 cancellations of insurance for no apparent reason but because foreclosure. So can you imagine waking up one morning and having 900 people gone and having almost 500 people calling you—I was the insurance chairperson—''Ms. Jackson, Allstate canceled me for no apparent reason. What is wrong? What have I done? I've never had a claim.'' We had a complete mess. In 1996, we had went from the 900 to 300. Now in 1998 we have 250—I think if I'm not mistaken—FHA foreclosures come in here yesterday, two weeks ago. And this is why I'm going to say to you. All of them are not because I found four yesterday, two were HUD and two were somebody else's just in two weeks, which is four houses that were closed. Why the other two are closed, I don't know. But, yes, it affects everything—it affects—
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    Chairman LAZIO. The investment in the community and what have you. But you had mentioned, in other words if I understand you correctly, you're saying that insurance dries up when the values go down, and there is more of an incentive for insurance companies to effectively red-line an area because of—

    Ms. JACKSON. Did that, been there. They did that.

    Chairman LAZIO. So, this is a much bigger issue than just——

    Ms. JACKSON. Thank you, I love you.


    I love you. I love you. I love you.

    Mr. EDWARDS. I'd like to also add something that happened in Indianapolis on Friday right before I got everything ready to come down here. In an abandoned home, there was a 14-year-old girl that was raped and murdered. So these homes are not only an eyesore for the community. They are also a magnet for that type of activity which inevitably lowers your property values and the quality of life for everyone around.

    Chairman LAZIO. Ms. Cincotta.

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    Ms. CINCOTTA. Where we had the press conference when we released our FHA study—ten years of it—and in Chicago in front of the home where it had been illegally deconverted and the back was all open even though it had the little lock on the front door which meant the taxpayers were paying somebody $127 a day to take care of it. And right before the press conference started, a lady came up to me and she says, ''I live across the alley. I don't want to get on the press, but I wanted you to know that two nights ago four guys dragged a teenager in the open basement and all raped her.''

    So, I mean, that's only a couple of months ago. I mean it's a steady thing. I don't know if the subcommittee realizes of the time lapse sometimes. People are kicked out of their homes, so the mortgage bankers can collect their money.

    We quite often in Chicago would tell the HUD office where these foreclosures were before they knew about them. So a building can get wrecked that was in very good shape when people moved out. But there was that time lapse, so we've had building that are almost gutted completely. You can see from the street through the roof, and then its assigned to an area management broker and little locks go on and little boards go on the bottom. The building is gone. But now the taxpayers are paying those folks $127 a day to manage it. It's not like, I move the front door, they come in and fix everything up right away. So that there's money made at the expense of the taxpayer while these buildings are lost just—that couldn't happen with the conventional market; they couldn't afford to let it happen. So you lose buildings.

    And I think one I talked about in my testimony from New Jersey, L&H. So much is wrong with their house they've never been able to move in since the Department of Family Services said they'll take their children away from them if they move in that building. That's still consistently going on.
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    It's the American dream, right.

    Chairman LAZIO. Let me just ask, because you had mentioned this in your presentation. This is not about increasing FHA limits and hearing about the disposition program, but the idea of increasing the market share of the FHA program to develop more business and take more inventory. Anybody want to react to that?

    Ms. CINCOTTA. Well, again, I think a lot of the problem is both the Fannie, Freddie, and FHA were all set up originally as new construction programs. And that FHA didn't come into the cities until the 1960's. And they didn't change anything, any rules, any inspections, anything from a brand new home with everything brand new is what was being funded, you know, rather than an older, existing home. So that the problem has been going on since then. Until there's a realization that the older existing homes need to absolutely have an inspection—there's not a new refrigerator that's got a warranty; there's not a new roof with a warranty; there's not a new toilet with a warranty.

    So that the adjustment has never been made. It's been, how many people can we get in for the fast buck, and get them out. And I don't object to any of them making money, but do it in a humane way. Inspect buildings; make sure that realtors don't loan people money.

    We have a lot of cases where we've heard where, if you're a realtor, you say, don't worry, I'll give you the downpayment. And you give me phony paper. So I get a FHA mortgage. Now I have an FHA mortgage to pay while I also have to pay you, which is a second mortgage.
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    Everybody who applies for an FHA mortgage has to check and ask that their tax forms can be looked at, but I would say it's never done. And if I know people are doing that, again, they have said the realtor can go out in their car, take the computer, give them phony 1040's and bring it back in for them.

    So, sometimes it's like you hear a cab driver will tell you that. He says, ''Well, I don't claim all my income or report it all to IRS.'' And the realtor said I could do this. Don't even think about it. Save some money. Report it to the Government, and then put a downpayment because you're now—if you're the one that's checked you're going to go jail and the realtor is scott free.

    But there is so many little ways of fraud because cliche—there are too many realtors that can support themselves for a regular market so they're all cutting into the—you know, get the business, talk people into buying homes that a lot of people aren't ready for. Conventional market, again, won't do that because they'll lose money also. But if the Government takes away all the risk from everybody it's a fair game to just line your pockets and the hell with the people and the neighborhood.

    Ms. JACKSON. And walk away, and walk away.

    Chairman LAZIO. And let me finally ask this to you, Mr. Quinn, because there have been clear statements made here that the assignment program that HUD has administered has left many communities endangered in many different ways in terms of value and quality of life, safety, and what have you. How do Fannie Mae's assignment programs differ from the programs that HUD has? Is there a quantifiable difference? What do you do that makes a difference?
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    Mr. QUINN. What we do is we require our servicers to keep the loan throughout the life of it, so we don't transfer it to someone else. Because if you're going to service a loan, you have to service from start to finish. It's easy to make money when all you do is collect payments, but the expenses are in delinquent loans.

