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Wednesday, June 16, 2004
U.S. House of Representatives,
Subcommittee on Housing and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 10:11 a.m., in Room 2128, Rayburn House Office Building, Hon. Robert Ney [chairman of the subcommittee] presiding.
    Present: Representatives Ney, Miller of California, Tiberi, Waters, Carson, Lee, Clay, Scott, Davis and Frank (ex officio).
    Chairman NEY. [Presiding.] The hearing of the subcommittee on H.R. 4110, entitled ''The FHA Single Family Loan'' will come to order. Let me say for the record, without objection, all members' opening statements will be made part of the record. Hearing no objection, they will be made part of the record.
    Today, the Subcommittee on Housing and Community Opportunity will hold a legislative hearing on H.R. 4110, entitled, ''The FHA Single Family Loan Limit Adjustment Act of 2004.'' This bill was introduced on April 1, 2004 by our subcommittee member, Congressman Gary Miller of California. And its primary cosponsor is the ranking member of the full Committee on Financial Services, Congressman Barney Frank.
    It is my hope that today's hearing will provide the subcommittee with the variety of perspectives necessary to form an opinion about the necessity of the legislation. I would like to note that the issue of FHA loan limits, particularly on the single family side, have always been a source of heated debate, as we know in previous congresses.
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    In fact, the files will reveal testimony dating back to May 5 of 1994, when advocates, some of who are represented here today, discussed the distinctive real estate markets of very high-cost areas. Those areas have traditionally been recognized as California, Hawaii, Alaska, New York and Massachusetts, to name a few.
    Over the past 10 years, Congress debated and later approved a proposal to index the FHA loan limits and tie them to loan limits established for the Federal Home Loan Mortgage Corporation, also known of course as Freddie Mac. It was clear—then and now—that linking the FHA loan limits to an established index or process would keep FHA current with relevant real estate markets.
    Today, we are faced with similar challenges raised 10 years ago. The central question is: how? And what is the proper role of the federal government to encourage homeownership, particularly among low-income families and other market segments that have traditionally been locked out of access to mortgage capital.
    Real estate markets vary. In Morgan County, Ohio—that is one of the 16 counties I represent—the average home price is $93,000 for a single family dwelling unit. Yet in Licking County, Ohio—also in the district—the average home price is $173,000.
    In Mr. Miller's 42nd congressional district in California, Orange County represents average home values of $357,000. In our ranking member, Ms. Waters' district, the subcommittee ranking member, the average Los Angeles home value in the 35th California district is $309,000.
    On the other hand, Richardson County, Nebraska in Mr. Bereuter's congressional district, is only $59,789. I mention the variety of loan limits because, as you can tell, geography most time dictates higher or lower average home values.
    Our FHA loan limit for high-cost areas is capped at $290,000 and the lowest FHA loan limit is $160,000. It is clear that some areas are not being served, therefore, by FHA.
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    Whether the private sector is meeting those needs is something this subcommittee will need to examine as we further look at homeownership goals.
    I am pleased to see today's witnesses. And I look forward to hearing their views on this proposal.
    It is important, I think, to note that there are a host of policy questions that have to be addressed as we discuss the merits of the legislation. Those questions or issues include the following: what is the proper role of FHA?
    Can FHA manage its risks and provide adequate oversight of its underwriting standards? What is the role of the private sector in encouraging low-income homeownership? And does H.R. 4110 complement or hinder that process?
    Finally, given the limited resources of the federal government, how can we limit as much as possible the federal government's potential liability? So I am hopeful that today's panelists will provide us with their perspective on these issues.
    During my chairmanship, I have attempted to include members as much as possible in the planning and implementation of housing hearings. As a result, I believe that the 22 housing hearings we have held to date have been balanced and have led to good legislation.
    And finally, I want to thank my colleague and our ranking member, Congresswoman Maxine Waters of California, for her leadership and partnership, which has, I think, resulted in the creation of very good legislation. I know we have many more obstacles and challenges that we have to face.
    I want to thank Chairman Oxley for his leadership; also our ranking member, Barney Frank and the members, frankly, of the Housing Subcommittee, both sides of the aisle. One thing I will note—and then I will conclude my opening statement—but one thing I think that has been good that we have all tried to do, working together both sides of the aisle, is to take pieces of legislation and try to move them forward, instead of maybe one omnibus bill that never sees light of day. And I think that has been one good approach.
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    And the other is to understand each other's areas in the country, not just congressional districts, but regions, and the wide variety of prices. And some of the housing needs in larger states or larger cities is different and has to be addressed differently.
    So that is why I think this bill by Mr. Miller and Congressman Barney Frank is an important piece of legislation.
    With that, I will turn to our ranking member.
    Ms. WATERS. Thank you very much. Good morning, Mr. Chairman. I would like to thank you for holding this hearing on this bill that was offered by Congressman Gary Miller, with my support and that of Congressman Frank, to increase the FHA single family loan limits in high-cost areas.
    I am pleased to be a cosponsor of H.R. 4110, which would increase the single family loan limit to 100 percent of the area median home price in each locality of the country. This legislation will be tremendously helpful to residents of Los Angeles, to residents of many other areas within my state of California and to residents of high-cost areas throughout our country.
    Obviously, changing the formula from 95 percent of the median home price also would benefit home buyers in every community in our country. In many areas in states such as California, New York, New Jersey, Maryland, Connecticut, Pennsylvania and Massachusetts, the median home price far extends the existing FHA loan limit of 87 percent of the confirming loan limit, which today computes to $290,319.
    The FHA loan limit for Los Angeles County is $290,319, the highest permissible under current law. Twenty-three of California's 58 counties, which have approximately 85 percent of California's total population, are currently at this $290,319 ceiling.
    As Mr. Eberhardt, president elect of the California Association of Mortgage Brokers, correctly observes in his prepared testimony today, for many home buyers in counties like Los Angeles, the FHA insured loan programs simply do not work. The Los Angeles Times recently reported the Los Angeles County median home price has jumped 20 percent in the past 12 months.
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    And the new median home price is now $379,000. Much of this growth is in areas where first-time home buyers choose to purchase.
    Mr. Chairman, I believe that residents of high-cost areas should have the same opportunity to access FHA insured mortgages as those who live in other less expensive areas. In my view, the local median home price, not an artificial statutory ceiling on cost, should be the benchmark for determining a person's eligibility for an FHA insured mortgage.
    My constituents and all residents of high-cost areas who are credit worthy should have the same right to obtain an FHA insured mortgage as residents in other parts of the country. I know that there are some who contend that the conventional mortgage market and the GSEs are adequately serving high-cost areas.
    I simply do not agree with that. Whatever one's view on this issue, I also see this problem as both a consumer protection issue and an equal protection issue.
    Why should someone seeking a mortgage in Los Angeles have fewer mortgage products available simply because the person resides in a high-cost area? There is no reason for residents of high-cost areas to have fewer mortgage options.
    As we consider this issue, it is important to remember that we are not appropriating public funds to support FHA insured mortgages. The taxpayers do not pay for the FHA program. And they would not incur any costs if this change were enacted.
    In fact, the Mutual Mortgage Insurance Fund currently has a healthy surplus, as the premiums paid are more than adequate to cover the costs of defaults under the program, nor would adoption of this change in the law have any impact whatsoever on the judgment of a lender as to the creditworthiness of any proposed borrower.
    Those who would be helped by this change in the law would pay the premiums required by law for their mortgage insurance. So the Mutual Mortgage Insurance Fund will be fully protected.
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    Consumers in high-cost areas would simply have more options when they seek a mortgage. And they would receive the competitive benefits that almost invariably result from an increase in the choices available.
    Mr. Chairman, it is also clear that when consumers have more choices available to them, they are far less likely to end up being victimized by a predatory lender.
    Finally, Mr. Chairman, I note that Secretary Weicher suggests in his prepared testimony that enactment of legislation to raise FHA's mortgage limits may result in a need for increased commitment authority. If the demand exists for this type of financing, why shouldn't we be meeting it?
    Mr. Chairman, FHA insured mortgages should be as available to residents of high-cost areas as they are to persons in less expensive parts of the country. We can and should raise the FHA loan limits to 100 percent of an area's median home price and thereby broaden the housing stock available to FHA borrowers in many high-cost areas, while maintaining the FHA's focus on first-time home buyers and the underserved.
    I would urge my colleagues to join me in supporting H.R. 4110. And thanks again for scheduling this important hearing.
    I look forward to the testimony of our witnesses. And I yield back, if there is any balance of my time.
    Chairman NEY. Thank you.
    Ms. WATERS. Thank you for your indulgence.
    Chairman NEY. The gentlelady yields back the balance of her time.
    Mr. Miller?
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Chairman Ney. I want to thank you for convening this hearing today.
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    Mr. Frank and I have been talking about the situation with FHA for over a year. And when we did the zero down payment for FHA, we looked at the disparity amongst different states.
    And Mrs. Waters, I want to thank you for cosponsoring this bill. Mrs. Waters and I share a problem that FHA is just not available in California. And some say, ''Well, why do we worry about it? They will be setting a precedent.''
    But I would like to point out that FHA currently adjusts for those high-cost areas of Alaska, Guam, Hawaii and the Virgin Islands. In those areas, the limits are $435,000. And nobody is arguing that that is reasonable.
    The problem is Alaska and Hawaii are $35,000 less in price value than California. So if it makes sense in Hawaii and it makes sense in Alaska, certainly it makes sense in California and other high-cost areas.
    Barney Frank's district is a great example. FHA is just not available in his district.
    And I was talking to Secretary Jackson about 3 weeks ago. And we discussed the disparity we have in some of these states. And at that point, he fully understood the concept that we need to be able to make the programs available in these areas.
    And some might say, ''Well, are we just supporting through subsidies some program in these areas?'' But that is not the case at all because if you look at the FHA program, it is estimated that the federal government makes $1.73 off of every $100 in FHA loan insurance.
    So it is a program that pays for itself. In fact, the federal government makes money off of it.
    This is a first stage. We also believe—Mr. Frank and I—that conforming loan limits need to be adjusted too. Freddie and Fannie are having difficulty.
    Yet we are working with the bankers to come up with a reasonable limit to place conforming at because we understand that the conventional marketplace has grown tremendously. But how do you maintain a fair share of the marketplace for the private sector in consideration for what Freddie and Fannie might come into?
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    And I believe we can also come to reasonable amounts that those can go to. We do understand that they just are not working today because they are just far too low.
    But this program that we have under FHA, people should not be discriminated against just because of the area they live in. And that is the fact we face today.
    Just on the Republican side of the aisle—and I did not bother to do the Democrat side because they are in the same situation Mrs. Waters and I are in—but just on our side of the aisle, Mr. Green's district in Door County, the median home price is $198,000. FHA does not go above $160,000. In Vilas County, it is $193,000; FHA stops at $160,000.
    In Katherine Harris' DeSoto County, it is $211,000 median income; FHA will go $191,000, which is closer.
    But you get down to Walter Jones' district, in Currituck County, it is $337,000 median income; it is $217,000 on FHA. In Dare County, it is $297,000 median income; FHA stops at $160,000. In Hyde County, it is $210,000; FHA stops at $160,000.
    In Peter King's district in Nassau, the median income is $357,000 and FHA stops at $290,000, which is much closer. In Doug Ose's district in Alpine County, it is almost $300,000 median income; FHA stops at $160,000.
    And we can go on to Mr. Renzi. Chris Shays is really out of line. His is $411,000 median income. FHA goes to $290,000 there.
    In Patrick Tiberi's district in Delaware, it is $259,000. FHA stops at $208,000.
    So we have a program that both conservatives and liberals alike support FHA because it is a program that has the marketplace available for people who want to own a home. It should be available to everybody, especially when it is a program that does make money. It is not a subsidy to anybody.
    Yet this program unintentionally, by the limits we have placed on it, discriminates on individuals based on where they live. And our concept is if it is a program that works and it is a program that is available and it is a program, especially with the new zero down payment law that is coming into effect, that is going to make homeownership available to more and more people throughout this nation, why in the world would we have a program that is proven to work and we are expanding in many areas and yet, we are going to say certain people because of the area they live in are not going to be available to participate in this program?
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    So I want to once again applaud Chairman Ney for allowing this time to hear this bill. Maxine Waters, I want to thank you for supporting this also. She realizes that California has a tremendous problem with housing. We are about 10 percent under the national average in homeownership.
    Instead of 69 percent, we are at 59 percent. That is a problem.
    And when we can take a program like FHA that is proven to work over the years, and it is a very solid program and it is a good program, we can take that program and implement it in areas that people are having difficulties getting into homes. I see no reason why we would not do that and create opportunity for everybody, instead of just opportunity for a few.
    So I look forward to the testimony today.
    And again, chairman, I thank you for holding this hearing. And I yield back the balance of my time.
    [The prepared statement of Hon. Gary G. Miller can be found on page 56 in the appendix.]
    Chairman NEY. Thank you.
    The gentleman from Massachusetts?
    Mr. FRANK. Mr. Chairman, I join in thanking you for your initiative here and the other initiatives you have been taking in the housing area. We have not done some of the major things I would like to do in some ways. But whenever we have been able to act, we have made things better. And your leadership has helped us, I think, significantly increase housing policy.
    This one seems to be very simple. And sometimes, when you advance something and you hear the arguments against it, you have to reexamine your position.
    But I must say that, having read the testimony that is not supportive of this bill, I feel reinforced by it. It is a very simple point.
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    The United States is not a ''one size fits all'' nation. The policy of the FHA has been to deal with housing up to the median. The theory is they are not going to help the upper income people.
    We have in this country today wide variances in that median. For much of Massachusetts, the FHA might as well be in Ukraine.
    Now the question is: should we have a national program, supported by the taxes and administered entirely by all the people in the country, that simply is inapplicable in some parts of the country? All we are saying is that it should operate in California and Massachusetts and New York and elsewhere in exactly the same fashion as it applies in the rest of the country.
    And the notion that you set a dollar limit and ignore median income flies in the face of every intellectual principal we know. Now I noticed Mr. Petrou says on page two of his testimony, ''In my opinion, it is time that FHA became an income targeted rather than a loan amount targeted housing program.''
    Frankly, our bill moves in that direction because what we are saying is that one uniform loan limit throughout the country does not make sense when you have these variances. And in fact, what we are saying is that people who are at the income level where they can pay the median price in a particular locality should not be ruled out because of some arbitrary national standard.
    Now I should point out, of course, the FHA remains a loan program and not an income targeted one. It is unfair to exclude people from it.
    But I will say if you were concerned about the efficacy of that, but we are moving in that direction. The testimony of Mr. Weicher said, ''It is unclear that this is the market the FHA should serve.''
