[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                        THE IMPACT ON HOMEBUYERS
                      AND THE HOUSING MARKET OF A
                     CONFORMING LOAN LIMIT INCREASE

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 22, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-114




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma                  KEVIN McCARTHY, California
BILL FOSTER, Illinois                DEAN HELLER, Nevada
ANDRE CARSON, Indiana

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 22, 2008.................................................     1
Appendix:
    May 22, 2008.................................................    37

                               WITNESSES
                         Thursday, May 22, 2008

Brinkmann, Emile J., Ph.D., Vice President, Research and 
  Economics, Mortgage Bankers Association........................    21
Cook, Patricia L., Executive Vice President and Chief Business 
  Officer, Freddie Mac...........................................    18
Hamilton, Thomas, Managing Director, Barclays Capital, on behalf 
  of the Securities Industry and Financial Markets Association 
  (SIFMA)........................................................    15
Lund, Thomas A., Executive Vice President, Single-Family Mortgage 
  Business, Fannie Mae...........................................    20
Malta, Vincent E., Malta & Co., Inc., on behalf of the National 
  Association of Realtors........................................    25
Peters, Heather, Deputy Secretary for Business Regulation and 
  Housing, State of California...................................    22

                                APPENDIX

Prepared statements:
    Carson, Hon. Andre...........................................    38
    Maloney, Hon. Carolyn B......................................    40
    Brinkmann, Emile J...........................................    44
    Cook, Patricia L.............................................    50
    Hamilton, Thomas.............................................    57
    Lund, Thomas A...............................................    83
    Malta, Vincent E.............................................    86
    Peters, Heather..............................................    94

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Statement of the National Association of Mortgage Brokers....   113
Miller, Hon. Gary G.:
    Letter to Chairman Frank and Ranking Member Bachus from 
      Members who are part of the California Congressional 
      Delegation.................................................   117
    Letter to the California Congressional Delegation from 
      various groups.............................................   119
Sherman, Hon. Brad:
    Letter to Chairman Frank from various Members of Congress....   121















 
                        THE IMPACT ON HOMEBUYERS
                      AND THE HOUSING MARKET OF A
                     CONFORMING LOAN LIMIT INCREASE

