[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
STRENGTHENING OVERSIGHT AND
PREVENTING FRAUD IN FHA AND
OTHER HUD PROGRAMS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 18, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-46
U.S. GOVERNMENT PRINTING OFFICE
52-402 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
DENNIS MOORE, Kansas, Chairman
STEPHEN F. LYNCH, Massachusetts JUDY BIGGERT, Illinois
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California RON PAUL, Texas
GWEN MOORE, Wisconsin MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida
C O N T E N T S
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Page
Hearing held on:
June 18, 2009................................................ 1
Appendix:
June 18, 2009................................................ 17
WITNESSES
Thursday, June 18, 2009
Berenbaum, David, Executive Vice President, National Community
Reinvestment Coalition......................................... 11
Donohue, Kenneth M., Sr., Inspector General, U.S. Department of
Housing and Urban Development.................................. 5
Kittle, David G., CMB, Chairman, Mortgage Bankers Association.... 9
Nunnink, Kevin K., Chairman, IRR-Residential, LLC, and Chairman,
Integra Realty Resources....................................... 7
Pellegrini, Frank, President, Prairie Title, on behalf of the
American Land Title Association (ALTA)......................... 8
Savitt, Marc, CRMS, President, National Association of Mortgage
Brokers........................................................ 10
APPENDIX
Prepared statements:
Moore, Hon. Dennis........................................... 18
Berenbaum, David............................................. 20
Donohue, Kenneth M., Sr...................................... 39
Kittle, David G.............................................. 58
Nunnink, Kevin K............................................. 67
Pellegrini, Frank............................................ 69
Savitt, Marc................................................. 85
Additional Material Submitted for the Record
Moore, Hon. Dennis:
Written statement of the U.S. Department of Housing and Urban
Development................................................ 95
Written statement of the National Association of Realtors.... 100
STRENGTHENING OVERSIGHT AND
PREVENTING FRAUD IN FHA AND
OTHER HUD PROGRAMS
----------
Thursday, June 18, 2009
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Dennis Moore
[chairman of the subcommittee] presiding.
Members present: Representatives Moore, Lynch; and Biggert.
Also present: Representative Posey.
Chairman Moore of Kansas. Good morning. Welcome to the
Committee on Financial Services, Subcommittee on Oversight and
Investigations. This subcommittee will come to order.
Our hearing this morning is entitled, ``Strengthening
Oversight and Preventing Fraud in FHA and other HUD Programs.''
I would like to welcome my distinguished colleague and the
ranking member, Judy Biggert, Congresswoman Biggert. And we
might have some other people show up, but we just got word that
there are going to be 28 votes in about 15 or 20 minutes. So I
doubt that we can get all of this in, in the next few minutes,
but we will move as quickly as we can here.
I would like to start my opening statement if that is all
right. And if there is time for Mrs. Biggert to complete her
opening statement, then so be it.
This hearing of the Subcommittee on Oversight and
Investigations of the House Financial Services Committee will
come to order. Our hearing this morning is entitled,
``Strengthening Oversight and Preventing Fraud in FHA and other
HUD Programs.''
We will begin this morning's subcommittee hearing with
members' opening statements, up to 10 minutes per side, and
then we will hear testimony from our witnesses. After that,
members will each have 5 minutes to question witnesses.
Without objection, all members' opening statements will be
made a part of the record.
Without objection, I ask that written testimony from the
Department of Housing and Urban Development and the National
Association of Realtors be entered into the record.
I now recognize myself for up to 5 minutes for an opening
statement.
On April 27th, I hosted a press conference at the Federal
Courthouse in Kansas City, Kansas, with Missouri Attorney
General Chris Koster, Kansas Attorney General Steve Six, as
well as the local FBI Supervisory Special Agent and a Special
Agent from the Office of the Inspector General from HUD. At
that event, our goal was to raise public awareness of the
mortgage fraud schemes that have been going on.
In the current economic environment, too many homeowners
are encountering significant difficulty in making their
mortgage payments. Too many are at risk of losing their homes.
There are a number of great people and resources out there to
help homeowners work with their lenders so they can meet their
mortgage obligations. Unfortunately, as a former district
attorney, I know all too well there are also people out there
who will exploit weakness and prey on the fear of others.
Over the last few months, we have seen an increase in the
number of fraudulent mortgage loan schemes that take advantage
of those homeowners in desperate situations. Under the pretense
of helping homeowners modify their mortgage obligations, these
schemes result in the loss of money, equity, and in many cases
the home itself. We often think of robbery as taking place with
a knife or a gun, but these thieves instead come with a smile,
a handshake, and a ballpoint pen, ultimately leaving a family
in deeper trouble.
Through my role as chairman of the Financial Services
Oversight and Investigations Subcommittee, I am determined to
ensure that local, State, and Federal law enforcement agencies
have all the resources and tools they need to prosecute these
horrible thieves. That is why I was a cosponsor of the Fight
Fraud Act, which was renamed the Fraud Enforcement and Recovery
Act by the Senate.
No matter what you call it, this legislation is important.
It strengthens the accountability standards for financial,
mortgage lending, and securities agents and institutions, and
authorizes additional funds for the Department of Justice, the
FBI, HUD's Inspector General, and other Federal agencies so
they can hire the investigators they need to examine and
prosecute fraudulent activity.