    I must say to Mr. Weicher that I am surprised at his lack of clarity after his many years in the housing business. My guess is that he is determined, in this case, to retire unclear.
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    But I do not understand what is fogging his vision, to be honest. It is a fairly simple point.
    And the market that we are asking the FHA to serve here, as in almost every place else in the country, is the median house price. When did we decide that serving people who are trying to buy the median price in the community, that that is not the market we want to serve?
    I do note that he says that this may result in a need for increased commitment authority. As Mr. Weicher knows, we already need more commitment authority. And one of the things I think we should be doing, Mr. Chairman, is asking our friends on the Appropriations Committee and the rest of the appropriations committees to stop putting the FHA on the kind of yoyo where we keep running out of commitment authority.
    The FHA is making money for this government. And there is no reason for this kind of commitment authority to be cut back.
    And on that point, I would note, by the way, that people have said: might this squeeze out low-income borrowers? Exactly the reverse is the case.
    Loans at the upper level of what the FHA does make significant amounts of money. The repayment rate is very high. And they make a profit.
    To the extent that the FHA is internally financial, that the FHA surplus helps make a case for continued FHA work, this makes it possible for us to do more for people at the lower end, not less, because no one suggests that this will cost us. And as a matter of fact, last year, when the gentleman from California, Mr. Miller, and I collaborated on legislation, helped strongly by the gentleman from Ohio, the gentlewoman from California, the chairman and ranking members of this committee and the full committee chairman.
    And we got the bill enacted. We did this for FHA multifamily. In fact, we were told by CBO that it was not going to raise any money because nobody wanted to build any old multifamily in those areas anyway, really a rather extraordinarily foolish comment from CBO.
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    And of course, they turned out not to be the case. And now we are told it has been so popular, it is putting a drain on the commitment.
    It cannot be that on the one hand, it is not going to be used because nobody cares and on the other, that it is going to cause a commitment drain. That is what they said about multifamily.
    So again, this is very simple. And I must say, I think the arguments against it kind of strange.
    The last issue is the Fannie-Freddie question. And we have two different views here. One from the mortgage bankers, which says it is okay to raise this—and I appreciate that—but do not go above the conforming loan limit of Fannie and Freddie.
    Freddie says, ''Yes, do this, but let us go up as well.'' Let me make a plea to people. We all know we are in the midst of controversy over Fannie Mae and Freddie Mac. What the gentleman from California and I tried to do here was to set that controversy aside.
    He and I do agree that there is a case for increasing their loan limits as well. But we think there is a very clear-cut equity case. There is an economic case. There is a homeownership case.
    People who are trying to buy a home at the median price in Los Angeles and San Francisco and the rest of the California and in Greater Boston and in New York and in Chicago should not be turned away by the same federal program that would serve people similarly situated everywhere else. That is all we are asking.
    The conforming loan limits of Fannie and Freddie, let's cross that bridge when we get to it, probably now next year. There will be issues there. But it should not—that controversy should not—be allowed to stop Americans who pay taxes and follow the law like anybody else and are as interested in homeownership from being denied the same access to FHA in real terms that people get elsewhere in the country.
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    Mr. Chairman, thank you for giving us a chance to have this hearing.
    Chairman NEY. Thank you.
    The gentlelady from California?
    Ms. LEE. Thank you, Mr. Chairman. And let me also thank you and our ranking member, Maxine Waters, and Mr. Frank and Mr. Miller for this bill and this very important hearing.
    As you know, the median housing price in the San Francisco Bay Area region, including my own district, is about $567,000. That is $567,000.
    So quite frankly, the American dream of homeownership is quickly turning into a nightmare for many people in California. As we push for more affordable, quality housing for all, the issue of FHA loan accessibility in many of our communities continues to be an issue.
    So I just want to thank the sponsors of this bill. I hope to join as a cosponsor of this bill.
    I know that in areas that have not benefited from FHA mortgages, this bill would certainly help families, individuals become homeowners, which of course really is the primary vehicle for the accumulation of wealth for sending one's children to college, for establishing a small business; really, for doing whatever an individual or family wants to do with their life. And so I just want to thank you very much for this bill.
    And just know that we in the Bay Area look forward to the movement of this bill because it certainly will help turn things around in terms of homeownership for our families in California. Thank you very much.
    Chairman NEY. Thank the gentlelady.
    Gentleman from Georgia, Mr. Scott?
    Mr. SCOTT. Thank you very much, Mr. Chairman. Chairman Ney and Ranking Member Waters, I want to thank you for holding this very, very important hearing today regarding single family loan adjustment act, H.R. 4110. I also want to thank the distinguished panel of witnesses today for their testimony.
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    From July 2001 to July 2002, Georgia—my state—ranked fourth in the nation in housing growth, both in the number of homes built and the percentage increase in housing. Five of the top housing growth counties in Georgia are located in my suburban Atlanta district.
    Part of this explosive growth is due to low interest rates and part is due to the rapid expansion of the south and east and northern suburbs of Atlanta. And while Atlanta is not considered as high cost a city as compared to New York, California and certainly in the State of Massachusetts, I am concerned with our overall homeownership rates.
    The good news is that for the first time ever, the majority of low-income and moderate-income families are owning their homes at a rate of 50.8 percent. However, compared to the national average of 68.6 percent, minority families still have some catching up to do. And this is particularly true with African-American families.
    Based upon the information recently presented before this committee from both Fannie Mae and Freddie Mac, all of the groups are moving along and increasing their homeownership rates. But there is retrogression only among African-American homeownership.
    So we do have some catching up to do. With interest rates at historical lows, I believe that we must push even harder to help increase all homeownership and especially minority homeownership and, of that, especially African-American homeownership. And adjusting the FHA home mortgage rate limits is a very important part of that equation.
    And I want to commend Mr. Miller, Representative Frank and Representative Waters for working on this very, very important problem. And I would like very much to join with them as a cosponsor of House Resolution 4110.
    Mr. Chairman, given that June is indeed homeownership month, it is most fitting that this committee, during this month, is considering this very important policy to expand affordable homeownership to more individuals.
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    Thank you very much.
    Chairman NEY. Thank the gentleman.
    Mr. Davis?
    Mr. DAVIS. Thank you, Mr. Chairman. I will not use anywhere near my four or five minutes, Mr. Secretary.
    But sometimes when I sit here, every now and then you have a sensation that you are feeling or hearing two ships passing in the night who really do not have any connection with each other. And I got a little bit of that sense after listening to some of the opening statements.
    I do not think any of us would take issue with the ranking member's comments or with Ms. Lee's comments from California about the need to obviously give FHA more capacity in high-income areas or high median income areas like California and parts of Massachusetts. I do not think there is a lot of opposition to that proposition from anyone here today.
    At the same time, it is certainly clear that nothing in this legislation really speaks to the ultimate issue, which is really finding ways to expand homeownership opportunities for families who are nowhere near being able to afford houses in this range. It is very much two ships passing in the night.
    So what I hope you will talk about in your testimony today or possibly in response to our questions is what we can do in the related area. How do we find some way to deal with the nagging homeownership gap that exists in this country between not just African-Americans and Caucasians but between Latinos and Caucasians and various other immigrant ethnic groups in the country?
    It strikes me that we are in need for some creativity in this area. It strikes me that we are in need for some fresh thinking in this area because we have these arguments and we have these conversations, but it does not seem that we have identified any significant manner to really allow FHA or the thrust of the housing market in this country to reach out there and sweep a lot of underserved members of the population.
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    So again, I do not think there is any opposition to this bill or to the thrust of this bill. But I hope that we are able to broaden the discussion a little bit to talk about what some of your goals, the administration's goals might be in the related area of narrowing the gap that Mr. Scott talked about.
    And I yield back the balance of my time.
    Chairman NEY. I want to thank the gentleman. And with that, we will begin with Mr. Weicher, who is of course the assistant secretary for housing, Federal Housing Commissioner, at the U.S. Department of Housing and Urban Development. And he has been in that post since June of 2001.
    Prior to his appointment to HUD, Mr. Weicher was the director of the urban policy studies at the Hudson Institute and a member of the Millennium Housing Commission. Welcome. And we will begin with your testimony.
    Mr. WEICHER. Thank you. And good morning, Chairman Ney, Ranking Member Waters and distinguished members of this subcommittee and full committee. And thank you for inviting the department to testify on the subject of H.R. 4110, the FHA Single Family Loan Limit Adjustment Act of 2004.
    We appreciate this opportunity to provide the subcommittee with the department's comments on this proposed legislation. In addition, on behalf of the administration, let me express our thanks for the committee's unanimous approval 2 weeks ago of H. R. 3755, the Zero Down Payment Act of 2004. In particular, let me also thank the authors of the proposal under consideration today, Representative Miller and Ranking Member Frank for their support of our zero down payment initiative.
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    The Zero Down Payment Act, if enacted, will help at least 150,000 creditworthy American families buy their first home each year. And HUD looks forward to continuing to work with the committee to move the Zero Down Payment Act toward enactment.
    The administration and the department are firmly committed to helping more American families achieve the dream of homeownership. Today, overall homeownership rates are at record high levels; 68.6 percent of all American families, almost 72.7 million, own their own homes.
    Minority homeownership, as Mr. Scott noted, is also at an all-time record. For the first time ever, over half of all minority families, 50.8 Percent, are now homeowners. That is almost 14.9 million.
    This is a good record, but we want to improve on it. There remains a homeownership gap between non-Hispanic whites and minorities.
    So in June 2002, President Bush announced an aggressive agenda to clear away the barriers to homeownership and add 5.5 million new minority homeowners by the end of the decade. Since the President announced that goal, more than 1.5 million minority families have moved into homes of their own.
    Our private sector partners, including the organizations testifying later this morning, have committed to increasing the number of loans to low-income families. This includes pledges to provide more than $1.1 trillion in mortgage purchases for minority homebuyers this decade.
    Congress has passed the American Dream Down Payment Initiative, which the President signed last December, authorizing $200 million a year to help homebuyers with down payment and closing costs.
    This administration has doubled the budget request for housing counseling funds from $20 million to $40 million. And Congress appropriated the funds. This year, we are asking for a further increase to $45 million.
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    The federal government's primary vehicle for increasing homeownership in America is the Federal Housing Administration, now proudly celebrating its 70th anniversary. FHA extends access to homeownership to individuals and families who lack the savings, credit history or income to qualify for a conventional mortgage.
    FHA pioneered the 30-year, self-amortizing mortgage and has insured 34 million mortgages during its history. In fiscal year 2003, FHA insured almost $150 billion in mortgages for 1.3 million families.
    Over the last 3 years, FHA has taken a number of steps to reduce barriers to homeownership. Our TOTAL Mortgage Scorecard is now in place so we can better assess risk on individual loans.
    We have eliminated paper mortgage insurance certificates. We have eliminated planned unit development approval requirements. We have modified our minimum distance requirements between private wells and sources of pollution for existing properties, which is especially important in rural areas.
    We have simplified the mortgage calculation for streamlined refinances. And we have provided a low-cost alternative to the inspection requirements for new homes.
    The goal of H.R. 4110, as we understand it, is to raise FHA mortgage limits in high-cost areas. Currently, the FHA loan limit is capped at 87 percent of the Freddie Mac limit in the highest costs areas. This is about $290,000.
    In other areas, there is a lower limit, either 95 percent of the local median single family house price or 48 percent of the Freddie Mac limit, whichever is greater.
    While we recognize the worthy intention behind the proposal, the department does not support H. R. 4110 at this time. Our analysis indicates that the proposed changes to the law would result in the following: the 87 percent limit in high-cost areas would be removed; instead, the limit in these areas would be 100 percent of the local area median. In all other areas of the country, the limit would also be 100 percent of the local area median.
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    The statutory floor limit of 48 percent of the conforming limit would remain intact at about $160,000. As it is now, nearly 90 percent of all U.S. counties are at the floor and would not benefit from this legislation.
    The effect of removing the cap would be to dramatically increase the mortgage limits in some extremely high-cost areas with more modest increases or no increases elsewhere. Specifically, lifting the 87 percent limit would affect only a few metropolitan areas, all either in California or in the Northeast.
    For example, the limit would rise to $568,000 in San Francisco, $374,000 in New York and $433,000 in Boston. It is unclear that this is the market that FHA should serve or that is not being served by the conventional market or the GSEs.
    Legislation to raise FHA's mortgage limits may result in a need for increased commitment authority. For example, two mortgages in San Francisco at the higher mortgage limit would amount to $1.2 million and would require as much authority as six mortgages in Columbus, Ohio, where I used to teach.
    FHA could expend more insurance authority that serve fewer households under this proposal.
    This concludes my statement, Mr. Chairman. And I thank the subcommittee for the opportunity to discuss this proposed legislation.
    [The prepared statement of Hon. John C. Weicher can be found on page 117 in the appendix.]
    Chairman NEY. I want to thank the assistant secretary for your testimony. The question I have is on the written, it says, ''It is unclear that this is the market the Federal Housing Administration should serve and that it is unserved by the conventional market or government sponsored enterprises.''
    So I just want to ask you: who do you think the FHA should serve, number one? And number two, what should be their role?
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    Mr. WEICHER. Our market, our public purpose, is to serve first-time homebuyers. And that tends to mean young families, young first-time homebuyers.
    Eighty percent of the business we do is first-time home buyers. Forty percent of that business is minority households.
    We are there to help families that are on the edge of homeownership to buy a home and to buy a home sooner than they otherwise would and get started on the path to building assets and establishing a solid place in our society. And we do serve that purpose and we serve it well.
    Chairman NEY. Wouldn't this bill help you? First of all, the first-time homebuyers, that is a rule within the department, right? It is not a statute.
    Mr. WEICHER. It is neither. But we appeal to first-time homebuyers. Eighty percent of our business is first-time homebuyers.
    But if someone buying another home, already a homeowner buying another home, wanted FHA insurance, needed FHA insurance, was buying a home where the loan was within the FHA limit in that area, then we would in fact insure that loan. Someone buying a home under $160,000 in Morgan County, buying a second home, a home for the second time, would qualify if they would choose to.
    They might not need it because they might have a higher down payment. They might have improved their credit history. But the option is there.
    Chairman NEY. Taking into account that you do obviously tend to help the first-time homebuyer—and it does not matter whether it is a statute or not or regulation or how it just falls into place—but then how do you help those first-time homebuyers in California or New York or Massachusetts? And wouldn't this bill give the ability to help them more? Or would it?
    Mr. WEICHER. Well, I think with the limits that I mentioned that would apply in some of these high-cost areas, in San Francisco at the ceiling of $568,000, you would need an income of about $115,000 to buy that home. There are not very many first-time homebuyers in that income range anywhere. At $115,000, you are well up in the income distribution for the United States.