                              ----------                              


                         Thursday, May 22, 2008

             U.S. House of Representatives,
                    Committee on Financial Services
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Sherman, Moore of Kansas, Capuano, Hinojosa, 
Clay, McCarthy of New York, Baca, Lynch, Scott, Green, Cleaver, 
Ellison, Perlmutter; Bachus, Castle, Biggert, Miller of 
California, Capito, Hensarling, Garrett, and Neugebauer.
    The Chairman. This hearing of the Committee on Financial 
Services will come to order.
    This is a very important topic. It is one that is clearly 
very much affected by actions this committee has taken and it 
is a matter of great interest to many members of the committee.
    It is also directly relevant to pending legislation because 
the issue of what the loan limit should be going forward for 
Fannie Mae, Freddie Mac, and the FHA is going to be decided in 
the next few weeks.
    The Senate committee has passed a bill that raises the 
limits somewhat. We have one that has raised them higher. We 
have the stimulus package which has raised them until December 
31st.
    As I look at the two bills, I am very encouraged that the 
bill that passed 19-2 out of the Senate committee and the bill 
that passed this House are very, very close conceptually. I am 
confident that we are going to be able to resolve the 
differences, but this is one of the differences we will have to 
resolve.
    Today's testimony is important both in terms of the current 
situation, but also could have an impact on what we do going 
forward.
    I will say that I was disappointed when the loan limit 
increase produced less activity than I had hoped it would. I 
understand there are reasons and I also believe that we are 
going to come out of this today with a strong argument against 
the yo-yo effect, and in fact, a strong argument for leaving 
them where they are.
    I did notice, for instance, that when we were debating this 
in the FHA modernization bill, when that became the one issue 
that prevented us from doing the FHA modernization, both the 
Secretary of the Treasury and then-HUD-Secretary Jackson, 
agreed with us that it would be a mistake to drop the limits.
    In terms of just economic theory, the most variant price in 
America, I believe, is the house price. The immobility of 
housing means that you get greater geographic variance in that 
price than almost anything else, and having one set price could 
not have made sense. It had to be either too high or too low; 
there just was no way given the variations.
    What we have seen recently is a problem in the private 
market, and I think there has been a consensus that has been 
shared by many here, by the head of the Federal Reserve, who 
has been very active in this, and by the Secretary of the 
Treasury, that this is a time when public and quasi-public 
entities can work cooperatively with the market in unsticking 
things.
    We have a problem now. We had this problem in the loans 
above the limits, that they were not selling.
    We tell the story about the child who touches the stove and 
gets burned and then does not touch the stove again. We have 
had a situation in the credit markets where a number of very 
smart people bought things they should not have bought.
    Having bought things they should not have bought, they now 
refuse to buy things they should buy. We have this with 100 
percent guaranteed student loans. I think you have to update 
unfortunately the story of the little boy such that the little 
boy touched the stove and got burned and now will not touch the 
stove or the refrigerator or the bathtub or the sink or the 
toilet.
    What we need to do is cooperatively work with people to get 
them back to touching white porcelain--just be a little more 
differentiating in which ones they touch.
    I think public/private cooperation plays a large role here. 
Ultimately, to the extent that we get out of the current 
situation and we get back to where the private market does this 
without as much involvement from the others, fine, although we 
should be clear that neither the FHA, Fannie Mae nor Freddie 
Mac displace the private market, but in fact work with it, 
multiply it in Fannie's and Freddie's case, by securitizing, 
although that is a particular issue that I would have now that 
I am going to ask people to address in the question period. It 
may not have been an initial issue.
    We now have in the Senate bill a provision that says even 
to the extent that they raise the loan limits, not enough in my 
judgment, those loans have to be securitized.
    I think that would just add to the current complication. I 
think they should have the option of securitizing, but not a 
mandate.
    We actually specifically addressed that issue in the 
stimulus and explicitly decided--I had a conversation with 
Secretary Paulson about it--not to require securitization. I 
think that even makes securitization harder. I think 
securitization will work better if it can be left to be done 
when it makes sense and not be mandated. That is something that 
we will want to address with people.
    I think we have a clear economic case now for raising the 
limits, but we still have to get to a later point. Maybe we 
will have resolved this. I do believe the bill will be signed 
by July 4th. I am now convinced that we will--I think we will 
now get a bill signed that is very close to what we have been 
doing.
    I am going to make another bold prediction that we will not 
only get a bill signed, but we will get the whole bill signed. 
I think we will get a bill signed that has every title and 
every section.
    [Laughter]
    The Chairman. We have adopted a new procedure, you may have 
noticed, with the agriculture bill. It is called the reverse 
line item veto, in which we delete items before they get to the 
President.
    [Laughter]
    The Chairman. There is a great consensus. I am joined by my 
colleague from California, Mr. Miller, and others who care a 
lot about this.
    With that, I am going to call now on my Republican 
colleague for an opening statement. We have only one panel. 
This is a very important issue to people and I think this is 
going to be a very substantive hearing.
    Mr. Bachus?
    Mr. Bachus. Thank you, Mr. Chairman, for holding this 
hearing. Obviously, the hearing deals with the current 
conditions in the jumbo mortgage market, something that 
concerns all of us.
    As the chairman mentioned, the bipartisan economic stimulus 
package which we enacted in February temporarily increased the 
conforming loan limit for Fannie Mae and Freddie Mac, raising 
that amount to $729,750 in certain high-cost areas.
    While those limits only apply to mortgages originated 
between July 1, 2007 and December 31st of this year, the GSEs 
are authorized to securitize these new jumbo conforming 
mortgages at any time during the life of the loan.
    The objective of this temporary increase in the GSE loan 
limits was to inject liquidity into the jumbo mortgage market 
at a time when investors' aversion to risk had cost spreads 
between interest rates on those mortgages and mortgages 
eligible for purchase by Fannie Mae and Freddie Mac to widen 
alarmingly.
    Lower rates on jumbo mortgages would in turn help increased 
demand in high-cost markets where the fallout from the bursting 
of the housing bubble has been the most severe.
    While these beneficial effects have been slow to 
materialize, there have been some hopeful signs in recent days 
that liquidity is returning to the jumbo market as the GSEs 
ramp up their purchases of these mortgages and spreads between 
jumbo conforming and regular conforming loans narrow.
    A key question that this committee must ask, and I am sure 
the witnesses, particularly from Fannie Mae and Freddie Mac can 
shed light on this, is whether Fannie Mae and Freddie Mac will 
be able to continue to support the conforming mortgage market 
