Panel 1 of a Hearing of the House Financial Services Committee- FHA Oversight of Loan Originators

PANEL I OF A HEARING OF THE HOUSE FINANCIAL SERVICES COMMITTEE
SUBJECT: FHA OVERSIGHT OF LOAN ORIGINATORS
CHAIRED BY: REP. BARNEY FRANK (D-MA)

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REP. LYNCH: I believe I'm next.

Thank you, Mr. Chairman. And I want to thank the witnesses for their patience today.

Mr. Murray, a long, long time ago, in your opening statement, you said that, in your opinion, the sky is not falling. And while that should be reassuring to the committee, over the previous months we've had a parade of stellar witnesses that have given us the same expression. I call to mind Secretary Paulson and Chairman Bernanke, who sat in that very same chair -- at that very same table and said that -- first of all, they said we had no problem. Secondly, they said we've got it contained. We heard from Fannie Mae and Freddie Mac that they were fine, in good shape going forward. So please forgive me for my skepticism.

But while the sky is not falling, the balance in the FHA Mutual Mortgage Insurance Fund certainly is. Would you agree?

MR. MURRAY: No, sir. Not necessarily so. It's --

REP. LYNCH: Well, I have numbers here that say that last year we had a balance of $21.2 billion and today we have a balance of $12 billion, a drop of 40 percent. That would be -- that would constitute a falling balance. Are we cool with that?

MR. MURRAY: No, sir. It's in an unencumbered reserve account. It's an accounting --

REP. LYNCH: I understand how you calculate it. They calculate a total. You calculated a total last year, and you calculated a total this year. And I know you're projecting losses in the future. But last year you projected -- let's see, 40 percent higher -- let's say -- you projected a 40 percent greater drop this year than you projected last year, using your own numbers.

MR. MURRAY: I'd have to say what I said -- stated earlier, that the actuarial and those sort of things are done out of our Office of Evaluation. That's well beyond my purview.

REP. LYNCH: Okay. Okay, let's go to Mr. Heist, then.

Hello, Mr. Heist. How are you? You're the inspector general, right?

MR. HEIST: Yes.

REP. LYNCH: You're familiar with this accounting?

MR. HEIST: Yes.

REP. LYNCH: Okay.

MR. HEIST: In some limited way, yes.

REP. LYNCH: Okay. By statute, the Mortgage -- the Mutual Mortgage Insurance Fund has to maintain at least a minimum 2 percent ratio between the balance in the fund and -- the projected balance in the fund and the --

MR. HEIST: Insurance.

REP. LYNCH: -- amount of FHA loans out there.

They were at 6.4 percent last year. They're at 3 percent this year after a 40 percent drop. Correct?

MR. HEIST: That's correct.

REP. LYNCH: Okay. Now, the data forecast that was used to project that is based on June 2008. Is that correct, Mr. Heist?

MR. HEIST: That's correct.

REP. LYNCH: Okay. I just want to say June 2008 is a significant date for the following reason. It was before IndyMac, that failure, which was mortgage related. It was before the government takeover of Fannie and Freddie. It's before Lehman went under, the largest single bankruptcy in the country in our history; the failure of AIG as a private entity. It was before Washington Mutual went under, which was the biggest thrift failure ever in this country. It was before the Citigruop bailout. It was before Morgan Stanley and Gold Sachs -- Goldman Sachs went out of the investment bank business. It was before Merrill Lynch collapsed and also the collapse of Wachovia. And it was before the unemployment rate went to 6.5 percent.

Now, all that considered, with all that data in front of us, Mr. Heist, based on all the available data, it is -- I am concerned about this. I think they're going to drop below 2 percent, and I think they're going to need a bailout from Congress.

And you're somebody who has looked at these numbers. Could you give me your opinion on this?

MR. HEIST: Oh, and in fact, the independent auditors who work for us, who did FHA's financial statements which were published the middle of November, said the same thing and expressed the same concern, that the assumptions that were used may be optimistic; and expressed the concern that capital ratio may indeed decline, at least towards 2 percent. And that is a concern.

REP. LYNCH: Okay. Mr. Murray, have you got anything to add to that? I understand it's a different department within FHA and a different -- and a different team, but the numbers are what they are. Can you persuade me that we're not going to approach that 2 percent?

MR. MURRAY: No, sir. I'm sorry, I couldn't do that.

REP. LYNCH: Okay. All right.

Mr. Chairman, I yield back. Thank you.

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