Ranking Member Judy Biggert was a lead sponsor of the bill
as well, and I would like to commend her for all the work she
has done over the years fighting mortgage fraud. I am sure she
shares my sentiment that I was pleased when President Obama
signed this important legislation into law.
One of the issues we will be focusing on today as we
consider strong oversight of HUD is the role of FHA and its
rapid expansion of lending in the mortgage market. Even after
the subprime market collapse, FHA has continued to provide
mortgage credit to responsible borrowers. But we must be
vigilant to ensure that the same bad actors who contributed to
the housing crisis don't make their way into the FHA program.
In addition to the Fraud Enforcement and Recovery Act,
President Obama also signed into law the Helping Families Save
Their Homes Act. These two new laws improve FHA requirements
and give the FHA more authority to keep bad actors out of the
FHA program and provide additional enforcement tools to police
those lenders who employ false or misleading tactics. In fact,
just last week HUD announced they suspended three lenders from
the FHA based on evidence of serious violations under HUD's
regulations.
Another area of concern is the use of reverse mortgages
that are primarily used by seniors. I agree with the
Comptroller of the Currency, John Dugan, who recently raised a
red flag on these reverse mortgages and noted that closer
Federal oversight may be necessary to protect the FHA and
homeowners.
I am also interested in learning more about the need for
accurate and independent appraisals, and the role appraisals
currently play with respect to FHA-insured loans.
If there is one lesson we have learned from the financial
crisis, it is that we need to eliminate conflicts of interest
and strengthen the integrity of any valuation process,
everything from credit rating agencies to appraisals. I look
forward to hearing from our witnesses on these and other
important oversight issues.
I will conclude my remarks by reminding everyone to be on
high alert for mortgage fraud. If you or someone you know is
suspicious of or unsure if someone is legitimately trying to
help, please contact local law enforcement and let them know so
they can investigate. It is imperative that we protect
ourselves, our neighbors, and put those people preying on the
victims of this housing crisis behind bars.
I now recognize our distinguished ranking member of the
subcommittee, my colleague and friend from Illinois, Mrs.
Biggert.
Mrs. Biggert. Thank you very much, Chairman Moore, and
thank you for scheduling this hearing today on mortgage fraud.
Some years ago, the Chicago Tribune published a series that
revealed that gangs in the Chicago area were increasingly
turning to mortgage fraud. They found it easier and more
lucrative, believe it or not, than selling drugs. And it turns
out that the gangs were not alone. Everyone, it seems, was in
on the act.
Earlier this year, a U.S. attorney in Chicago, Patrick
Fitzgerald, brought mortgage fraud indictments against two
dozen players. They are brokers, accountants, loan officers,
and processors and attorneys. So mortgage fraud comes in all
sizes and shapes. Scam artists inflate appraisals, flip
properties, and lie about information, including income and
identity on loan applications. Some use the identity of
deceased persons to obtain mortgages. And other desperate
thieves bilked the most vulnerable homeowners and seniors in
dire financial straits out of their homes and home equity.
Let's face it; I think this is just the tip of the iceberg.
And as we in Congress work to get the economy back on track and
credit flowing again, we have to address what was the root of
the mortgage meltdown in the first place, and that was mortgage
fraud. Mortgage fraud is at the root of the meltdown that has
undermined our housing market and contributed to this economic
downturn.
To restore confidence in the home buying process, it is
critical that we provide our investigators and prosecutors the
tools and resources that they require to accomplish their
mission and put bad actors behind bars.
As a former real estate attorney, and a member of the House
Committee on Financial Services, I have seen firsthand the
devastating effect of mortgage fraud. It has plagued our
financial system and economy. Most tragically, it has cost
millions of American families their houses, and required
taxpayers to commit trillions of their hard-earned dollars to
prop up the financial industry. It is just not fair to the good
actors in the industry and the 90 percent of homeowners who are
paying their mortgages on time.
According to the FBI, its mortgage fraud caseload increased
by 237 percent in the last 5 years, and investigations more
than doubled in 3 years. During a 12-month period ending in
2008, mortgage fraud reports increased by 44 percent, reaching
over 63,000 reports, with predictions of up to $25 billion in
losses.
That said, I am not surprised that, with FHA's significant
increase in market share, that fraud has quickly followed. And
I did introduce several bills, starting in 2007. Several passed
the House, and then went over to the Senate, where somehow they
got lost. And so we kept introducing and introducing, and
finally went to the Judiciary Committee, and put the mortgage
fraud into a bill that was introduced by Chairman Conyers and
Chairman Moore and other members. And this was H.R. 1748, the
Fight Fraud Act, which was the House version of Senate 386. And
with that, we both had the ability to go to the White House
while this bill was signed into law by the President.
So as we work to pinhole loopholes and close them as we
work to modernize the financial laws and regulations, it is
also our duty to supply Federal law enforcement with the tools
and resources that they need. And in addition, I think it is
critical that we hold a hearing to learn more about the kinds
of technology that can be used to increase transparency in the
mortgage process to quickly flag illegal activity and apprehend
the perpetrators.
So, Chairman Moore, I would really like to request that we
hold a hearing on technology, which I think would be helpful to
this. By increasing the transparency in the process through
technology, this would help.