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    In Boston, the income that you would need to afford a $433,000 home would be something like $85,000. Again, that is well up in the income distribution. And there are not very many families buying a first home in that situation.
    Chairman NEY. The gentleman from Georgia, Mr. Scott?
    Mr. SCOTT. Mr. Weicher, would increasing the FHA loan ceiling limit the ability to insure mortgages in other places in the country?
    Mr. WEICHER. It would affect it if we ran into our commitment authority limit, which Ms. Waters and Mr. Frank referred to. And as Mr. Frank said, that is a matter that is under the jurisdiction of the appropriations committees.
    And last year, we ran into that limit in the multifamily programs and had to suspend operations twice. And we almost ran into the limit on the single family programs.
    Given the fact that there is a commitment authority limit, then there is always the possibility that we will reach that limit. And we have reached it a couple of times in the last 5 years.
    At this point in this year, we are not close to reaching the single family limit. But there would be no guarantee that we would avoid it, avoid reaching that limit in future years, in boom years.
    Mr. SCOTT. So your opposition to this is based on what? What evidence?
    Mr. WEICHER. Well, we have had the experience of having to shut down access to FHA programs because we have reached commitment authority limits in the past. And that is a matter of concern.
    And, as I was saying in response to the chairman's question, the income levels needed to afford a home with FHA insurance, at the ceilings that this legislation would establish in many areas, are quite high and not really, in our judgment, are we reaching people who need FHA to buy a first home. At $85,000 or $115,000, we are well up in the income distribution.
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    Mr. SCOTT. How do you address the concerns raised by Mr. Frank and Mr. Miller in terms of the inequities of the playing fields, especially facing states like Massachusetts and California? How do we handle that? How do we address that, if not through this bill?
    Mr. WEICHER. Well, I think the problem is that we have some areas which have extremely high home prices. And those areas are not really markets in which first-time homebuyers are active.
    They are active in other parts of those metropolitan areas. They are not in San Francisco, particularly, but they are in other areas in the Bay Area, in Oakland and so forth, where prices are lower.
    Mr. SCOTT. All right. Thank you, Mr. Chairman.
    Chairman NEY. Mr. Miller?
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Chairman.
    Mr. Weicher, I have great respect for you. And some of my comments I am going to make are not an attack. I see things a little differently, in some fashion.
    I have been a developer for well over 30 years and a councilman and a mayor, state assemblyman and now a congressman. And housing is a passion for me.
    And we have talked about the regulatory barriers that have really impacted homeownership in this country. And our goal is to expand homeownership.
    And government's role, in many cases, is just to provide opportunity, not guarantees or subsidies in my mind, but to provide opportunity. The fact is that things have changed in this nation.
    There is staff who are sitting behind me now that were able to buy a home on the Hill here in years past just because FHA was available to them. That no longer exists on the Hill today, as you know, they are not available because the housing has increased in price range so much that FHA does them no good.
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    And I look at the housing industry as a huge puzzle. And it is made up of many parts—the lenders, bankers, mortgage brokers, mortgage bankers, realtors, title companies. And when we deal with risk and other things, we look and say: how do we make all these things work? How does it come together?
    And you made one statement that kind of opened my eyes. You talked about the commitment authority limits.
    And you said that this year, we have not reached that for single family, but in a boom year—if it got any boomier, I do not know if you could be able to get realtors and builders down to the ground because they think this is wonderful. These are boom years.
    And even during boom years, we are having a problem. Things have just changed entirely. If you look and you say that you do not know that this is necessary in some areas, well, it has been necessary in Alaska, Hawaii, Guam and the Virgin Islands.
    And it has worked in those areas. And I do not know why it will not work in the other areas that are being underserved today.
    And we have a group out there in this nation I call the ''new homeless.'' And that is a husband and wife, they are working real hard. And they might just be out of school. And the wife is a schoolteacher and the husband is a fireman or a police officer.
    And combined income, they are somewhere in the $80,000 range. And they are in their early 20s and they are out wanting to buy a house. And the fact is that in a little place called Diamond Bar, California, where I am from, which most people do not think is a real elite, exclusive area—I think it is a very nice community—but you are paying over $500,000 for a home.
    So if you can find a home out there for $400,000 that these people would love to be able to buy, that they can qualify for in the $80,000 price range, FHA is not available to them. Zero down payment is not available to them through the program.
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    I am not sure what market FHA is trying to serve, based on some of the statements. Because if we are trying to serve first-time homebuyers and that is the goal, a homebuyer should not be discriminated against because they want to own a home in the community they grew up in.
    And the fact of life is beyond their control, the housing industry has kept this economy fairly strong in recent years during a recession because it has boomed. And it has put people to work. They pay taxes. And the governments are operating because I believe the backbone of this country in the last few years has been the housing industry and groups associated with it.
    So to tell somebody that we think a program should apply to first-time homeowners, yet we are going to discriminate against you because of where you want to live—that you want to live in Maxine Waters' district or you want to live in Oakland in Barbara Lee's district or you want to live in Orange County or L.A. County in my district—we are actually telling those first-time homebuyers that we have a program that obviously we believe works because we continue it, yet we are not going to make it available to you because you happen to have been raised in an area that the costs have gone so high that you do not qualify for a program that is proven to work.
    And when we talk about commitment on authority for limits, I always support those type of things. But you know, it might put a larger smile on my face if those limits were raised and it benefited the district I represent too.
    And I know Mr. Frank has a similar feeling. He has no problem with raising those limits.
    But it would be nice, when we raise those limits, if the people we represent, who are hardworking people and many first-time homebuyers, it is just the home they are trying to buy the first time is more expensive than they would like to pay. Yet they are stuck with a situation that they have no option but to pay it if they want to live in the community that they were raised in, that they understand, that they know the people, that their friends live in, their family lives in.
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    And so I guess my main question: if truly FHA's goal is to help first-time homebuyers and that is their primary focus and then expanding it past there, how in the world can we say that a program that the government makes money on, is proven to work, if it works in Hawaii and Alaska, why will it not work in New York, in Boston and in California?
    Mr. WEICHER. Let me start with your first point, Mr. Miller, about the boom years.
    Mr. GARY G. MILLER OF CALIFORNIA. And many want to see these boom years continue, so I think they are that good.
    Mr. WEICHER. We certainly want them to continue too. I do not think there is any disagreement there at all.
    The commitment authority limit, we will not reach the single family commitment authority limit this year for two reasons. One is last year, Congress did raise that limit very sharply for this year, compared to what it was the year before.
    And second of all, the refinancing boom has finally lost some steam, as rates have risen a little bit lately. And that makes a difference.
    But last year, we came very close. We came very close to having to close down the single family programs in late summer at a time when it would not have been possible for Congress to increase our commitment authority limit. It does happen.
    Chairman NEY. Time is expired.
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. I will come back to this.
    Chairman NEY. We will come back to it.
    The gentleman from Massachusetts, Mr. Frank?
    Mr. FRANK. To begin where you just ended, why does the department not ask for enough commitment authority so you have a margin of error? There is no downside whatsoever, it seems to me, to being somewhat over.
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    Have you done that? Why not ask for enough so that you will not be in danger of running out?
    Mr. WEICHER. It is always a projection, Mr. Frank, of what commitment authority will be needed for a year that starts 8 months after the President's budget.
    Mr. FRANK. Once you start, you have not been willing enough to ask for extensions. Is there a downside if you ask for more commitment authority than is needed and get more commitment authority than is needed?
    Mr. WEICHER. There is no budgetary downside at all.
    Mr. FRANK. Is there any other downside? Does it hurt your feelings? What is the downside?
    Mr. WEICHER. No, I——
    Mr. FRANK. Then there is no downside.
    Mr. WEICHER. Not that I see.
    Mr. FRANK. Okay, given that there is—I am sorry, finish.
    Mr. WEICHER. I am sorry, if I could respond. It always takes time for an action when we see a problem.
    Mr. FRANK. I agree.
    Mr. WEICHER. And last year, we did in fact, as you know, have to shut down the GSRI fund.
    Mr. FRANK. Let me say two things. First of all, since there is no downside, overshoot. There is no downside, so why not ask for enough so it is very, very unlikely.
    Secondly, I agree that the Appropriations Committee was too slow and we should push for it. But if in fact you have enough commitment, the key policy point is that giving you commitment authority that would handle any increase that would result in this bill has no downside, correct?
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    Mr. WEICHER. That is right.
    Mr. FRANK. Okay. So then the question is this: given that—and that is the only possible thing, you say. And the gentleman from Alabama said we want to help low-income people. I agree.
    I spend most of my time in this committee trying to help lower-income people get housing. So I have no apology to make about now being for a bill that focuses only on this.
    I would like to have an omnibus bill. We do not have one. And is there anything in this bill, if we can resolve the commitment authority issue by you asking for more than enough, with no downside, is there anything in this bill that would impinge on our ability to help lower-income people?
    Mr. WEICHER. There is not anything in the bill which would limit that. It would simply depend on the willingness of our lenders who make the loans.
    Mr. FRANK. I understand that. But would the willingness of your lenders to make loans to people at the lower end be somehow negatively affected by this?
    Mr. WEICHER. I doubt it, Mr. Frank.
    Mr. FRANK. So do I. Good.
    Mr. WEICHER. But I do hear that question. I do hear that comment being raised from time to time when loan limits——
    Mr. FRANK. Well, you do not believe it and I do not believe it. So when we find somebody who does believe it, we will talk to him. Because I think it becomes very clear.
    Nothing in this bill has any negative effect on lower-income people. And as a matter of fact, to the extent that it affects them, it can help them.
    Because if we go forward with this with enough commitment authority—and there is no good reason not to have a good commitment authority—the FHA surplus will go up and the FHA will be in better shape. This improves the status of the FHA.
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    So then I want to respond to one point you made. Because all we are asking for is that people who are trying to buy a median house price anywhere in the country get the same.
    If somebody came in and said the fair market value for Section 8 should be the same dollar amount everywhere in the country, we would all be outraged because we recognize that housing prices differ. In fact, many of our housing programs take into account this differential.
    I mean, realtors tell me: location, location, location—except where the FHA is concerned? The FHA is going to ignore location.
    All we are asking for, again, is the median price. Now I thought I heard you tell the gentleman from Georgia or that your response was that there will be certain areas of the country where first-time homebuyers will just have to be shut out. I find that really a very inappropriate response.
    You say, ''Well, in parts of Massachusetts, parts of California, we just will not be able to accommodate first-time homebuyers.'' I do not want to tell people—you know, we are talking about Boston.
    We are talking about big cities. We are talking about places where minorities live. What is the justification for saying we are just going to have to accept the fact that you will not have first-time homebuyers there when we could aid them with no downside?
    Mr. WEICHER. My point in response to Mr. Scott was that the income levels needed to support the ceilings in the highest-cost areas were very high for any family at that income level to really be a first-time homebuyer; $115,000 would be what you would need in San Francisco. And that is way up in the income distribution for the United States and way up in the income distribution in San Francisco.
    Mr. FRANK. It is. And these are, to some extent, where the median house prices are, the median income is somewhat higher. It is not always the same. But why do we then walk away from them?
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    I mean, what is your reason for saying that people at that median should not be allowed to take advantage of FHA if they want to buy a median house price when it has no negative—I guess, that is? What negative effects will this have from a public policy standpoint?
    Mr. WEICHER. Our point is that there are——
    Mr. FRANK. I did not ask for your point, Dr. Weicher. You had a chance to make your statement. I am asking my question: what negative effects would raising the FHA limit to the median have, from the public policy standpoint?
    Mr. WEICHER. The public purpose of FHA is to help——
    Mr. FRANK. Okay, let me try one more time. I am not asking you for your lecture on the public purpose of FHA. You have said that. I am asking you what negative effects this would have.
    If the answer is none, then I want you to say ''none'' and I will be through.
    Mr. WEICHER. We are here to serve the first-time homebuyer. And the first-time homebuyer is seldom in this income——
    Mr. FRANK. Okay, I understand that. Some first-time homebuyers will not be helped by this. We will not reduce the incidence of firefighters. It will probably do very little to cure public health diseases. I understand that.
    This is a limited bill that does limited things. If I had more time, I could join with you in a list of things it will not do and does not pretend to do.
    Now would you please, I am asking you as a personal favor, answer my question. What negative effects from the public policy standpoint would this bill have?
    Now a negative effect is not the fact that it does not do what it does not claim to do. A negative effect is something that it does that would not be useful. Please tell me if there are any negative effects that will result from passing this bill from the public policy standpoint.
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    Mr. WEICHER. Our——
    Mr. FRANK. That is not a hard question. If you want to evade the question——
    Mr. WEICHER. Let me try again. FHA is here to do a job that the private sector does not.
    Mr. FRANK. Oh, you know better than that. I understand that.
    Mr. WEICHER. No, sir. I did not finish my answer.
    Mr. FRANK. Excuse me. Your answer is——
    Mr. WEICHER. FHA is here to do a job that the private sector does not do. The private sector does serve families with incomes of $85,000——
    Mr. FRANK. And what negative effects? I mean, you know better than this. What game are you playing here? If the answer is none, if you are saying it does not do anything negative, but we do not want to do it because that is not the purpose of the FHA, kind of teleological, glad.
    But I am asking you a question that I really would like you to answer honestly. I am really getting frustrated here.
    What negative effect is there? The fact that the FHA has this purpose or that purpose, you know that is not a negative effect. What negative effects would it have, if any?
    Mr. WEICHER. Mr. Frank, I am sorry. I have tried to answer the question.
    Mr. FRANK. No, you have not. Do you know what a negative effect is? A negative effect is something that makes something worse. How does this make a situation worse? What would be worse in terms of public policy if we pass this bill, in terms of societal effect?
    Mr. WEICHER. We do not think FHA should be serving markets that are served by the private sector.
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    Mr. FRANK. I understand that.
    Mr. WEICHER. Because we have an advantage because we have the full faith and credit of the government of the United States.
    Mr. FRANK. So this would be unfair to the private sector, is that what you are saying?
    Mr. WEICHER. Yes.
    Mr. FRANK. Why didn't you say that first? You think that the reason not to do this is it would be unfair to the private sector for the FHA to cover median prices in this regard?
    Chairman NEY. With this point, the time has expired. But we are going to get to Mr. Davis and then back, if you would like to——
    Mr. FRANK. He will not answer it in the next five minutes. But I understand that we cannot have the median house price in high-cost areas because you think it would be unfair to the private sector?
    Mr. WEICHER. Yes.
    Chairman NEY. Mr. Davis?