    So what we require our servicers to do is a great job on every loan, to try to work out every loan, or to foreclose as quickly as possible. And if foreclosure occurs, as soon as we know it is foreclosed, we secure it the same day. We have Fannie Mae people working with the servicers and the servicers just love it. I mean, the fact that we're there training their staff and giving them instant decisions on whether to work out a loan or not, it makes the whole process flow very smoothly.

    Chairman LAZIO. Do you think the HUD proposal to sell the servicing to someone other than the originator is a faulty proposal? Would you be critical of that? Or what is your reaction to that?

    Mr. QUINN. I mean, we have looked at it, and our feeling has been that if you're going to service a loan, you need to service all loans. That if you are going to service, you should be just as good as anyone else, and you should do the workouts because it's—like I say, it's very easy to service a loan that's paying. All that costs is in the loans that go bad. And so, we do not believe and we do not switch delinquent loans to another servicer mainly because we believe every servicer should be good at it, perform it well, and keep those homes on the books. So, we don't believe in it.

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    Chairman LAZIO. Great.

    Ms. CINCOTTA. I think that what they're trying to do is raise the limits, cover the problem, compete with the regular market. Why? So that it covers the loss at the other end so you're not going to hold them now with their feet to fire and the loss, you know, it just covers the problem. It just covers it. We'll sell them off so, I did it. I was wrong, so I sell them to both people on both sides of me. I look OK, it's their problem. It's still covering up a problem and then what HUD doesn't do is bite the bullet and do something about the problem. Don't cut into the conventional market. God bless, let's bring the conventional market in more. Inspect the homes, put a policy on them, a warranty on them, give the people some relief, put in what they are doing—something like they're doing in Pennsylvania but not just everybody makes money and the neighborhood goes to hell.

    Ms. JACKSON. May I ask a dumb question?

    Chairman LAZIO. Sure.

    Ms. JACKSON. Maybe you can ask Cuomo, Cisneros, Kemp—why did they get rid of the mortgage assignment program which helped people that were really and truly in trouble? And if that's possible, since we're supposed to be going so far back, they could put it up now because we're already getting ready to go—what did you call it?—the millennium, whatever. We can may be get something to use in this new time that will help people in trouble. So we won't have so many foreclosures.

    Chairman LAZIO. Let me be fair to all the people that you just mentioned, because it was actually Congress that acted on that. A General Accounting Office report indicated that the program, the way it was run, at least, wasn't really having much of an overall impact on keeping people solvent. One of the challenges I think we have is to do a better job of credit counseling, both before and as soon as people begin to run a little bit in arrears. And we need to look for ways in which we can devote more resources to get people that kind of counseling help. And I think that's probably one of the more important things that we can do.
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    Mr. QUINN. Mr. Chairman.

    Chairman LAZIO. Yes.

    Mr. QUINN. I would just like to, for the record, to assure you and Ms. Cincotta on her opening statement that Fannie Mae has always met its goals, the GSE goals. And we only expect those numbers to continue to increase. We don't expect them to decline in the future. We have programs in place. We expect to exceed—we expect our numbers to go up from where they are now.

    Chairman LAZIO. And we look to hold you to that.


    Ms. CINCOTTA. One other thing, there was an article in the Chicago paper awhile back, and it had a picture of Sam Pierce. That's when we had the 95,000 or more foreclosures. And under it, it says, everybody knows he was guilty of everything he was accused of, but now he's too old to prosecute. This is after the fact. After the worst foreclosures. And what I said is, I don't know in Chicago, also, they drag Mafia people on their way to the cemetery and put them in jail. But HUD and the Government never after people, but you can have an article that says everybody knows he was guilty of everything he was accused of. And nobody ever hauled him in and put him on the stand and said, name names. Because there was too much money involved.

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    Chairman LAZIO. Let me again thank this panel.

    Ms. JACKSON. Thank you.

    Chairman LAZIO. Both this panel and the panel previous to this panel gave what I thought were excellent testimonies. Very, very good; your experience and expertise are going to be invaluable as the subcommittee considers the merits of various reforms suggested by HUD and by Congress and the proposals to expand the Federal Housing Administration program to higher income people.

    Many of you raised uncertainties and serious questions regarding HUD's initiatives. In fairness, HUD is grappling with the comprehensive management reform plan—reducing staff resources. That being said, I want to again emphasis the need for HUD to establish a clear mission and have staffing follow that. I strongly urge the Department to proceed cautiously and in consultation with this subcommittee on new and untested programs. Our goals here are the same: increasing and sustaining homeownership, safe and healthy neighborhoods for our children, strengthening local economies, and providing great opportunities for low income families to reach self-sufficiency. I am very confident that, working together, we can move a long way toward achieving these goals.

    I guess I would be remiss if I didn't say what I thought was striking about the testimony was the fact that there are all types of unintended consequences, including divestment from neighborhoods, the spiraling down of commercial enterprises in under-served areas, lower home values, of an assignment program that does not protect communities. And the mission has got to be so much broader than that which I think has been articulated today at this hearing.
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    So, again, let me thank everybody for being here, for shedding light on the problem. I look forward to working with you, and this hearing is adjourned.

    [Whereupon, at 12:54 p.m., the hearing adjourned, subject to the call of the Chair.]