So with that, I would like to thank today's witnesses and
my colleagues on the committee for their commitment to one of
the most important issues today.
Chairman Moore of Kansas. Thank you to my ranking member.
And I really appreciate her service on the committee and the
insight she brings to this.
I want to say, very quickly here, we have received some
unpleasant information, which is that at about 10:15, 28 votes
are going to be called. I don't know, this was not planned, we
certainly didn't know about this, but I want to introduce at
least three of the witnesses who traveled here first. And we
may have to take written testimony from the others. If we are
going to be gone for 2 hours over there voting, which may be
the case, seriously--I would love to say differently--but the
problem is that Secretary Geithner is coming at 1 p.m., so we
need to be ready for him.
I want to introduce Mr. Kenneth Donohue, the Inspector
General for the Department of Housing and Urban Development.
During the savings and loan crisis, Mr. Donohue served as
Assistant Director in the Office of Investigations in the RTC.
And I am going to shorten the introductions right now, and
I hope all the witnesses understand. I am not trying to slight
anybody, but we have to move along here.
Mr. Kevin Nunnink--I invited him--who is chairman of the
IRR-Residential and chairman, Integra Realty Resources, is from
Kansas, and he will be testifying as well.
We are going to ask Mr. Pellegrini to testify. And would
you like to introduce Mr. Pellegrini very quickly?
Mrs. Biggert. Yes. I would like to welcome from Chicago a
fellow lawyer, Mr. Frank Pellegrini. He is the founder,
president, and chief executive officer of Prairie Title
Services in Oak Park, and serves many of my constituents in the
13th Congressional District. And he is a principal of the law
firm of Pellegrini and Cristiano, a general practice firm that
specializes in real property law, business formation and
counseling, and estate planning. Welcome.
Chairman Moore of Kansas. Thank you. I am not going to
introduce the other witnesses right now, and I apologize for
that. I am not trying to slight anybody, but I hope you
understand. We want to get moving here so we can move as
quickly as possible. Without objection, the written statements
of all the witnesses will be made a part of the record. You
will each be recognized for a 5-minute statement. We are going
to start with you, Mr. Donohue.
And please, I am not trying to slight the other witnesses
by not introducing you, but I hope you understand why I am
doing this.
Mr. Donohue, please. You have 5 minutes, sir.
STATEMENT OF KENNETH M. DONOHUE, SR., INSPECTOR GENERAL, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Donohue. Thank you, Chairman Moore, Ranking Member
Biggert, and members of the subcommittee. I appreciate the
opportunity to testify on the role of FHA in addressing the
housing crisis, as well as other HUD-related topics. Through
our work in auditing and investigating many facets of the FHA
program over the course of many years, we have had concerns
regarding FHA's systems and infrastructure to adequately
perform its current requirements. This was expressed by the OIG
to the FHA prior to the current influx of loans and to the
numerous proposals that expand its reach. We remain keenly
interested in FHA's ability and capacity to oversee newly
generated businesses.
The past year-and-a-half have certainly produced a lot of
changes. With the collapse of the subprime market, FHA has seen
a dramatic increase in new businesses. The Housing and Economic
Recovery Act created a program to enable FHA to refinance the
mortgages of at-risk borrowers and authorize changes to the
Home Equity Conversion Mortgage program that will enable more
seniors to tap into their home equity. The volume of single-
family loans has increased by a tripling from $59 billion in
2007 to over $180 billion in 2008. FHA's share of insured
endorsements has increased from 24 percent to 63 percent, which
includes home sales and refinances.
Though HUD is hiring some new personnel, we believe there
is a critical need for more resources for FHA to enhance its IT
systems, to increase its personnel to deal with escalating and
processing requirements, to increase its training to maintain
the workforce with the necessary skills, to oversee the
numerous contractors it maintains, and to increase its
oversight of all critical front-end issues, including areas
such as the appraisal and underwriting process.
We are gratified the new penalty provision we helped craft
was inserted into the HERA bill. The statute now creates a
penalty for committing fraud against FHA programs, and it will
be a useful tool for prosecutors and the law enforcement
community to employ.
We are also very pleased that many of the provisions we
advocated to Congress to improve internal control process and
enhance penalties were incorporated both in the Fraud
Enforcement and Recovery Act and the Helping Families Save
Their Home Act.
The Secretary also announced a number of new
transformations, initiatives designed to address some of the
concerns we are raising. The results of the last actuarial
study shows that HUD has sustained significant losses in its
single family program, making a robust program's reserves
smaller. As of September 30, 2008, the fund's economic value
was an estimated $12.9 billion, an almost 40 percent drop from
over $21 billion the year before. That represents 3 percent of
the mortgages insured by the FHA. Although above the 2 percent
ratio required by law, it is well below the 6.4 percent ratio
at the same time last year.
If more pessimistic assumptions are factored in, the ratio
could dip below 2 percent in succeeding years, requiring an
increase in premiums or congressional appropriations
intervention to make up the shortfall.
As the Department is in the process of reforming its annual
actuarial reviews, it is critical that assumptions used to
drive the current estimates of the health of the fund be
supportable.
Among many different areas we have reviewed, we have found
the FHA needs to improve its internal control structure. Our
audit over the FHA appraisal roster identified weaknesses in
the quality control review and the monitoring of that roster.