    Mr. DAVIS. Mr. Weicher, let me shift direction a little bit, but not too far from the thrust of what Mr. Frank is asking you. Your assertion, as I understand it in response to Mr. Miller's comments and Mr. Frank's comments, was something to the effect that if we expand the limit from 87 percent to 100 percent, that we frankly will not really be impacting a whole lot of people; that the FHA somehow does not really have the ability, as a general rule, to really serve a San Francisco or a Boston because as a practical matter, the cost in those markets is out of the range of the average FHA customer. That I understand to be your point.
    Let me try to introduce a little bit of evidence into the abstract argument that we are having here. The 87 percent level—and I am not a mathematician—but if you look at San Francisco, if 100 percent level would be $500,000 or if the median price is $568,200, 87 percent of that would be somewhere around $540,000 or $530,000.
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    Right now, does the FHA play in the San Francisco market? Does the FHA play in the New York market where 87 percent would be presumably around $340,000 and Boston where 87 percent would be around $410,000? Does the FHA currently play in those markets?
    Mr. WEICHER. We do not do very much business in those markets because the limit, as——
    Mr. DAVIS. But do you do any business in those markets?
    Mr. WEICHER. A little.
    Mr. DAVIS. Okay, so if you do any business in those markets, then wouldn't it be obvious—I mean, it seems that Mr. Frank's point would probably be if you do any business in those markets, you will do a little bit more business in those markets if the cap goes up. So doesn't that serve the ultimate public policy purpose of the FHA?
    Mr. WEICHER. I think the point is the current limit in all of those areas is $290,000 because that is the national cap. We do not go over $290,000 anywhere.
    And in those markets, we do a little bit of business at $290,000. Going to $568,000 or $374,000 is a big increase. It is not simply moving up to the national conforming loan limit of $333,000. That, I think, is the answer.
    It is not 87 percent of the current median——
    Mr. DAVIS. I see.
    Mr. WEICHER.—when you get above $290,000.
    Mr. DAVIS. Well, let me ask this question then. What I expected you to say to Mr. Frank was that the negative impact or the perverse impact of this change is that it would somehow limit the FHA's ability to serve areas that are very much within the intended coverage—low-income areas or areas that are generally underserved by the market that exists—whether it is the GSEs or the regular market.
    That is the answer I would have expected you to give to Mr. Frank's question. So I guess I want to spend a little bit of time figuring out why you did not give that answer.
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    You have 100——
    Mr. FRANK. Will the gentleman yield briefly?
    Mr. DAVIS. Not until I finish the round of questions. You have $165 billion in last year's fiscal year for FHA commitment. Is that about right? Is that the number in your opening statement, around $165 billion?
    All right. Now it seemed that your initial point was because the number is a finite number—let's say it goes up to $190 billion this year; it will be a finite number—if the FHA is having to make more of a commitment in upper income areas, I suppose logically one could ask that that would mean that somewhere you are going to have to lessen the commitment. Does that mean that you are going to have to say, ''I am going to take something out of this pot to put it over in this pot?''
    That is not the answer that you gave. So I am trying to see what it is that I am missing about the way this program works.
    Right now, there are no regional quotas in the way the FHA administers its program, right? There are no State by State quotas?
    Mr. WEICHER. That is correct.
    Mr. DAVIS. So what I am trying to do is to understand your position and understand the way the program works. If you have a finite number—$190 billion—and the FHA is having to make a larger commitment in high-income areas, why doesn't that somehow pull from the pot of money that is available in more traditional areas?
    Mr. WEICHER. We have a national commitment authority. But within that limit, we are a demand program. If a mortgage meets our standards, we approve it. We approve them in the order in which they come in.
    The commitment authority limit only bites when we get close to it late in the fiscal year. If the commitment authority level were high enough, as Mr. Frank said and as I said also, this would not be a problem.
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    Mr. DAVIS. Is there a way that you could—I am going to cut you off for a second—is there a way that you can carve out a portion of the commitment level that will meet underserved areas specifically or low-income areas specifically? So that if there is any additional amount of money that has to be put on the table, it is only coming from what is serving a San Francisco or a Boston already?
    The number you give in your opening statement is that two mortgages in California might amount to six mortgages in Ohio. I understand that. Not all parts of Ohio are underserved areas.
    If the goal of the FHA is to target a particular class of individuals, those whom you have defined as those outside the reach of the normal market, is there any way that a carve out could be set up or that some kind of ceilings could be set up within the FHA to guarantee that you are not pulling from that pool, but you are only pulling from the pool in relatively high-income areas anyway?
    Mr. WEICHER. Not without substantial resources being devoted to trying to estimate demand in each market and manage the program within each market on a day-to-day basis. We do not have those resources. You all have not appropriated those resources to us and we have not asked for those resources.
    Mr. DAVIS. Let me ask this question. Going back the last 3 or 4 fiscal years—I guess the whole life of the Bush Administration—how many times has the FHA exceeded its commitment level in the last 4 years?
    Mr. WEICHER. Twice on the GSRI fund, which includes condominiums and home equity conversion mortgages. It includes some single family mortgages. And we have come very close once in the Mutual Mortgage Insurance Fund, which is the basic homeownership program.
    Mr. DAVIS. And did you respond to that gap by coming back to Congress and asking for a supplemental appropriation?
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    Mr. WEICHER. Yes.
    Mr. DAVIS. Okay.
    Mr. WEICHER. And we received it in one case and not in others.
    Mr. DAVIS. Okay.
    Mr. WEICHER. In the single family case, we managed to avoid it.
    Mr. DAVIS. In the 4 years, the 4 fiscal years of the Bush Administration, has the FHA asked for a larger commitment level each year?
    Mr. WEICHER. Yes, I believe that is accurate. We have two programs. And I believe that is accurate. We have never asked for a reduction. I might have to answer the specifics for the record.
    Mr. DAVIS. Okay. Well, that is not that hard a question, I mean whether or not the FHA has sought a higher number. You just happen to not know that.
    Mr. WEICHER. I just do not have the four-year numbers in mind.
    Mr. DAVIS. Okay. All right. I think my time is expired.
    Mr. FRANK. Mr. Chairman?
    Chairman NEY. What I am going to do, if the gentleman could yield, I am going to come back to Mr. Miller and another round over here and then we will move on to panel two.
    Mr. Miller?
    Mr. GARY G. MILLER OF CALIFORNIA. Okay, thank you, Mr. Chairman.
    Let us make a few assumptions: first of all, that we will acknowledge the buyer has to qualify for a loan. So it does not matter what the person wants to buy. If it is $400,000, $435,000, $500,000, you have to qualify. So we will set that aside.
    And I think I can speak for Mr. Frank and I and probably every member of this committee, we will do everything in our power to make sure that if this becomes law, that we are going to give you more authority to be able to accomplish that. So let's set that aside too as an issue.
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    I guess the question is: how will the current FHA program be negatively impacted if this bill becomes law?
    Mr. WEICHER. I do not think the program will be negatively impacted.
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you. I think that is what Mr. Frank was trying to get to. And we agree with you. We do not think it will be either.
    I mean, we understand that if we do not set parameters, there could be things that go wrong. But if we say that the buyer has to qualify, we have to provide authority and if that happens, the FHA program really will not be impacted in a negative fashion.
    The problem we face and I guess the reason this bill is here, if you take the average increases in home prices in not high-cost areas throughout this nation, from 1992 to 2002, it was 52.7 percent or 4.3 percent annually. And based on those type of increases, I am sure that FHA works in many of those areas. Not a problem.
    The problem we face is in the areas we are talking about, in high-cost areas—Mr. Frank's State and my State, New York and some others and many of the members of this committee, if you look at individual counties within their states—the home prices have increased by 169.7 percent or 10.4 percent annually. That is the problem.
    It is not that the program does not work. It is not that Congress is not trying to provide authority. It is not that we would ever assume anybody should be made a loan who does not quality for a loan.
    The fact is that if you are willing to buy entry level housing in these high-cost areas, you did not increase 4.3 percent in costs over the 10 year period. You increased 10.4 percent.
    That puts those people who want to be first-time homebuyers out of the equation. And that is something that is absolutely beyond their control. I mean, if it could be controlled, they would control it.
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    If the local housing market could control it, they would control it. The problem is with the regulatory barriers, the demands on these areas, the basic costs associated with the Endangered Species Act in California that we have that really impacts our marketplace and other things, we have created a situation or the situation has been created whereby a good program—FHA—is just not available because of change.
    And that is what we are trying to do here. We are saying things have changed. Now we need to change to accommodate that change.
    We are not trying to do something that is unreasonable. We are not trying to create an impact on the program where it will not be solvent in the coming years.
    We are saying that things have changed. And when you go to Congress and you say we need to increase authority for the amount you can lend, it is based on change. And we can say, based on this bill, how that will change the situation to expand the program to create equality and equity throughout this nation for first-time homebuyers. It is going to take more authority.
    I do not think you are going to have a problem at all having Congress come back and say, ''We are going to give you more authority.'' The problem is if we do not change things, if we do not look realistically at this, if we do not look realistically at conforming loan limits—and understand that the private sector, the bankers and stuff, have to be safeguarded on the conventional market—if we do not start looking at some of these things, the situation we have in this country for housing is going to become worse.
    The goal is to provide available, ready financing that makes sense to people. The zero down payment that Mr. Tiberi introduced, I think it makes a lot of sense.
    I am just envious. I am envious. And even Mr. Tiberi is going to be envious when he looks at the fact that Delaware County, the median income—the median home price is $259,000 and FHA only goes to $208,000, so that will not even work in his district and he is the author of the bill.
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    So we are trying to say we do not want to do anything that has a negative, detrimental impact on FHA. I do not want to do that. That is not my goal. I am not trying to create a subsidy. I am not trying to create anything other than a program that works.
    And I believe when you take the issues off the table that need to be taken off—like that yes, you have to qualify; yes, we need to increase loan authority—what we are trying to do has no negative impact on FHA. In fact, we believe that it enhances FHA and it goes in the direction we want HUD to go.
    And I saw the red light come on. So I am going to have to yield back the balance of my time.
    But I know Mr. Frank wants to expand on that. But I think we got our answer, Mr. Frank. It has no negative impact, I think, aside the couple of issues that we have set aside that we know are understandable.
    And I would love to talk to you about this further privately. We are going to run out of time. And with that, I yield back the balance of my time.
    Chairman NEY. The gentleman from Massachusetts?
    Mr. FRANK. I just want to return to the argument we got, which is that the negative is that it somehow is unfair to the private sector. But the private sector is a differentiated group.
    One very important part of the private sector in the housing areas is the realtor profession, a very important profession when it comes to single family homes. They are very much in favor of this bill. The realtors are pretty private sector.
    The mortgage bankers are in favor of some increase. They have a question about the interaction with the conforming loan limit.
    The home builders similarly think we should raise the limit, although they do not want it to go without limit, they said. They want it to be above the current ceiling but less than the median house price.
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    So we are talking about at least three important groups here—the mortgage bankers, the realtors and the home builders—who are supportive of some increase. The realtors are very enthused.
    Which—and let me also ask you this because in other parts of the country where the FHA lends to the median, where the median is within range, is the existence of an FHA lending to people who are buying homes within the median income unfair to the private sector in Kansas and Nebraska and Kentucky and places? Do you think it is unfair to the private sector in those places?
    Mr. WEICHER. We do not quite go to the median. We go to 95 percent of median.
    Mr. FRANK. Okay.
    Mr. WEICHER. But——
    Mr. FRANK. Do you think it is unfair to the private sector in those places where you go to 95 percent of median?
    Mr. WEICHER. No, I do not think it is unfair. I do think that the——
    Mr. FRANK. Why not?
    Mr. WEICHER.—the institutions, the segments of the industry that I am referring to are the lending side.
    Mr. FRANK. Okay, just the lenders.
    Mr. WEICHER. Not the builders and realtors. We do not compete with them.
    Mr. FRANK. So the question is: why is it unfair to the lenders to have the FHA lend to the median in Boston?
    Mr. WEICHER. The median in Boston——
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    Mr. FRANK. But why is it unfair to them?
    Mr. WEICHER.—carries you so far into the high end of the income distribution that you are really not serving the first-time homebuyers that we are there to serve.
    Mr. FRANK. No, no. I did not ask you what——
    Mr. WEICHER. In other areas, we are serving——
    Mr. FRANK. You understand English better than you pretend. Why is that unfair? You just restated the point. Why is that unfair to the private lender?
    Mr. WEICHER. Why is it unfair to serve up to $430,000 in Boston?
    Mr. FRANK. Why is it unfair? No, you said the harm was that it was unfair to the private sector. And you said you meant the lenders. I am listening to you and I am trying to ask: what is unfair about that to the private lender, having it be FHA eligible?
    Mr. WEICHER. Our purpose——
    Mr. FRANK. What is unfair about it for the private lender?
    Mr. WEICHER. Our purpose is to serve first-time homebuyers. And that is who we try to serve. And in those ranges, we are not reaching first-time homebuyers.
    Mr. FRANK. Okay, Dr. Weicher——
    Mr. WEICHER. We are reaching people who the——
    Mr. FRANK. You are being deliberately evasive.
    Mr. WEICHER. I am not trying to be, sir.
    Mr. FRANK. You keep restating that. I understand that. I asked you what the harm was in that. And you said it is unfair to the private sector. You said that. Do you remember that?
    Mr. WEICHER. Yes, certainly.
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    Mr. FRANK. And I am asking you now, I want to understand the mechanism by which it is unfair in the Boston area or in parts of California. How is it unfair if the FHA guarantees the loan? How is that unfair to the private lender?
    Mr. WEICHER. Private lenders serve that market. And they serve that market——
    Mr. FRANK. So if there is a market that is being served by the private lender, it is unfair to the private lender for the FHA to step in?
    Mr. WEICHER. It is unfair to use the full faith and credit of the government of the United States——
    Mr. FRANK. Which is the FHA.
    Mr. WEICHER.—where there are private alternatives that serve the market.
    Mr. FRANK. In Kansas and Nebraska and the Dakotas, does the private market serve people who are trying to buy homes at 95 percent of median?
    Mr. WEICHER. The private market serves them. But it is also true——
    Mr. FRANK. No, no. Just answer my question.
    Mr. WEICHER. It is also true that we serve them. And we have no protection from competition.
    Mr. FRANK. Okay. You want to evade the question here.
    Mr. WEICHER. No.
    Mr. FRANK. Does the private market—I am talking now only about the unfairness element—does the private market fail to serve 95 percent of median in those states that I have been talking about?
    Mr. WEICHER. Those are the markets we serve.
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    Mr. FRANK. Excuse me, does the private sector——
    Mr. WEICHER. Those people we serve. The private sector, which has no bar to serving, to competing with us in those markets, does not compete with us.
    Mr. FRANK. If there was no FHA, do you think there would be a failure to serve people at 95 percent of the market in those areas?
    Mr. WEICHER. I think there would be a failure to serve many of the people we now serve or they would be served at substantially higher costs than they are being served.
    Mr. FRANK. Okay, so that is the issue.
    Mr. WEICHER. Well, either could——
    Mr. FRANK. Either way, right. So that you think it is unfair to the private sector if, as a result of the FHA, some people who would be served would be served at lower costs. And I think that is right.
    But what you are telling people who happen to live in an area where they are already penalized because the home price—median home price—is so high that, to the extent that they can get some help with the cost, we will not give it to them even though there is no harm. And that is my problem.
    I think the fact that, even without the FHA, yes there would be private lenders who would help people in these 95 percent median areas. They would have to pay more.
    And what you are saying is that people who live in high-cost areas, they should have to pay more, even though, as we said, no harm is being done.
    Mr. WEICHER. Again, we are trying to serve the first-time homebuyer.
    Mr. FRANK. I do not care. But you keep saying that. And that is not the answer—do you really not understand the difference between a statement as to what the purpose of the program is and then a question as to what harm is being done?
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    Let me put it to you this way. It will make you feel better.
    Given that this is the purpose as you see it, what harm is done from deviating from the purpose. I guess that would be the way to put it. You really cannot answer that by just restating the purpose, can you?
    Mr. WEICHER. FHA is not harmed, to our knowledge, by serving people who are buying homes in this price range.
    Mr. FRANK. Who is harmed?
    Mr. WEICHER. We are——
    Mr. FRANK. Who is harmed?
    Mr. WEICHER. We are——
    Mr. FRANK. Who is harmed?
    Mr. WEICHER. The private lenders who would serve that market are at a disadvantage.
    Mr. FRANK. Okay. So your basic point is that we should not give FHA coverage of median prices in our high-cost areas because it would harm the private lenders who would otherwise be able to make more money than they make.
    Thank you.
    Chairman NEY. Thank you.
    Mr. Miller?
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. Expanding on what Mr. Frank is getting to—and I agree—I am very concerned that whenever we do something, we are not cutting into some private sector marketplace. And I have talked to the bankers about this.
    When we are talking about conforming loan limits, my first meeting was with bankers saying, okay, the conventional market has grown tremendously because the cost of housing has risen so much that many of the programs are not available that currently were available. And FHA is one of those.
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    If you look at what marketplace FHA has in some of these areas, like in Orange County, only 9.2 percent of the loans would have been available for FHA. In Santa Clara County, only two percent of the loans made would ever qualify for FHA.
    In Ventura County, only 7.7 percent of the loans made would qualify for FHA. And that is just qualifying; not saying they got it, but they have qualified for it.
    And that is the problem today. I would never propose a bill to come in and cut into the private marketplace. But the problem is the market has grown to such a degree that we are going out of the marketplace because we are not trying to keep up with it in having a share that we normally have historically had in the past.
    I mean, the conventional marketplace has grown tremendously, percentage-wise, from what it used to be. I am not looking at impacting bankers and lenders. That is not my goal.
    The goal is: how do you keep up with change? Things are changing. I believe it is our responsibility to try to keep up with change. And this bill, I believe, goes a lot in that way.
    And maybe we need to look at something on tying this in some way back into conforming, as the process goes through. But I think conforming has to be addressed too, which we are not doing today.
    So Mr. Frank and I are not closed to the concept of: we will look at FHA; let us look at something with conforming so there is some rationality here. But conforming is not where it should be today.
    But I am not willing to move that until we come to some agreement with the private sector on where it should go to. And that is a process we are undergoing.
    And I am well aware of that. And I do not want to infringe upon their fair share of the market. So we need to go there. It is not ready today. But I think we are ready with this in some fashion. Maybe it is a modified fashion. But we do need, I believe in all fairness, to move this. And at that, I thank you for your time, Mr. Secretary.
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    Chairman NEY. I want to thank the members of the committee. I want to thank Mr. Weicher for participating in the energetic give and take of public debate in the U.S. Capitol. Thank you.
    Mr. WEICHER. Thank you, Mr. Chairman.
    Chairman NEY. With that, we will move on to panel two. Give a minute for panel two to come forward.
    I want to thank the panel. The first witness on the panel is David Berson. And he is Fannie Mae's vice president and chief economist. He is responsible for managing the economics department at Fannie Mae, including forecasting and analyzing the economy, interest rates and housing and mortgage finance markets.
    Mr. Berson also advises Fannie Mae's chairman and operating committee on finance, economic, tax and housing policy issues. Welcome.
    The next two witnesses I will defer to Congressman Miller for introductions.
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. There are two individuals I would like to introduce. John Eberhardt, first, it is my pleasure to introduce him today. He is president-elect of the California Association of Mortgage Brokers. Mr. Eberhardt has been a mortgage broker for over 13 years. And after moving from Wisconsin to California, he opened Prime Equity Management, which is located in Torrance, California, with this father-in-law, Fred Barth.
    He is very active in this company. He is no stranger to the political arena. He had civil involvement where it began in Wisconsin when he served as legislative aid to then-governor Lee Dreyfus.
    More recently, in 2002, Mr. Eberhardt was selected by the National Association of Mortgage Brokers to their task force to formulate recommendations for change to the good faith estimate. So I am really looking forward to your testimony today.
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    The next one is Glenn Hellyer, who I have known for years. He is from my home district. Mr. Hellyer is a realtor, providing real estate services in Southern California for over 25 years.
    For the past 4 years, Mr. Hellyer has operated an independent real estate broker and realtor in Yorba Linda, California, offering residential and commercial real estate services. Owing to his vast accomplishments at promoting homeownership, Mr. Hellyer was appointed honorary director for life of the California Association of Realtors and served as president of the Anaheim Board of Realtors.
    And I welcome both of you here today. And the panel, it is good to have you here.
    Chairman NEY. I want to thank the gentleman and also thank the witnesses today.
    Next is Jonathan Kempner. And he is president and chief executive officer of the Mortgage Bankers Association. Prior to assuming his present role in April of 2001, Mr. Kempner was president of the National Multihousing Council for 14 years.
    Next witness is Frank Nothaft. And he is Freddie Mac's chief—did I say it correctly? Thank you. He is Freddie Mac's chief economist, where he is responsible for primary and secondary mortgage market analysis and research, macroeconomic analysis and forecasting. He is also involved in the analysis of affordable lending activities and policy issues affecting the housing industry.
    Next is Basil Petrou, who is a principal and managing partner of Federal Financial Analytics, Incorporated. The company provides financial analytical services on legislative and regulatory issues to non-bank financial institutions such as insurance companies and mortgage corporations.
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    And last, but not least, is Barbara Thompson, who is the executive director of the National Council of State Housing Agencies, a national, non-profit organization committed to advancing the interests of lower-income and underserved people through the financing, development and preservation of affordable housing. Ms. Thompson also serves as vice president of the National Housing Conference.
    And we will begin with our first panelist, Mr. Berson.
    Mr. BERSON. Thank you, Chairman Ney and members of the committee. My name is David Berson. I am vice president and chief economist for Fannie Mae.
    I want to thank you for inviting me to testify about this important issue of homeownership affordability in high cost areas. I commend the members of the subcommittee for your attention to and leadership on this issue.
    By most national statistical measures, the past 3 years have been the best in history for American housing, homeowners and mortgage finance. The housing boom has reached most regions in the country, including central cities, suburbs and rural areas.
    Low mortgage rates and overall record affordability have combined to create 3.2 million more homeowners since 2000, benefiting families and helping energize the nation's economy. And homeownership has been a sound investment. Since 2000, house prices have appreciated on average by about 26 percent nationally.
    However, in a growing number of areas, strong housing demand and limited supply has generated even more dramatic price appreciation. Combined with a relatively slow pace of income growth, this is putting homeownership increasingly out of reach for working American families, especially now that interest rates are rising.
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    Mr. Chairman, in addition to my testimony, I am submitting data for the record that demonstrates this effect and highlights some of the specific areas that are impacted most.
    To summarize briefly, home price gains closely track income growth in the long run. If home prices rise consistently faster than income, homes will become unaffordable and demand will drop. Over the past 3 years, home prices nationwide have appreciated on average by 7.6 percent per year, significantly above the rate of income growth, which has averaged 4.5 percent over the same period.
    So far this year, home price gains continue to be strong. In several markets, particularly in the East and West Coasts, double-digit home price appreciation has dramatically outpaced income growth. These areas may be susceptible to sharp declines in housing demand, especially when mortgage rates rise.
    Although housing affordability remains high nationally, it has become a serious issue for some states. For example, between February and March of this year, the share of households in California able to afford a median-priced home declined by three percentage points to 21 percent.
    The California Association of Realtors has recently reported that affordability in the state has fallen to an all time low. Monterey, Northern Wine Country, Orange County and Santa Barbara regions were the least affordable in the state, with only 14 percent of households being able to afford the median-priced home.
    The problem is most acute in California, New York and Northeast states such as Massachusetts, Maine, Delaware, New Hampshire and a few others. House prices in California increased more than 14 percent last year, while incomes rose by just over two percent.
    In New York and New Jersey, house prices increased by over 12 percent in 2003, while incomes rose by just under 2.5 percent. And in Massachusetts, where home prices went up by over 10 percent, incomes increased by about two percent.
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    But the problem is even wider than that. We see similar trends in Florida, Maryland, Virginia, Minnesota and even Nevada.
    Currently, the median home price in nine metropolitan Statistical areas is above the conforming loan limit. In 1999, that was true in only three MSAs.
    These affordability problems emerged in a period of 45-year low interest rates, which helped to offset some of the negative affordability effects of higher prices. The period ahead is likely to be marked by higher interest rates which will erode affordability further even if incomes rise.
    Over the long run, home prices and incomes have moved together, and that is our expectation going forward as well.
    Mr. Chairman, I recently participated in writing a paper for the Homeownership Alliance entitled, ''America's Home Forecast: The Next Decade for Housing and Mortgage Finance,'' that discusses this in greater detail. I will also submit this paper for the record.
    In the short run, however, recent increases in interest rates in response to stronger economic growth and signals from the Federal Reserve of tighter monetary policy will only make affordability an even greater problem. We are already seeing families shift to adjustable rate mortgages or ARMs, especially interest-only ARMs, in order to be able to afford the purchase of a home.
    These loans expose homebuyers to greater risk once the initial period of payment stability is over. With short-term interest rates at 45-year lows and likely to rise over the next several years, these homeowners are most exposed to interest rate risks going forward.
    Fannie Mae is a private, shareholder-owned company with a public mission to promote and expand homeownership. Our mission is to tear down barriers, lower costs and increase the opportunities for homeownership and affordable rental housing for all Americans.
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    We take our mission very seriously. Lenders, especially small community banks, depend on us to develop new mortgage products, processes and technology solutions so they can serve more families, serve them better and make the mortgage process faster, easier and cheaper for all involved.
    Our investments in technology have increased underwriting flexibilities, expanded markets for our lender partners and, by reducing the cost of originations, enhanced affordability for the home buyer. This January, Fannie Mae took its mission commitments one step further. We launched our Expanded American Dream Commitment, pledging to help 6 million families—including 1.8 million minority families—become first-time homeowners over the next decade.
    With this pledge, we set a goal of raising the minority homeownership rate from the current 49 percent to 55 percent by 2014, with the ultimate goal of closing the gaps between minority homeownership rates and non-minority homeownership rates entirely.
    Addressing the needs of borrowers in high-cost areas will be crucial to meeting our corporate objectives.
    Mr. Chairman, we are very glad to have this opportunity to discuss the very real problems of families living in high-cost areas who do not have access to the benefits provided by Fannie Mae and Freddie Mac. As you know, the families who find homeownership unaffordable in these areas are not just low-or moderate-income families, but also middle-income families.
    Many two-earner households cannot afford homes in some of these high-cost areas in the country today. Congress chartered Fannie Mae to expand access to mortgage credit for all of these households—low-income and middle-income.
    In 1992, Congress complemented that mission with explicit requirements——
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    Mr. GARY G. MILLER OF CALIFORNIA. [Presiding.] You will need to wrap this up. Your time is expired.
    Mr. BERSON. All right. I will wrap it up.
    Mr. GARY G. MILLER OF CALIFORNIA. So much to say; so little time, right?
    Mr. BERSON. Exactly.
    Mr. Chairman, thank you for holding this hearing highlighting the critical issues for millions of families around the nation.
    Let me conclude, Mr. Chairman, by stating that Fannie Mae is in favor of legislation that helps homeownership opportunities, especially for underserved populations.
    Thank you, Mr. Chairman.
    [The prepared statement of David Berson can be found on page 59 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Well, you have done a wonderful job. Thank you, Mr. Berson.
    Mr. Eberhardt?
    Mr. EBERHARDT. Mr. Miller, Mr. Frank, thank you for having me here today.
    My name is Jon Eberhardt. And I am the president-elect for the California Association of Mortgage Brokers, a state affiliate of the National Association of Mortgage Brokers, NAMB. And NAMB is the largest organization of individual loan originators in the country.
    NAMB has a membership of over 24,000 originators and affiliates and supports consumer education and a code of ethical conduct by its members. Like my NAMB colleagues, I originate loans for a living and have done so since 1991.
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    My company, Prime Equity Management, located in Torrance, California, is a medium-sized shop with 10 originators. We are certified to originate FHA insured loans as an FHA correspondent.
    I am here today to speak in support of H.R. 4110.
    The Los Angeles Times recently reported that Los Angeles County's median home price jumped 20 percent in the past 12 months to $379,000. Entry level houses in Los Angeles County that traditionally sold for $280,000 are now selling anywhere between $360,000 and $380,000 at the entry level. Yet the FHA loan limit for L.A. County is $290,319.
    Twenty-three of California's 58 counties are currently at this $290,319 FHA ceiling, with another six counties approaching the ceiling due to the latest jump in home prices. These 29 counties represent approximately 85 percent of California's population.
    California is not alone. High-cost areas exist in states across the country.
    Maryland, for instance, has five of 24 counties currently at the $290,319. They have another seven counties that are approaching the limit.
    These counties represent a great majority of the population of Maryland. States that currently feature counties at or approaching the maximum FHA loan limit include Pennsylvania, Connecticut, Massachusetts, New York, New Jersey, among others. If you go just south of Washington, D.C. into Virginia, I am sure you would find that they would be in a similar situation.
    Recognizing high-cost areas with regard to FHA loan limits is not new to this legislative body. Congress already recognizes high-cost areas in Hawaii, Alaska and various United States territories.