Results from a number of other audits have noted significant
lender underwriting deficiencies and other operational
irregularities.
The tightening credit market has increased FHA's position
as a loan insurer. And with that is coming increases in lender-
brokers seeking to do business with the Federal program, and a
concern regarding some of these loan originators.
For example, we currently have under investigation several
FHA lenders who were also lenders in the subprime market. FHA
lender approval increases 525 percent in the last 2-year
period. Newly signed legislation mandates an enhanced
eligibility approval process, and we look forward to its
implementation.
We recently completed inspection of the Mortgage Review
Board enforcement action and its effectiveness in resolving
cases of serious noncompliance with FHA regulations,
particularly during this period of significant change in the
housing market. Again, the new legislation contains some
provisions to strengthen this board, an important
recommendation from our inspection.
Another area of concern is the growing HECM, or reverse
mortgage program. We are aware that the larger loan limits can
be attractive to exploiters of the elderly, whether it be by
third parties, or even family members who seek to strip equity
from seniors. Due to the vulnerability of the population this
program serves, we are also concerned about evasion of
statutory counseling requirements.
Finally, since you are about to undertake financial
regulatory reform shortly, I think it is important to raise a
few issues. The fact that our nationwide mortgage lending
system is fragmented, with separate players embracing different
requirements, creates opportunities for waste, fraud, and abuse
that a more unified approach could potentially mitigate. We
think it would be beneficial for the FHA to come together more
significantly, in a unified lender oversight consortium with
Fannie Mae, Freddie Mac, the FDIC, and Ginnie Mae, in order to
create standardized forms.
Chairman Moore of Kansas. Excuse me, Mr. Donohue. I
apologize. We are going to have to wind up, and your written
statement will be made a part of the record. I am going to move
on to the other two witnesses and then to the other three for a
brief statement as well, if that is okay. And I apologize for
this. This was not planned at all.
[The prepared statement of Inspector General Donohue can be
found on page 39 of the appendix.]
Chairman Moore of Kansas. At this point, the Chair
recognizes Mr. Nunnink. And everybody's statements will be made
part of this record.
STATEMENT OF KEVIN K. NUNNINK, CHAIRMAN, IRR-RESIDENTIAL, LLC,
AND CHAIRMAN, INTEGRA REALTY RESOURCES
Mr. Nunnink. Thank you. Chairman Moore, Ranking Member
Biggert, and members of the subcommittee, thank you for
inviting me to testify today.
As a real estate appraiser for 30 years, I appreciate this
opportunity to speak on an important topic critical to
restoring the confidence in the real estate mortgage industry.
I am chairman of both Integra Realty Resources and IRR-
Residential, and we have a thousand licensed appraisers working
throughout the United States.
Sound mortgage underwriting includes two separate but
equally important components: First, a borrower's ability to
pay as evidenced by their income and credit score; and second,
sufficient value of the real estate to support the loan type,
as evidenced by the appraised value. It should be noted that of
all the professionals involved in the mortgage origination
process, the appraiser is frequently the only professional who
visits the property implicitly for the purpose of providing due
diligence for their lender client. He inspects the property and
makes sure the property has sufficient value to support the
intended loan. Appraisers are licensed and professionally
trained to value real estate, and must meet education and
experience requirements.
Appraiser separation is particularly important in today's
mortgage industry, where virtually all mortgage originators
sell their mortgage paper to the secondary market, and thereby
hold minimal long-term risk.
An independent appraiser makes it much more difficult to
initiate mortgage fraud. An independent appraiser serves as the
safeguard for the protection of the current and future parties
to the loan transaction, including the borrower, the
originating lender, the secondary market participant, and as we
are now seeing, the taxpayer.
Any effort to circumvent the independence of the appraised
value heightens mortgage risk. Because of the housing slump and
corresponding disruption in the credit markets over the past
couple of years, there have been a number of initiatives,
legislatively and by regulation, increasing the separation
between the contingent fee real estate mortgage professional
and the appraisal process. We support those efforts.
Congress appropriately restricted this type of influence in
FIRREA in 1989, but because mortgage bankers and brokers were
not regulated by the FDIC, they did not have to provide
separation between the appraisal process and the mortgage
originator. The Fraud Enforcement and Recovery Act of 2009
appropriately provided further regulation upon these
nontraditional bank lenders.
There have been two structural conflicts of interest in the
appraisal process: one, loan originators selecting and
regulating the volume of work to the appraiser; and two, real
estate mortgage companies providing bundled services, including
appraisal, whose primary goal is to drive EBITDA, is contingent
upon a successful loan closing. In both cases emphasis is upon
the loans, not protecting the independence of the appraisal
process.
We were disappointed when the final version of the Home
Valuation Code of Conduct gave a pass to those companies,
lender-owned or not, that also provide title insurance, loan
closing services, etc. In those cases, the company's ability to
receive the title and closing fees is contingent upon the loan
going forward, which in part is conditioned upon the appraised
value process they manage, and an inherent conflict of
interest.
Chairman Moore of Kansas. Excuse me, Mr. Nunnink. I
apologize, but we are going to have to wind up with that. And
we will receive your written statement in the record.
Mr. Nunnink. Thank you, Mr. Chairman.
[The prepared statement of Mr. Nunnink can be found on page
67 of the appendix.]