    These areas feature an exception that takes their available loan limit to 150 percent of the current FHA ceiling.
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    The United States now boasts homeownership in excess of 60 percent. Minority homeownership is over 50 percent. Both of these numbers are the highest in history.
    Home prices are driven by an increased demand for homes which outpaces sales of existing homes and new development. I would like to make the observation that if we put five million new homebuyers in homes before the end of the decade, that probably home prices will continue to increase.
    To facilitate the demand for homes, certain steps should be taken to accommodate buyers, particularly first-time homebuyers. FHA insured loans are more accommodating to first-time homebuyers than other types of loan programs, as they are designed to include flexibility for debt ratios, income and credit history. Such flexibility is not included in conventional lending guidelines.
    FHA insured loan programs should serve as a permanent backstop for all first-time homebuyer programs. By creating the ability for FHA loan programs to float up and down, matching 100 percent of the local median home price, the legislation seeks a logical loan limit that will benefit both the housing industry and the consumer.
    Why is this particular solution needed? I am going to skip down, because I am going to miss my five minutes.
    So currently purchases of new homes are restricted through a legislatively mandated ceiling derived from a complicated formula. H.R. 4110 simplifies the process by instead tying the FHA loan limit to the local area median prices. The working families that live in areas that exceed the FHA ceiling, yet need and qualify for an FHA insured loan, should not be penalized because of where they live.
    This committee has already approved beneficial legislation in H.R. 3755, the Zero Down Payment Act of 2004. However, one must ask the question: how many homebuyers are not going to have access to the zero down program due to the current FHA ceiling?
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    Finally, over the past several years, I have averaged three to four FHA deals a month. The last FHA insured loan that I did was in October of 2003. That is 9 months ago.
    In my experience, minority first-time homebuyers are often the hardest hit. The type of loan that has replaced the FHA insured loan has a higher incidence of default.
    Mr. GARY G. MILLER OF CALIFORNIA. You need to wrap up.
    Mr. EBERHARDT. Before I conclude, I would like to thank Mr. Miller for noting that this bill would not just serve high-cost areas. His remarks contained a list of counties across the country where the FHA loan limit is well below the median home price in those counties. I am thinking of Delaware County in Ohio, Door County in Wisconsin.
    This legislation has the support of mortgage brokers throughout the country.
    Mr. GARY G. MILLER OF CALIFORNIA. You will need to wrap up, sir.
    Mr. EBERHARDT. H.R. 4110 is an essential tool to further increase homeownership. Thank you.
    [The prepared statement of Jon Eberhardt can be found on page 84 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Eberhardt.
    Mr. Hellyer? Yes, you may proceed.
    Mr. HELLYER. Sir, it is an honor that you invited me to be here today. And I appreciate your invitation.
    My thanks to Chairman Bob Ney, Vice Chairman Mark Green, Ranking Member Maxine Waters and all the members of the subcommittee for inviting me here today to testify on H.R. 4110.
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    This bill will enable more prospective homebuyers to achieve the American dream of homeownership.
    My name is Glenn Hellyer. And I have been a realtor in Orange County, California for over 25 years. I have represented homebuyers and homeowners all throughout Orange County and the neighboring counties.
    In years past, I have used FHA loans to help first-time homebuyers, low- and moderate-income buyers and buyers who could not qualify for conventional loans because of high loan-to-value ratios or high payment-to-income ratios. FHA loans are no longer a useful product for prospective homebuyers in high-cost areas of the country like my area because its maximum loan limits are restrictive.
    As a result, working families such as teachers, police officers, fire fighters, nurses and others have all been left behind just because of their location, their geographic location. H.R. 4110 would correct this inequity.
    Housing prices in California, Massachusetts, New Jersey, New York, Connecticut and I am sure other states, have experienced tremendous growth over the past few years. Unfortunately, the FHA loan limits have not grown in a manner to mirror the growing cost of homeownership in these areas.
    Another burden that has not been discussed today has been those workers who may only qualify under FHA loan guidelines but are restricted by the current loan limits we find on our already overcrowded roads, having to commute long distances every morning and evening.
    FHA has played an enormous role in helping families realize the dream of homeownership at no cost to taxpayers. However, there are many Americans who are not able to realize this dream. Those who happen to live in communities with high housing costs are not afforded the benefits of FHA simply because of the current loan limits.
    H.R. 4110 would eliminate the current loan limit ceiling and allow FHA limits to rise to the median home price in each locality. Working families who need and qualify for FHA should not be penalized because of their geographic location. H.R. 4110 would correct this disparity and make FHA loans available to all prospective homeowners nationwide.
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    I appreciate the opportunity to provide you this testimony. And I will be happy to answer any questions you may have.
    [The prepared statement of Glenn Hellyer can be found on page 89 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Hellyer.
    Mr. Kempner?
    Mr. KEMPNER. Thank you.
    Good morning, Congressman Miller. I am Jonathan Kempner, president and CEO of the Mortgage Bankers Association. Thank you for inviting MBA to share its views on H.R. 4110.
    We believe that H.R. 4110 highlights the critical and unique role of FHA in expanding homeownership opportunities for those families that are unserved or underserved, especially first-time, low- and moderate-income and minority homebuyers. To this purpose, FHA has a tremendous track record.
    Over the past 70 years, MBA and our members have worked in close partnership with FHA to deliver affordable, long-term financing. Today, MBA members originate and service the vast majority of FHA loans each year.
    Nowhere inside or outside the Beltway will you find a stronger advocate for FHA than the Mortgage Bankers Association. In 1998, MBA strongly advocated for the successful increase in FHA's maximum mortgage limits that raised the minimum limit to 48 percent and the maximum limit to 87 percent of the Freddie Mac conforming loan limit.
    This incremental change broadened the housing stock that was available to FHA borrowers and allowed FHA to serve a larger number of high-cost areas. H.R. 4110 proposes to adjust the FHA mortgage limit from 95 percent of an area's median home price to 100 percent.
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    Additionally, H.R. 4110 would remove the 87 percent ceiling on FHA mortgage limits. This latter provision would result in FHA mortgage limits in certain areas of the country exceeding—and in some cases, far exceeding—the conforming limit.
    We support raising FHA's mortgage limits to 100 percent of an area's median home price, but believe it best to cap these mortgage limits at the conforming limit. We believe that aligning FHA's loan limits with the conforming limit will appropriately broaden the housing stock available to FHA borrowers in many high-cost areas without shifting FHA from its stated mission of serving first-time homebuyers and the underserved.
    MBA bases our position on the following three principals: first, FHA's core mission should stay squarely focused on the modest end of the mortgage market. Fannie Mae and Freddie Mac, as federally charted enterprises, define the conforming market that includes the majority of first-time and low-income homebuyers, which are FHA's primary target. FHA's primary mission should be to operate within this conventional market and not exceed it.
    Second, the benefits of FHA mortgage limits in excess of conforming loan limits are unclear. Currently, the jumbo mortgage market is robust, with private lenders providing a wide range of jumbo products throughout the country. Greater analysis is necessary before it is clear whether FHA could develop a product that would bring improvement to the jumbo mortgage market.
    Finally, FHA may not be well positioned to step outside its core mission and manage a jumbo loan program. Currently, FHA is focused on providing homeownership opportunities for those with less income, poorer credit or no credit. While FHA has had success with these borrowers, it has not been without management challenges. It is unclear whether or not FHA, in its current structure, has the capacity to appropriately identify and manage the risks of jumbo mortgage products.
    In closing, I would like to reiterate MBA's support for an incremental approach in raising FHA's mortgage limits by benchmarking mortgage limits to 100 percent of an area's median home price and capping the maximum FHA mortgage limit at the conforming limit.
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    Thank you for giving MBA the opportunity to testify on H.R. 4110. We look forward to working with Representative Miller, Representative Frank and the subcommittee on this important legislation.
    [The prepared statement of Jonathan L. Kempner can be found on page 91 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mr. Kempner.
    Mr. Nothaft? Is the correct, Nothaft?
    Mr. NOTHAFT. Yes, that was pretty good.
    Thank you, Chairman. I am Frank Nothaft, vice president and chief economist of Freddie Mac.
    Mr. GARY G. MILLER OF CALIFORNIA. Excuse me, you need to turn your microphone on.
    Mr. NOTHAFT. Thank you. I welcome the opportunity to be here today to discuss H.R. 4110, the FHA Single Family Loan Limit Adjustment Act of 2004. Freddie Mac supports efforts by Chairman Ney, Congressmen Miller and Frank, Congresswoman Waters and other members of the committee to help meet affordable housing needs in all neighborhoods, and especially in high-cost markets.
    We believe that these needs are best served by a higher loan limit for FHA, coupled with a higher loan limit for Freddie Mac and Fannie Mae, in high-cost markets. This will expand the market, provide more access to credit and lower homeownership costs.
    H.R. 4110 is an important vehicle to focus congressional attention on meeting the urgent need for affordable housing.
    Housing affordability is an issue in all high-cost markets across the nation. As an example, in March, the median sales price of a single family home was $428,000 in California and was $560,000 in San Francisco.
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    In 2003, the median price of a home in Boston was $413,000. In these and other high-cost markets around the nation, a higher FHA loan limit and a higher loan limit for Freddie Mac and Fannie Mae would be vehicles for bringing low-cost, accessible mortgage credit to more families.
    Today, I will first discuss general effects of an FHA loan limit increase upon the overall mortgage market and then provide some specific comments on H.R. 4110.
    There are two effects of raising the FHA loan limit on the overall mortgage market. First, a higher limit will draw additional borrowers into the market, expanding the overall size of the home purchase origination market.
    Second, by providing an alternative source of mortgage insurance, it will draw some borrowers from the conventional market. We have conducted analysis at Freddie Mac to parse out both effects with market data. Our analysis was focused on the previous jump in FHA loan limits that was enacted in 1998.
    What we found was that the higher FHA limits increased overall home purchase for the population of loans that fell within the new, higher FHA loan limits. The number of conventional loans and the number of privately insured loans was reduced.
    We estimated that the overlap with the conventional market was between 22 percent and 49 percent of the new volume of FHA loans. The midpoint of this range, or 35 percent, is very close to the estimate of the overlap computed by the General Accounting Office in a 1996 report.
    I will now describe some observations I have on H.R. 4110. H.R. 4110 alters the FHA loan limit in two respects. First, it eliminates a maximum loan limit by decoupling the link to the Freddie Mac loan limit. Second, it sets the FHA loan limit at 100 percent of the median house price, up from 95 percent.
    Eliminating the maximum loan limit means that the FHA limit will exceed the Freddie Mac and Fannie Mae loan limit of $333,700 in a number of markets. In Manhattan, the median value of owner-occupied single family homes is in the neighborhood of $1.5 million. Likewise, the FHA loan limit in the San Francisco metropolitan area would approach $750,000.
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    Congress should consider carefully what it wants the FHA program to accomplish and how best to achieve its policy objectives. Currently, there are 82 counties that are at the FHA maximum loan limit, including the New York, San Francisco and Boston metropolitan areas.
    Maintaining a maximum loan limit, perhaps linked with the Freddie Mac loan limit, would assure that FHA continues to serve its intended borrower population, while assuring families greater access to a wider alternative of housing finance options.
    A second part of H.R. 4110 increases the loan limit for those areas where it is currently set at 95 percent of the median house price. The proposed increase to 100 percent of the median house price will affect 539 counties in the nation.
    The families who will benefit from FHA's lower down payment requirements and higher payment-to-income ratios will tend to be lower-income, have less savings and be first-time homebuyers. However, some of these borrowers would also have qualified for a conventional, privately insured loan.
    We estimate that several thousand lower-income and minority homebuyers, who otherwise would have qualified for and taken out a conventional mortgage, will opt for the FHA insured loan.
    Because the FHA program touches so many aspects of the mortgage market, it is also important to look at how the overall strength of the FHA insurance fund could be impacted by the legislation. Increasing the FHA loan limit would also have an impact on our ability to meet the affordable housing goals proposed by HUD.
    HUD's market analysis was completed months ago and did not factor in an FHA loan limit increase. Thus, the FHA loan limit increase will make it more difficult for us to make the proposed goal levels.
    Dick Syron, Freddie Mac's new CEO, has defined a mission-centric focus to our activities. Included within this is a new product development to help meet the affordable housing needs in all neighborhoods.
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    Congressional action to support affordable housing throughout the nation, and especially in high-cost markets, is well justified. And we support your efforts to ensure that America's families have affordable housing in the cities in which they work.
    Mr. GARY G. MILLER OF CALIFORNIA. You will have to wrap up.
    Mr. NOTHAFT. As I have stated, we believe that these families are best served by a higher loan limit for FHA, coupled with a higher loan limit for Freddie Mac and Fannie Mae. This will expand the market, provide more access to credit and lower homeownership costs and make home possible for more of America's families.
    Thank you.
    [The prepared statement of Frank E. Nothaft can be found on page 96 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, sir.
    Mr. Petrou?
    Mr. PETROU. Thank you. Discussion of the FHA loan limits usually fail to address a key fact. Raising the FHA loan limits only serves those borrowers who already have the high income necessary to otherwise qualify for the loan.
    Uncapping the FHA loan limit will not allow a borrower with a $50,000 income to qualify for a $300,000 FHA insured, 30-year, fixed rate mortgage, even at today's low rates. If interest rates rise, the larger FHA loan is placed that much further out of the reach of the moderate income borrower.
    Mr. Weicher addressed some of these income classification issues. But no matter how one looks at these income requirements for the new, higher FHA loan limits that would be resulting from this bill, they target the very top of individual income taxpayers.
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    Only the top 8.5 percent of all individual income tax returns in 2001 had adjusted gross income of over $100,000. And only the top two percent were above $200,000, where some of the high limits would take us. Furthermore, 77 percent of the tax returns between $100,000 and $200,000 reported a deduction for home mortgage interest, indicating the filer already owned a residence.
    In short, if FHA starts targeting loan amounts where borrowers are required to have incomes of $135,000 to $200,000 or more, then it can safely be said that these borrowers are at the very top income categories and are almost assuredly not first-time homebuyers. In my view, this is not and was never meant to be the target market for FHA single family mortgage insurance.
    Additionally, uncapping FHA limits in high-cost areas may act to push some housing further out of reach of low- and moderate-income borrowers. There is some evidence from previous FHA loan debates that higher FHA limits may serve to raise the cost of new housing that is made available to FHA-eligible borrowers in an area subject to the higher limits.
    Moreover, the higher FHA loan limit does nothing for the moderate income borrower who qualifies for a loan amount below the old FHA limit. While that borrower gains nothing, he or she may well suffer as the market focuses on the new availability of FHA insurance at the high end.