Chairman Moore of Kansas. And I want to recognize the other
witness who traveled to come here. Then we are going to take 2-
or 3-minute statements from each of the other witnesses if we
have time. Votes have not yet been called yet.
Mr. Pellegrini, if you would please. And again, please
forgive this. We did not plan it this way.
STATEMENT OF FRANK PELLEGRINI, PRESIDENT, PRAIRIE TITLE, ON
BEHALF OF THE AMERICAN LAND TITLE ASSOCIATION (ALTA)
Mr. Pellegrini. Thank you, Mr. Chairman. Good morning,
Ranking Member Biggert, and distinguished subcommittee members.
I am a member of the board of governors of the American Land
Title Association, which I am here today to represent.
ALTA is the national association for the title industry,
representing nearly 3,000 member companies, with more than
100,000 employees, including title insurers, title insurance
agents, abstracters, and attorneys that operate in every State
and county throughout the United States.
In my hometown of Chicago, as in many large urban areas,
the proliferation of mortgage fraud activities is particularly
disturbing. As Mrs. Biggert pointed out, the profile of the
typical Chicago gang leader has evolved into a picture of a
graying, suburban technology-friendly convict overseeing
operations as diverse as mortgage fraud and drug dealing.
This form of criminal activity is spreading. Fraud, in
fact, is the second leading cause of title claims, so we track
it very closely. Our experience dictates that mortgage fraud
schemes change with the economy. In a more robust economy, we
witnessed that claims involve inflated values. As prices have
fallen and equity has dried up, we now see loan-slamming
claims. Additionally, with large numbers of mortgage defaults,
short-sale mortgage fraud claims are becoming more prevalent.
Title professionals enjoy a unique vantage point from which
to observe, identify, and thwart instances of fraud. We are the
independent third party to the transaction, whose only interest
is to the integrity of the transaction and the protection of
our customers. Through training and experience, we hone our
ability to spot improper transactions every day. We look for a
number of mortgage fraud indicators, including earnest money
deposit that comes from someone other than the borrower, or
lack of information about the source of the deposit; similar
carry-back documents that are not being disclosed to the
lender; payments to third parties that will not appear on the
HUD settlement statement; wide swings in the mortgage amount;
recent sales with increases in price, and checks to others at
closing, which could be a sign of flipping; substitution of
sales contract for a higher amount; the signing of blank
documents, and changes or increases in the purchase price.
As settlement service providers, we prevent fraud by
carefully checking identification. In fact, we know of a case
in which a caregiver stole the information of an elderly
gentleman whom he worked for by merely acquiring the driver's
license and replacing the picture on it. The caregiver then
applied for a mortgage refinance and walked away with $65,000.
In this case, a check of the birth date would have been a tip-
off that something was wrong. We also prevent fraud by knowing
our customers.
Chairman Moore of Kansas. Mr. Pellegrini, I apologize to
you, too. If we can, we are going to give each of the other
witnesses 2 minutes to try to summarize their testimony. Then
we are going to start with some questions. All of your written
statements will be received for the record.
[The prepared statement of Mr. Pellegrini can be found on
page 69 of the appendix.]
Chairman Moore of Kansas. Mr. Kittle. And again, please
accept our apologies. Mr. Kittle, if you would, please, sir.
STATEMENT OF DAVID G. KITTLE, CMB, CHAIRMAN, MORTGAGE BANKERS
ASSOCIATION
Mr. Kittle. Thank you, Mr. Chairman.
FHA is a program that is vital to the American home buyers.
It is one that is important to me personally, as I purchased my
first home in 1978 with the FHA program. Currently, FHA is
experiencing a rebirth, and I want to preface my remarks this
morning with a direct appeal to Congress that if we don't take
this opportunity to be proactive and get FHA the resources it
needs, the recent reemergence of FHA won't last long. We have a
chance to prevent future problems, and we must start today.
First and foremost, we need to give FHA the resources it
needs to operate in an increasingly nimble and high-tech real
estate finance industry. Its market share has risen from 3 to
30 percent virtually overnight, but it is still hampered by
outdated technology, and its staff is stretched dangerously
thin.
The solution is fairly straightforward. Under HERA,
Congress has already authorized $25 million per year for
staffing and technology upgrades. We now need to work together
to make sure this funding is appropriated.
We also need to make sure Ginnie Mae has the resources it
needs to keep pace with the spike in government lending. From
2007 to 2008, its issuance has increased from $85 billion to
$221 billion, with a staff of 65. That needs to be increased to
at least 90. Currently, FHA requires mortgagees to have a
minimum net worth of $250,000 in order to be qualified to
underwrite FHA loans. Brokers must have a net worth of $63,000.
MBA believes that both these standards should be increased to
make these industries more accountable.
Specifically, we recommend mortgage bankers should have a
minimum corporate net worth of the greater of $500,000 or 1
percent of FHA loans, up to a maximum of $1.5 million. Mortgage
brokers should have a minimum corporate net worth of $150,000,
with half of 1 percent of their loan volume, up to the minimum
of the mortgage bankers.
Finally, Congress needs to address FHA's loan limits which
are scheduled to expire January 1st. The markets crave
certainty, and this is not the time to be reducing loan limits.
We support permanently raising FHA loan limits to $625,500, and
allowing it to go to $729,750 in high-cost areas.
Now is the time for Congress to improve resources for these
agencies in order to prevent problems from occurring in the
future. Thank you.
Chairman Moore of Kansas. Thank you, Mr. Kittle, for
summing up so quickly.
[The prepared statement of Mr. Kittle can be found on page
58 of the appendix.]
Chairman Moore of Kansas. Mr. Savitt, if you would, please.
STATEMENT OF MARC SAVITT, CRMS, PRESIDENT, NATIONAL ASSOCIATION
OF MORTGAGE BROKERS
Mr. Savitt. Good morning, Mr. Chairman, Ranking Member
Biggert. As a Main Street mortgage professional for the past 28
years, I am here to inform you that our fragile housing market
is once again on the verge of collapse. This time it has
nothing to do with exotic programs or high interest rates,
although it does involve serious acts of misconduct.
The country's largest providers of mortgage financing,
Fannie Mae and Freddie Mac, have seriously strayed from their
chartered missions, aided by the New York Attorney General,
Andrew Cuomo. At issue here is the Home Valuation Code of
Conduct, known as the HVCC.
In 2007, the Attorney General began an investigation of
Washington Mutual and an unregulated appraisal management
company known as eAppraiseIT. His investigation also warranted
subpoenas of Fannie and Freddie, where certain information was
discovered in that investigation which the Attorney General has
refused to turn over. That investigation is now being
concluded.
As a result of that investigation, we now have the HVCC or
the Home Valuation Code of Conduct. The same failed and flawed
model that the Attorney General discovered all of this
misconduct is now the solution, or the supposed solution, for
the problem. And what we are seeing here is that the consumer
is being seriously harmed by this code.
We estimate that it is costing consumers conservatively
$2.8 billion a year in extra charges. This code has created
long delays in the mortgage financing process, which requires
extended lock-in fees the consumer pays for. Appraisals have
gone from anywhere from $150 to $300 more than their normal
costs. So what is involved here is serious expenses for the
consumer.
It is also hurting small business. Appraisers are being
paid approximately 60 percent of what they were being paid
before May 1st, when this code first went into effect. Mortgage
brokers do not have the ability to deal with the appraisers
that they have been dealing with. Years of business
relationships have been destroyed. And again, these are also
causing long delays.
We have several examples which we would like to submit for
the record of what this is doing to the American consumer. And
we see that if this code is not withdrawn shortly, we are going
to see even more serious consequences. Thank you.
Chairman Moore of Kansas. Thank you, Mr. Savitt.
[The prepared statement of Mr. Savitt can be found on page
85 of the appendix.]
Chairman Moore of Kansas. Mr. Berenbaum, sir.
STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT,
NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. Berenbaum. Mr. Chairman, thank you. Ms. Biggert, thank
you for having us here this morning.
I would like to start by taking strong exception to Mr.
Savitt's remarks with regard to the Home Valuation Code of
Conduct. We believe a strong HVCC that should be expanded to
reach FHA and VA loans is critical to protect the consumers'
interests. Quite candidly, lender pressure brought about
widescale overvaluation of properties. And today the opposite
issue of, in fact, lower prices through broker price opinions
are driving down values and impacting on the tax base around
the Nation.
Second, I would quickly like to make the point that we
strongly believe there is a need for additional regulation and
oversight in the FHA program and related government programs,
particularly with regard to the HECM program and the
proprietary products.
As a national HUD-certified counseling agency, we are
seeing widescale abuse of seniors at this moment in time who
are being victimized, as the Comptroller of the Currency noted,
by predatory practices in that area.
Third, we are about to release a report where we tested
over 200 providers of foreclosure prevention services. And we
completely agree with your remarks that in fact it is the Wild
West out there. What we are seeing is average fees of $2,900
for a service you can get for free from your servicer or a HUD-
certified counseling agency, coupled with widescale
misinformation.
Last, I would like to speak to some of the issues that we
are seeing right now with regard to fraud in the FHA program.
We do believe there is a need for greater staffing and
oversight within FHA, coupled with, in fact, the President's
announcement yesterday that there was a need for a consumer
financial protection agency. We know when there are CRA loans,
we know when there is responsible lending. Both consumer
protection and profit go hand-in-hand. And we hope that working
with this committee and each of you in the coming year we can
realize that environment. Thank you.
Chairman Moore of Kansas. Thank you, sir.
[The prepared statement of Mr. Berenbaum can be found on
page 20 of the appendix.]
Chairman Moore of Kansas. I thank the witnesses for their
statements. Again, I apologize for this. We are going to move
very quickly here. I am going to ask unanimous consent from
members present that each member have 2 minutes to ask a
question or ask questions. And we will alternate sides. We will
get in as many questions as we can, and follow up with written
questions.
And each of your testimony will be received, the written
statement, in the record, as well as what you have said here
today.
So we are going to start, I would like to ask the first
question. Mine for 2 minutes is Mr. Donohue. Judging from your
statements, your testimony, it sounds as if Congress has taken
some good steps with the Fraud Enforcement and Recovery Act,
but unless Congress provides the funding to follow through,
some of this is going to be for naught. Is that a fair
assessment of your testimony, sir?