    Implicit in H.R. 4110 is the assumption that the current way FHA sets area loan limits falls short of matching the area's true median house price. In fact, just the opposite is the case.
    The current system ties the calculation of the median house price for an MSA to the median house price in the highest-cost county within the MSA. The result is that the FHA limit for the MSA is clearly not reflective of the true median house price for the entire MSA. It is higher.
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    Shifting the FHA area limit calculation from 95 to 100 percent of the calculated amount will only aggravate the current distortion. It is commonly assumed that borrowers with higher incomes are for, some reason, safer credits than low- and moderate-income borrowers.
    Evidence from private industry shows that this is not the case when considering low down payment borrowers during periods of regional economic stress and falling home prices. Past experience with regional downturns in house prices has shown that houses at the upper end of the house price distribution scale are likely to suffer more serious declines in property values than more moderately priced houses.
    During a period of economic stress and falling home prices, the lack of liquidity at the higher end of the house price market will be felt to the detriment of the holder of these mortgages. Since FHA insures 100 percent of the loan amount, the FHA stands to lose a great deal in this situation.
    Just as new borrowers paid the higher FHA loan premiums needed to return the single family mortgage fund to economic solvency in the early 1990s, so too will future moderate income borrowers bear the higher cost associated with the losses resulting from defaults on larger FHA loans in the event of a future regional decline in house prices.
    Will there be a regional house price decline that will result in higher losses to FHA? We do not know. But we do know that low- and moderate-income borrowers gain nothing and may well lose from retargeting FHA to higher-income borrowers.
    Why would Congress want to run that risk when so much more needs to be done to provide affordable housing for minorities and low- and moderate-income borrowers and renters? Unlike the current process of targeting borrowers by setting FHA loan limits, targeting FHA to borrower income would ensure the program promotes homeownership for those borrowers whose needs remain unmet by private markets.
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    Income targeting would enhance homeownership even in high-cost areas without creating a subsidy for higher-income borrowers or an incentive for higher home prices that may cut lower income borrowers out of homeownership. Income targeting does not mean that every area of the country must have the same top limit—be it 80 percent, 100 percent or even 120 percent of area median household income.
    However, it is critical to set the income limits in a way that puts taxpayer-supported programs to work for those potential borrowers in the neighborhood who need them the most. Income targeting the FHA single family program also assures that the insurance subsidy remains with targeted borrowers during periods of rising interest rates. As mortgage interest rates rise, the amount of income needed to qualify for a given FHA loan amount also rises.
    In other words, the FHA loan limit approach of targeting borrowers leaves low- and moderate-income families behind during periods of rising interest rates. In my opinion, the FHA program should do just the opposite. During periods of rising rates, it should assure that its subsidy remains targeted to the low- and moderate-income borrower and first-time homebuyer.
    Income targeting the FHA single family program will assure that this happens. If we increase the——
    Mr. GARY G. MILLER OF CALIFORNIA. You will need to wrap up your testimony, sir.
    Mr. PETROU. If we increase the scope of FHA without focusing it on the real needs of underserved borrowers, we run the risk of undercutting the program and its ability to serve those who need it at the time when they need it the most.
    [The prepared statement of Basil N. Petrou can be found on page 102 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, sir.
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    Mrs. Thompson?
    Ms. THOMPSON. Thank you, Representative Miller and Ranking Member Frank. I am Barbara Thompson, executive director of the National Council of State Housing Agencies. Thank you for this opportunity to testify on behalf of NCSHA in support of H.R. 4110.
    NCSHA represents the housing finance agencies of the 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. State HFAs issue tax-exempt private activity bonds, allocate the Low-Income Housing Tax Credit and administer HOME funds to finance affordable homeownership and rental housing for lower-income and moderate-income families.
    I want to thank you, Representative Miller, and Ranking Member Frank for introducing H.R. 4110, which will help many more families in this country achieve homeownership.
    FHA Mortgage Insurance is essential to the success of the Mortgage Revenue Bond first-time homebuyer program, which HFAs operate in every state. MRBs have made homeownership possible for more than 2.4 million low- and moderate-income families. Another 100,000 families become homeowners each year with MRB mortgages.
    In 2002, nearly 60 percent of all MRB loans financed by state HFAs were insured by FHA. In some states, including Ohio, Utah, and Mississippi, that percentage was 90 percent.
    MRB borrower use of FHA insurance is widespread for many reasons. FHA is frequently less expensive for the borrower than private mortgage insurance. FHA down payment requirements are generally lower. And, FHA is often the best option—sometimes the only option—for homebuyers with low credit scores.
    Unfortunately, in some high-cost areas of the country, FHA insurance is not as useful as it might be because its maximum mortgage limits lag median home prices. As a result, some working families have limited or even no access to FHA insurance, making it difficult for them to buy homes in the communities where they live and work.
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    Current FHA limits constrain the availability of MRB first-time homebuyer loans in some metropolitan areas of many states. The maximum mortgage limit is simply too low in some high-cost areas for MRB borrowers to purchase MRB-eligible homes with FHA insurance.
    In Boston, for example, a family earning the maximum income allowable under the MRB program could afford a home priced at 78 percent of the median purchase price. However, this family could not buy that home with FHA insurance because the FHA maximum mortgage limit is 71 percent of the median purchase price.
    In Oakland, an MRB-qualified family earning the maximum allowable income could afford a home priced at 67 percent of median purchase price but could not buy that home with FHA insurance, which in that area is limited to 59 percent of the median purchase price.
    FHA limits also constrain MRB borrowing in places you might not think of, like Madison, Wisconsin, Minneapolis, Minnesota and Ann Arbor, Michigan.
    H.R. 4110 would enable families living in these and other high-cost areas to access FHA-insured MRB loans and a larger universe of moderately priced homes.
    Before closing, I want to thank you for your continued help and ask for your continued help in removing another serious constraint on the MRB program, the Ten-Year Rule. This rule each year prevents tens of thousands of first-time homebuyers from benefiting from MRB mortgages. It forces states to use payments on MRB mortgages to retire bonds outstanding, rather than fund new mortgages to low- and moderate-income families.
    The Ten-Year Rule will cost states $3 billion in MRB mortgage money this year. Massachusetts loses $288,000 a day; Ohio, $450,000; and California, $1 million a day to the Ten-Year Rule.
    The Housing Bond and Credit Modernization and Fairness Act, H.R. 284, would repeal this rule. It has 348 House cosponsors. The corporate/jobs tax legislation passed by the Senate last month and reported by the Ways and Means Committee just this week appears to be the only possible vehicle for passage of Ten-Year Rule relief this year.
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    The House bill does not contain the relief. The Senate bill includes a one-year repeal of the rule and prospective repeal for bonds issued after the bill's date of enactment.
    Please help us ensure the survival of the Senate Ten-Year Rule relief provisions in conference. Please communicate your support for it to Ways and Means Chairman Thomas and House leaders.
    Thank you for this opportunity to testify.
    [The prepared statement of Barbara J. Thompson can be found on page 113 in the appendix.]
    Mr. GARY G. MILLER OF CALIFORNIA. Thank you, Mrs. Thompson.
    Mr. Nothaft, you made a couple of good points, I think. You talked about the median income home in certain areas. And you talked about in some areas it goes to $1.5 million and whatever and somewhat tying the maximum in with conforming in some way. Not a bad concept, I think. Maybe Mr. Frank and I would look at that as this bill proceeds.
    You had a concern with FHA's capacity to manage this new program. I would like you to expand on that and then would you give me an idea on the cost of a conventional versus FHA to a buyer?
    Mr. NOTHAFT. I do not have the information on the price.
    Mr. GARY G. MILLER OF CALIFORNIA. Is your microphone on?
    Mr. NOTHAFT. I think so.
    Mr. GARY G. MILLER OF CALIFORNIA. Okay. Yes, that is better.
    Mr. NOTHAFT. I do not have the information on the pricing at my fingertips. But as I recall, let's say comparing FHA Mortgage Insurance with private mortgage insurance, they are very competitive for loan-to-values of around 95. FHA becomes a little less expensive relative to private insurance when you get up to about 97 LTV. When you are below a 95 loan-to-value ratio, generally the private mortgage insurance is less expensive than FHA Mortgage Insurance.
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    I do not recall mentioning any concerns I had about capacity. I think the capital markets are actually very broad. And the FHA loans are financed primarily through the Ginnie Mae mortgage-backed securities program.
    Ginnie Mae mortgage-backed securities are issued into the broader capital markets, which are very deep. So I do not think there would be any capacity concerns.
    Mr. GARY G. MILLER OF CALIFORNIA. The new zero down payment we are hopefully going to be able to start through FHA, if we somewhat had a cap on this thing so it just did not go through the roof, you know, to conforming or whatever, wouldn't you think this would be a beneficial program to have an increase in, to provide that opportunity for people who are working real hard, but they are renting right now? They do not have discretionary 20 percent down or whatever would be required. Wouldn't you think that would be a tremendous benefit?
    Mr. NOTHAFT. There are parts of the bill that are very much aligned with the objectives that Freddie Mac has too, such as the increased homeownership.
    Mr. GARY G. MILLER OF CALIFORNIA. The limit is the main concern. Okay, thank you.
    Mr. NOTHAFT. Absolutely. Absolutely.
    Mr. GARY G. MILLER OF CALIFORNIA. Mr. Petrou, you talked about the concern that you had with difficult situations in the economy or whatever, if FHA was in the marketplace. During the 1990s recession—you do recall that one; I recall it well as a developer—that was as severe as I have seen, for a more protracted time even than most.
    I mean, if the 1980s recession was a good hit because prime went up to 24. I mean, that made it really tough so people could not sell their home to buy a home. It was a different type. We recovered from that much quicker.
    The 1970s was the same way. We had to move past that when the marketplace finally came back in the 1990s. It has been really, really strong since then.
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    But even during those difficult times of the 1990s, there was no congressional appropriation to FHA for losses. I mean, they revamped the program somewhat.
    Generally, FHA makes money for the federal government. Before that, it was even giving money back to people.
    Don't you think the system is strong enough to deal with those?
    Mr. PETROU. You are right. There was no congressional appropriation during that time. And in part, it was because of FHA loan limits in California and Massachusetts, when both of those states incurred significant losses as home prices collapsed.
    The FHA loan limits were set at such a low level that FHA did not experience the kind of significant losses on high LTV properties in those states as did the private sector did.
    Mr. GARY G. MILLER OF CALIFORNIA. Loan rates are relative to market addition. The home value in 1989 is not what the home value in the overall marketplace is today. I mean, it has grown tremendously. The upper end is nowhere near what it was in March of 1990.
    So based on the given marketplace is still relative. FHA is still going to be, if we do put some kind of a cap on it, it is still going to be at the bottom end of the market. And the bottom end of the market is safe because it is like in a marketplace where the economy goes bad, you are going to sell a whole lot more Fords than Mercedes.
    And we have a bigger market for Fords than Mercedes. And if anybody is going to take a big rebate, it is going to be Mercedes, rather than Ford because most people could not afford it.
    The homes we are talking about in the FHA price range are the homes that most people can afford and even people in the upper ranges, if they get in difficult situations, can afford that one. Don't you think there are safeguards built on in just the change in the economy alone, where it does not create a different situation than we faced earlier?
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    Mr. PETROU. No, I do not. I think actually what happened was that the indexing of the FHA loan limit has moved FHA into the market you are talking about. I think this current bill would move FHA further into the market I was talking about, which suffered serious losses in the late 1980s and early 1990s in New England and in California.
    Mr. GARY G. MILLER OF CALIFORNIA. In California, FHA had a larger share of the market in 1990 than it does by far today because we have priced FHA out. So FHA is not even there.
    Mr. Eberhardt, I guess the other question would be: what is the implication on working families that are working real hard out there if you do not have that access to an FHA program?
    Mr. EBERHARDT. If I am buying a home in Wilmington or Carson or Long Beach and I am a first-time homebuyer and the home price there is probably $380,000 or so, and I want to buy that home, currently I have to take a look at other options opposed to or aside from FHA. I look at conventional.
    If I do not have a conventional type credit score, I cannot get a conventional loan. So then I would probably go backwards and take a look at sub-prime. Sub-prime loans——
    Mr. GARY G. MILLER OF CALIFORNIA. So you are going the wrong direction?
    Mr. EBERHARDT. Yes, you are going the wrong direction.
    Mr. GARY G. MILLER OF CALIFORNIA. That is exactly what I thought and what I wanted to hear.
    Glenn, what do you think—Mr. Hellyer—would be the typical loan that replaces FHA? Is this back on the same line?
    Mr. HELLYER. It is more expensive, Mr. Miller. And that is the problem. You have those folks that may not have the FICO requirements to get a conventional loan, may not have the down payment. They have to now try to save. They have to work their credit up in order to get in to qualifying.
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    I will give you an example as to how impossible that is in Orange County. Last month, the Orange County Register ran an article that said that the median price rose over the last year in an amount equal to—wait for it—$323 a day. Nobody can save that much. There is no way.
    And there are first-time buyers in the $400,000 range. There are those that can qualify on the payment, I mean with the current interest rates.
    But no conventional loan product that I know of enables those folks to buy, at least not buy in their marketplace in Orange County. We see—and I reference this in my earlier remarks—that we see people having to drive away from the employment center, crowd the freeways.
    And it is because they want to own. They want that opportunity to gain equity. But they do not have it in their locale.
    Mr. GARY G. MILLER OF CALIFORNIA. So we are actually hurting the people that we are trying to help most by driving them to sub-primes instead of giving them the option they should have, basically?
    Mr. HELLYER. Sure.
    Mr. Frank?
    Mr. FRANK. Mr. Petrou, you said that there was evidence that higher FHA area loan limits push up area home prices. Could you tell me about that evidence?
    Mr. PETROU. During the debates of the early 1990s, what it was—and it was anecdotal evidence. That is all.
    Mr. FRANK. Oh, okay. Thank you. Just anecdotal. So there is nothing in writing you can send me?
    Mr. PETROU. I have to go check in the testimony.
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    Mr. FRANK. All right, would you? Because if it is just anecdotal evidence——
    Mr. PETROU. Okay.
    Mr. FRANK. I was skeptical, to be honest, because it sounded to me like the kind of argument you throw in. If you have, I would be willing—I take it back. Send me your anecdotes. I will even be prepared to look at those.
    Mr. PETROU. Okay.
    [The following information can be found on page 123 in the appendix.]
    Mr. FRANK. I will not even put them at the bottom of the page, like the Reader's Digest. I will read them up on the top.
    But I am skeptical that there is any significant evidence of the FHA loan limits pushing up home prices.