Mr. Donohue. I do believe that, sir. I think it is very
important that the funding be addressed in this regard. And, in
fact, most recently the Secretary testified to the fact as far
as the need of additional IT funding for FHA as well as
staffing. They do have a need for staffing programs.
Chairman Moore of Kansas. Mr. Nunnink, do you have any
comments on that, sir?
Mr. Nunnink. I agree with that.
Chairman Moore of Kansas. All right. Do any other witnesses
have any other comments besides that they agree funding is
necessary for this? Any other comments?
Mr. Pellegrini. Mr. Chairman?
Chairman Moore of Kansas. Mr. Pellegrini?
Mr. Pellegrini. I would like to point out that--we believe
that Congress should require borrowers to receive their key
closing documents in advance of closing, a consumer protection
measure which is strongly encouraged and supported by HUD. This
would give the borrowers the early opportunity, and the closing
agents, to review those documents. And that would be a strong
way to thwart fraud.
Mr. Berenbaum. Mr. Chairman, I would also like to add we
would like to see HUD collaborating with the Federal Trade
Commission in the future on issues that are relevant to
marketing of products, misrepresentation, and fraud.
Chairman Moore of Kansas. Mr. Savitt or Mr. Kittle, any
comments, sir, either one of you?
Mr. Kittle. Well, only to the money issue. The money has
been authorized. We just want to make sure that it is
appropriated.
And I will give you a specific example. There are HUD
systems over there right now that are on a system called COBOL,
which is pre-DOS, which is pre-Windows 2003. And I think there
is only--and I am not making this up--three or four people left
alive who can work on the system if it breaks down. It is
incredibly antiquated. We can't talk to them as lenders. And if
you want to streamline it and save money, we have to
appropriate the funds.
Chairman Moore of Kansas. Thank you to the witnesses, and I
apologize. My time is up. I am going to yield 2 minutes now to
the ranking member, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman.
Mr. Pellegrini, you mentioned in your testimony that for
borrowers, and to root out fraud more effectively, it would be
helpful for consumers to have their completed closing documents
24 hours in advance of the closing.
Congresswoman Bean, in one of our markups on mortgages,
wanted to require that completed documents be presented to the
consumers 2 days in advance of the closing. That amendment was
withdrawn because there was some objection, but they are
working on it. It appears that the 24-hour requirement may be
more feasible. Would you just address that a little bit?
Mr. Pellegrini. Well, Congresswoman, the more time that we
can allow a borrower to examine documents and have them
available at the closing, or prior to the closing, would be
beneficial. We would support any bill that would allow a
greater amount of time to examine and go over and educate the
borrower on the loan process.
Mrs. Biggert. Sometimes I just remember that at the
closings everything was fine, but there might be something on
the title policy that hadn't been cleared yet, and then that
would mean that the closing took a little bit longer. Does that
still happen a lot? Let's say a fence is over the line and how
is that going to be resolved?
Mr. Pellegrini. Of course, those issues always present
themselves at the closing table. Often, the closing table is
not the culmination of the transaction; sometimes it is merely
the beginning of the transaction in some instances. But we find
those title issues to be in place in many situations. But
certainly the more preparation that can be done in advance
would certainly expedite the closing.
Mrs. Biggert. Thank you. And then I want to go to Mr.
Donohue. I am concerned about the seniors being victims of
fraud. How many actual complaints has your office received
about the HUD programs? Do you have the data or can you get it
for us?
Mr. Donohue. I can get the data for you. We have seen an
increase.
Chairman Moore of Kansas. Your microphone, sir?
Mr. Donohue. I don't have the numbers, Congresswoman, but I
can certainly get them to you. We have seen an increase in
volume with regard to cases. I have an active sampling of
egregious cases to present to you if you would like.
Mrs. Biggert. Good. I would like that very much.
Chairman Moore of Kansas. Thank you. Your time is up. And
Mr. Lynch, you are recognized for 2 minutes, sir.
Mr. Lynch. Thank you, Mr. Chairman. I appreciate it. I
apologize to the witnesses as well. We had no idea this was
going to happen.
Mr. Donohue, very quickly. We have concerns about the
mutual insurance fund, whether we are below 2 percent. And I
know FHA is only required to report once a year. I am very
nervous about that, given that we were down 40 percent the last
time we checked. Do you have any information for the committee
with respect to whether or not we are below that 2 percent
minimum?
Mr. Donohue. Sir, they are currently doing--first of all,
we have met with your office as well. We support your
legislation.
Mr. Lynch. Right. You are very good on that. I appreciate
it.
Mr. Donohue. I certainly support the idea of doing the
actuarial study twice a year, as you have recommended. But the
thing as far as the numbers are concerned, we are watching this
closely. We have our own independent auditors that are watching
the actual study itself. The one problem that is faced with, as
you might be aware, is the recovery rates on foreclosure
properties. They had estimated that last year at 60 percent. It
is down more like 40 percent.
Mr. Lynch. Right.
Mr. Donohue. So the question has come back down as to what
point it is. The Secretary made some comments last week, but we
will watch this very closely.
Mr. Lynch. All right. I am running out of time here, the
little that I have.
Now, you know, you were doing 3 percent of the market, now
FHA is doing 30 percent of the market, and the market is
tanking. I can't imagine how we are going to end up with a
result where we are above our 2 percent. I think we are going
to have problems.
I would like to have an opportunity, if we can't have a
hearing--and I know that the chairman is jammed because he has
a certain set of schedules for hearings going into August,
ending in August. Would you be willing to meet with me and my
office? I would like to meet with FHA and also Ginnie Mae. I
have problems over there as well. And it is just a shame that
this has happened on this day, but some of this stuff is out of
our control. But we are going to have to take a real hard look
at this.
Mr. Donohue. I am more than happy and more than willing,
sir, to sit down with you and discuss this in detail.
Mr. Lynch. Thank you. I yield back.
Chairman Moore of Kansas. Thank you, Mr. Lynch.
And I want to ask another question. We are going to have
another round. I think we have time for 2 minutes each.
Mr. Nunnink, one issue that concerns me is appraisal fraud
and the role of appraisals in our mortgage systems. I think
this is an important issue. The Inspector General suggested
bringing back the FHA Appraiser Fee Panel.
Can you talk about appraisal fraud? How much of an issue is
it in our current system? And what can be done to correct it?
In about 1 minute, 44 seconds.
Mr. Nunnink. Yes. Very simply stated, that FIRREA has
effectively dealt with eliminating appraisal fraud, and it was
passed in 1989. It is entirely possible to have separation at a
bank between those ordering the appraisal and those originating
mortgages. So I don't think a panel like FHA is necessary. I
think less government is better than more government.
And so my conclusion is that the existing system, if you
follow Home Valuation Code of Conduct, will suffice.
Chairman Moore of Kansas. Do any other witnesses have
comments on this?
Mr. Berenbaum. I would like to comment on that, Mr.
Chairman.
Chairman Moore of Kansas. Yes, sir, Mr. Berenbaum.
Mr. Berenbaum. I believe actually the valuation issue
remains one of the outstanding issues that has not been
addressed by either statute or regulatory reform discussions at
this point. The Appraisal Foundation and other key players in
this industry have not really done enough to ensure accuracy in
valuation. We have been commenting on this issue for several
years now. And again here we are today with broker price
opinions being used that are depressing values across the
country, and they are conflicted. So this is an issue that
needs more attention.
Chairman Moore of Kansas. Do any other witnesses have--we
have 20 seconds? Yes, sir, Mr. Savitt?
Mr. Savitt. Mr. Chairman, what we are looking at here with
appraisals, we are looking for appraisal independence, and we
don't have that with the Home Valuation Code of Conduct. The
results of the Attorney General's Office was from an
investigation of a federally chartered bank and an unregulated
appraisal management company. That is the model they are using
today. As a matter of fact, the banks and some of the lenders
actually have joint ventures, where they own up to 20 percent
of those appraisal management companies. It is the same failed,
flawed model that created the investigation. So with that, how
do we have appraisal independence? We don't.
Chairman Moore of Kansas. Thank you. Again, I apologize.
Ranking Member Biggert is recognized for 2 minutes.
Mrs. Biggert. Thank you. Mr. Savitt, could you tell me how
the implementation of the Home Valuation Code of Conduct has
impacted your members and consumers? What type of cost
increases have been to consumers as a result of the
implementation? And how is the average consumer affected by
that?
Mr. Savitt. The average consumer is affected by it costing
them substantially more money. We used data from HMDA and also
from Wholesale Access, and we came up with a number of $2.8
billion. And that is a very conservative number, because we
knew that number might be attacked, so we wanted to go on the
low side. That is additional lock-in fees because the
appraisals are taking anywhere from 35 to 40 days longer than
they used to. That results in longer lock-in fees which the
consumer pays, usually a minimum of a quarter percent. And then
appraisals that used to cost anywhere between $350 and $400 are
now costing anywhere between $500 and $750. My own office, we
used to pay $350. We are now paying $750 for appraisals. And
this works, as I said, out to $2.8 billion. This is hurting
mortgage brokers, it is hurting--by losing deals over this. It
is destroying relationships, it is hurting the appraisers, who
are being paid 60 percent less.
Mrs. Biggert. Thanks. I have one more question I want to
get in to Mr. Kittle. FHA may require taxpayer funding next
year for the first time in its history. Is there anything that
we can do today proactively to avert large losses in the years
to come?
Mr. Kittle. Well, you can appropriate the funds to make
them--technologically bring them into the 20th Century. That is
the first thing you could do. And to go back to Mr. Lynch's
comment just a minute ago, or his issue, if they have the right
computer systems and the right reporting systems, he can get
the reports he needs not once a year or twice, but maybe
monthly. We need to just bring them up technologically. It will
help stop fraud. I mean fraud is rampant, but--
Mrs. Biggert. Every year they say they are going to do
this, and it never comes to fruition. Thanks.
Mr. Kittle. We need to appropriate the money.
Chairman Moore of Kansas. Again, my thanks to the panel
members and my thanks to the witnesses who have testified here
today. I look forward to working with our witnesses, and my
Republican and Democratic colleagues, to ensure our
constituents are protected to the greatest extent possible.
The Chair notes that some members may have additional
questions, and other members who are not present may have
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.
Again I apologize for this. I thank the witnesses for
traveling here and for your testimony. This hearing is
adjourned.
[Whereupon, at 10:47 a.m., the subcommittee was adjourned.]
A P P E N D I X
June 18, 2009
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