    You also say that, quite correctly, these higher loan limits will not do anything to help low- and moderate-income families obtain mortgages. As I said, I agree.
    It will not combat cancer. And it will not clean up the rivers. And it will not make America more secure against enemies foreign and domestic.
    I freely concede, most bills do not do most things. They tend to do one thing.
    But I am interested in your interest—I infer from this—in helping low- and moderate-income families obtain mortgages. Could you tell me some of the previous proposals you have put forward that would be helpful here? I mean, since you have raised the subject, what have you recommended or would you recommend that we do to help low- and moderate-income families obtain mortgages?
    Mr. PETROU. I actually testified in front of this committee a few months ago on the zero down payment program.
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    Mr. FRANK. Okay, we have already done that one. As you know, the committee has already voted that. And we are going to do that.
    So anything else besides that?
    Mr. PETROU. Well, I have worked with my clients on a variety of private sector affordable housing programs.
    Mr. FRANK. Well, I understand. But you are here testifying in Congress. Are there other things we could do to help them?
    I mean, I welcome your interest in this. I spend a lot of time on it. I appreciate that you were for the zero down payment, which we have done. Are there any other proposals you would make to help low- and moderate-income families obtain mortgages?
    Mr. PETROU. I actually do believe that if you income targeted FHA, you would see, when the lenders and the builders and the realtors realize that it is in a particular area income targeted, there will be some creative work on the part of programs.
    Mr. FRANK. Well, let's see how that works. When you income target, at what level would you income target?
    Mr. PETROU. That would vary to the area. I would let community groups and others determine and come and testify and talk to HUD about what the income target——
    Mr. FRANK. That is a fascinating legislative process we have here. Congress would pass a statute with different income limits in different parts of the country?
    Mr. PETROU. Yes.
    Mr. FRANK. Would they be different income limits—you were talking before—as percents of the median. Obviously, you have different median incomes. But would you have varying percentages of the median in different parts of the country.
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    Mr. PETROU. I think there are several ways you could do it.
    Mr. FRANK. But you would have different percentages of the median?
    Mr. PETROU. Yes.
    Mr. FRANK. How will the areas be? Will there be standard metropolitan statistical areas or states or counties?
    Mr. PETROU. I would do it on median area income. You can do it on census tract if you wanted to get down to that area.
    Mr. FRANK. So you would have FHA have different percentages of median incomes by census tract?
    Mr. PETROU. Well, right now they have different loan amounts tied to home price. And that is dramatically different.
    Mr. FRANK. I understand. But what is the political body by census tract? You said we would have community groups decide. Would Congress sign off on this?
    We have not been that busy lately. You have given us a lot of work to do. I am just fascinated.
    Mr. PETROU. Congress also did not—you know, they told HUD to go to 95 percent.
    Mr. FRANK. No, let's not change the subject. I welcome your interest in helping low- and moderate-income. I have to be honest with you. I mean, a lot of people, when we were talking about this bill, who said, ''Well, what about the poor people?''
    To be honest with you, much of the time when I am trying to help the poor people, a lot of these people are not around. So now that they have dropped in and now that they have this somewhat fortuitous interest in helping the poor people, I want to make hay while the sun shines. So I would like you to tell me how we do that.
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    You are not seriously suggesting that by census tract, we have local groups recommend there would be 85 percent of the median in one census tract and 95 percent in the adjoining census tract?
    Mr. PETROU. Well, as you know, in some areas of the country, gentrification is an issue, especially in the inner city. And there are community groups that are very concerned that if you raise limits, if you target higher income people, you destroy the nature of the——
    Mr. FRANK. So you would allow people in the census tract to tell the federal government to keep the income level for FHA down in that area and not in other areas? See, here is the problem. What about people who want to gentrify? They would be allowed to go up?
    Mr. PETROU. I think basically you could have a situation in which you would have a standard—you know, targeted to the MSA median income, but with exceptions for areas where people come in and appeal to HUD. I would think an affordable housing group should be allowed to appeal to HUD.
    Mr. FRANK. To lower the percentage of income in a particular area?
    Mr. PETROU. Yes.
    Mr. FRANK. Okay. And what would the general level be, percent of median?
    Mr. PETROU. That would be something for Congress to determine.
    Mr. FRANK. Well, excuse me, but you are here recommending to Congress. That does not work.
    Mr. PETROU. Okay.
    Mr. FRANK. I mean, you cannot come here as a witness to tell Congress what to do—which is a privilege of American citizens—and then say, ''Oh, but you do it.'' It is your idea.
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    Because we have very radical differences. You have 70 percent of median, 80 percent, 100 percent. I mean, this is not a detail. This is the heart of the issue.
    Mr. PETROU. I would start at 100 percent of area median income.
    Mr. FRANK. Okay. But now let me just ask you a last question—100 percent of area median income, but would there then be a limit at 100 percent of median income on the price that they could get of the house? Or would you——
    Mr. PETROU. No, it is totally determined by the market.
    Mr. FRANK. So you would just leave that? So at 100 percent of median income, if they can sort of work it out, they could go as high as they could show someone they could afford.
    Mr. PETROU. Exactly.
    Mr. FRANK. Okay. Thank you, Mr. Chairman.
    Mr. CLAY. Thank you, Mr. Chairman. And I guess this question would be for the entire panel. Earlier today, HUD testified that the passage of this bill would be unfair to private sector lending institutions.
    And I just wanted to know: do you share? I mean, do you agree or disagree with this position? And explain for me in detail, if you could.
    We will start with you, Mrs. Thompson.
    Ms. THOMPSON. We are all for competition. And we think that it will not be harmful to the private sector. In fact, the very lenders you are talking about are the lenders that make the Mortgage Revenue Bond loans that our agencies issue bonds to finance. So we are not concerned about that.
    Mr. CLAY. Okay. Thank you.
    Mr. Petrou?
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    Mr. PETROU. Actually, I would probably say it probably would, as currently written, harm some lenders. I am more concerned about the harm it would do to the FHA insurance program in the event of an economic downturn.
    Mr. CLAY. Thank you.
    Mr. NOTHAFT. No, it is not unfair. It gives more options, more loan products for consumers to choose from. And anything that does that, I think helps to expand the market.
    Mr. CLAY. Thank you.
    Mr. KEMPNER. I would not use the word ''unfair.'' We are very sympathetic to the bill. But we want to make sure that we know all of the consequences, especially of raising the limit above the conforming line.
    As all of you know, especially Congressman Frank, a key issue now in the GSE debate is the affordable housing goals. And there are all kinds of cross currents, ripples. A term that keeps coming up is ''unintended consequences.''
    So as the mortgage bankers, we are quite comfortable going up to the conforming limit 100 percent. But after that, in our institutional gut, we start getting a little concerned that we do not fully understand, fully appreciate what those ripples are.
    Mr. FRANK. Will the gentleman yield to me? I think the chairman would give him an extra minute, if he would.
    Let me just follow up with this. This is a legitimate concern. But I really have a serious question here. Is your concern about our going above the conforming loan limits the FHA effect or the bootstrapping effect it might have and then the conforming loan limits might come up after it?
    If you knew that we were going to do this and never raise the conforming loan limits for Fannie and Freddie to catch up, would you have the same concern?
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    Mr. KEMPNER. The honest answer is that we do not know. There is a lot swirling around.
    Mr. FRANK. That is not only an honest answer, it is the most honest answer I ever got.
    Mr. KEMPNER. Well, the fact is that our notion is that we would like to study it more. And we do not mean that as a way of just pushing this away because we are very sympathetic to the bill and we applaud you for proposing it. But there is so much going on here, especially in that, the interplay between the GSEs, affordable housing and FHA and the consequences on FHA.
    We cannot give you an honest answer at this point.
    Mr. FRANK. Excuse me? And I think the chairman will accommodate me.
    But there is an interplay between theoretically the jumbo—the conforming loan limits at Fannie and Freddie and Fannie and Freddie's housing goals. I do not see an interplay between the FHA loan limit and the affordable housing goals for Fannie and Freddie, unless you implicitly assume that the conforming loan limits are going to follow the FHA limit up.
    What is the interconnection between the FHA limit and the affordable housing goals of Fannie and Freddie?
    Mr. KEMPNER. My understanding is depending on how aggressive those goals are, it will have definite possible rippling effects on FHA and its health. The jumbo market is quite different.
    And as people know, jumbo by definition is above conforming. It has definite characteristics that are not the same as the conventional market.
    And again, our honest answer, we have spent hours on this. We wanted to come forward and help the committee.
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    Mr. FRANK. I understand that. But just to pursue this a little, by definition we are talking about loans that would be above what Fannie and Freddie could do.
    And I do not understand how the FHA guaranteeing loans that are above what Fannie and Freddie can do can have an affect on the affordable housing goals of Fannie and Freddie, especially when they are expressed in percentages. I mean, they are just off their charts.
    That does not mean there are not issues here. But I do not see how they interact with the affordable housing goals.
    Mr. KEMPNER. I appreciate that. And again, I cannot tell you definitively what those are. But I can tell you that there are consequences.
    And our feeling is that the more time we would have to study it, in our institutional gut, we felt very comfortable coming up and applaud you coming up to 100 percent. But when you start going into by definition the jumbo market, we start getting queasy and at least want to spend time understanding.
    There are all kinds of cross currents. I can give you a couple of bullet points.
    Mr. FRANK. No, I am talking only about the affordable housing goals, not general ones. That was my only question.
    Mr. KEMPNER. I understand that.
    Mr. CLAY. Mr. Chairman, reclaiming my time.
    Mr. GARY G. MILLER OF CALIFORNIA. Mr. Clay, you have an additional four minutes, sir.
    Mr. CLAY. Thank you, Mr. Chairman.
    Mr. Hellyer, I will ask the same question: would this bill be unfair to private sector lending institutions?
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    Mr. HELLYER. No, I appreciate the opportunity to respond to that. I was wrestling with what I wanted to say while I was listening to the other witnesses here.
    And I think if I took that notion back to my realtor friends in Orange County, that we ought not have this bill because it would do harm to the lending community, they would find that amusing. Because the fact of the matter is there is not a product there right now that enables buyers in our area to do that. There is no existing product.
    Maybe if FHA provided it, maybe there would be more competition. But absent that, there is not. They are going elsewhere. They are having to commute to own a home.
    Mr. CLAY. Thank you.
    Mr. Eberhardt?
    Mr. EBERHARDT. Two answers. First of all, I fully agree with Glenn. It is important that you note that FHA is a guarantee. It is a guarantee of private mortgage insurance or mortgage insurance, not private, by the government.
    So if you are talking private sector versus public sector, the only real people that FHA is competing against is the private mortgage insurance companies. That is the private sector they are talking about because the money is being loaned by the lender irregardless.
    To answer Gary Miller's question to Mr. Nothaft, .25 percent is the difference between Fannie, Freddie and FHA. FHA is probably that much more expensive.
    Mr. CLAY. Okay, thank you.
    Mr. Berson?
    Mr. BERSON. I think we would welcome the opportunity to compete head to head, in a fair manner. I do not see unfairness in this at all, as long as the limits are similar between the conforming market and FHA.
    Mr. CLAY. Okay, let me start with you.
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    Mr. GARY G. MILLER OF CALIFORNIA. So we did ask the mortgage private group to come and testify. So they were invited, but they were not able to attend today for some reason.
    Mr. CLAY. Thank you, Mr. Chairman.
    Housing prices in the past few years have exponentially increased, faster than the increase in the number of low-income households. Would not the passing of this legislation result in relief for homebuyers in high-cost areas? And doesn't the current FHA ceiling preclude potential homebuyers in high-cost areas from participating in the zero down payment legislation that recently passed this committee?
    I will start with you, Mr. Berson.
    Mr. BERSON. We are in favor of policies that increase homeownership. Because in high-cost areas, prices have gone up so much faster than income, you have excluded—and not just in the FHA market, but in the conforming market as well—a substantial number of households from participating in the market. Proposals that would reinclude them we think would be good policy.
    Mr. CLAY. Thank you.
    Anybody else on the panel want to take a stab at it?
    Mrs. Thompson?
    Ms. THOMPSON. Yes. This proposal would only help. And I just want to emphasize, because I think it is so very important, that the greatest single producer of homeowners from a federal program perspective—the greatest two—are the Mortgage Revenue Bond and the FHA insurance program that often goes with it.
    So here you have a federal program, the Mortgage Revenue Bond program, that allows a certain income level person to participate and buy a home up to a certain level, but the insurance does not extend to that level. That just does not make sense.
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    I mean, to say that first-time homebuyers do not benefit from this, as the assistant secretary said, is simply wrong. The MRB program is only available to first-time homebuyers. It won't work everywhere, as you point out, Mr. Frank. There are places where homes are just unaffordable to MRB qualified first-time homebuyers.
    But there are many states—we think more than a dozen—where qualified MRB borrowers cannot buy the homes that Congress said they could buy—they are within the MRB limits—because they cannot get the other federal help, the FHA insurance. It is absurd.
    Mr. CLAY. Anyone else? Yes, sir?
    Mr. PETROU. I would like to address two points. The MRB is targeted to 115 percent of median family income in an area. And this is one of the issues you would get when you start talking about going over 100 percent of median family income.
    It is a special program. And whether or not there is a match, this is exactly the kind of thing where people could discuss with HUD whether 100 percent is appropriate or 115, et cetera.
    The second thing I would like to point to is the zero down payment program. I testified in favor of that program. But I made it quite clear that I thought it should be targeted only to low- and moderate income borrowers.
    I think the concept of the FHA insuring a $600,000 mortgage with no borrower equity is a pretty scary thought.
    Mr. CLAY. Thank you.
    Mr. FRANK. Would the gentleman yield? The zero down payment program does that, correct?
    Mr. PETROU. Correct.
    Mr. FRANK. Yes, not this though.
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    Mr. PETROU. No, not this.
    Mr. CLAY. Yes, that is on the zero down payment. Anyone else? If not, thank you very much for your answers.
    Mr. GARY G. MILLER OF CALIFORNIA. Are there any more closing questions, Mr. Frank or Mr. Clay? We will wrap this up.
    Mr. FRANK. Mr. Clay generously accommodated me and you he, so I am through.
    Mr. GARY G. MILLER OF CALIFORNIA. We are even. Okay.
    Well, I want to thank the witnesses today. You have provided a lot of good information. And this was a hearing for that purpose, to bring in the information. I have heard some very good points that I think Mr. Frank and I will take into consideration before this bill comes to markup.
    I would like to ask for unanimous consent that a statement be introduced in the record from the National Association of Homebuilders. Without objection.
    The chair notes that some members may additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.
    Thank you for attending our hearing. Meeting is adjourned.
    [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]