in a safe and sound manner, while assuming additional 
responsibilities in the subprime and jumbo markets.
    Although these higher loan limits for Freddie and Fannie 
may help to reassure mortgage lenders and stabilize local 
markets that have been battered by sharp price declines and 
record foreclosures, policyholders must be mindful that they 
are also increasing the risk for these two GSEs.
    Strong and well-capitalized GSEs are essential to the 
stability of the housing finance system and our financial 
markets generally, and that is why I remain committed to 
working with Chairman Frank and our Senate counterparts to 
achieve comprehensive GSE reform this year.
    I think the GSE reform is one of the things that there is 
some unanimity over the need for. As Chairman Frank and I have 
expressed on many occasions, we just regret that component and 
the FHA component has not already passed and been signed by the 
President.
    I welcome the witnesses and look forward to your testimony. 
I thank you, Mr. Chairman, and yield back the balance of my 
time.
    The Chairman. I thank the gentleman. I would just say that 
the GSE reform has actually been a very bipartisan approach 
because we passed a very good version of it in the previous 
Congress under the chairmanship of Mike Oxley, and then we 
worked again and we got overwhelming votes.
    I know there was some controversy over the affordable 
housing fund. That is important to me but it is separate from 
the structural case of reorganization. If you look at just the 
reorganization, we have gotten close to 400 votes in a 
Republican-led Congress and a Democratic-led Congress.
    I share his view and I am hoping that we will finally get 
that one done by the end of the month.
    The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman. Thank you for holding 
this hearing. It is important for us to understand the delays 
in the effective implementation of increased loan limits. It is 
even more important for these hearings to focus on making these 
loan limit increases for high-cost areas permanent.
    Unfortunately, at the Senate Banking Committee mark-up, 
they moved toward a limit of $550,000. This figure will deprive 
hundreds of thousands of people in high-cost areas in 
California and elsewhere of the benefits that the GSEs are 
supposed to provide consumers.
    I believe it is essential in any conference, formal or 
informal, that in arriving at a comprehensive housing bill, the 
House conferees insist on the House position to permanently 
increase the ceiling to $729,750 in the high-cost areas.
    A bill that does not achieve that goal I do not think will 
be acceptable to those of us who represent such areas.
    This country is very similar in so many ways from one place 
to another. The same stores at the same prices. Maybe you pay 5 
percent more for a cheese dog here, a McDonald's hamburger 
there. Even our weather. Maybe it is 10 percent hotter, 20 
percent hotter in one place than another.
    Housing prices are the one thing that is dramatically 
different. In Pittsburgh, the median home price was $120,000 
last year. In Omaha, $138,000. In Los Angeles, $589,000. That 
is a ratio of difference that makes the political differences 
between Oregon and Kentucky look like nothing.
    We cannot have one-size-fits-all. We knew that when these 
limits were created many decades ago. We recognized that Guam, 
Hawaii, and Alaska had to have higher limits.
    Now we realize there are 10 to 15 high-cost areas on the 
mainland of the United States, the lower 48, that need these 
higher limits as well. We are not talking about millionaires. 
We are talking about teachers and police officers. Can they 
afford a modest three bedroom home anywhere in the L.A. metro 
area, and more importantly, anywhere in the 27th District?
    That is why we need to have the changes that we made in the 
Economic Stimulus Act made permanent. This committee and this 
House was wise enough to do so. As testimony we will hear 
today, this could mean $400 a month on somebody's mortgage. 
That is important not only in this time of economic crisis, but 
in the years to come.
    I hope very much that the House insists upon its position 
and that the Senate sees the wisdom and we get this matter 
handled in a way that meets the needs of high-cost areas.
    I yield back.
    The Chairman. The gentlewoman from West Virginia, the 
ranking member of the Housing Subcommittee, is recognized for 3 
minutes.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you for holding 
this hearing. It is important for us to understand the 
consequences of our actions and with the passage of the 
stimulus package and the temporary increase in loan limits, we 
have an unique opportunity here today, I think, to see what 
impact these increases will have on the housing market.
    I supported the passage of the stimulus package and was 
able last week or more recently to get an amendment to 
temporarily raise those loan limits for VA loans, guaranteed 
loans, as well.
    The credit crunch has been affecting the Nation recently 
and it has been making it very difficult even for borrowers 
with stellar credit ratings to obtain loans for more than the 
conforming loan limit.
    In many expensive housing markets, as we have heard, 
including parts of my own district in West Virginia, this 
situation has put the American dream of homeownership on hold, 
particularly for those who are first-time homebuyers.
    Despite raising the conforming loan limits, the market has 
been slow to respond. Recently, there have been, I think, some 
encouraging signs.
    According to an article that appeared in the Washington 
Post on Saturday, just in the past 2 weeks, interest on the new 
conforming jumbo mortgages for amounts between $417,000 and 
$729,750 have come down enough to make a difference to 
borrowers. I hope this is a trend that continues.
    I look forward to hearing the panel. I thank the chairman 
for allowing me to give an opening statement. Thank you.
    The Chairman. The gentleman from Massachusetts, my 
colleague from the high-cost area.
    Mr. Lynch. Thank you, Mr. Chairman. I want to thank the 
ranking member as well.
    I appreciate that we are having this hearing on the 
progress of efforts to expand the conforming loan limits. I 
represent a significant part of the City of Boston and the 
outlying suburbs, as the chairman mentioned. This is very 
important to the people that I represent.
    The gentleman has already noted--the gentleman from 
California--the disparity between regions here. The area that I 
represent, the 9th Congressional District of Massachusetts, is 
enormously impacted.
    The questions I would like the panelists to help us with as 
we go forward today--I do appreciate your willingness to come 
forward and help the committee with its work, I really do--
there seems to be several explanations of why the initial 
response was so slow.
    Number one, I guess I am curious, was it just a slow start 
with a new product, and is that now being rectified? I read a 
story several weeks ago in the New York Times that was 
enormously critical, and I will not repeat the quotes in the 
paper by some of the folks who are trying to deal with this, 
but they were extremely critical.
    Most recently, not a couple of days ago, a Washington Post 
article said that to the contrary, there may be some 
significant progress.
    I would like to hear about that. Also, I would like to hear 
from the panelists about what is sticking the throttle here? 
What is the problem that is causing the slow down? Is it in 
fact the inability of us to securitize these in a similar way 
as we do the previous conforming loans that are purchased?
    Is it the fact that these are not TBA eligible? What is the 
problem here that perhaps we did not foresee other than the 
difficult loan environment right now because of the housing 
crisis?
    Those are some of the things I would like to touch on. 
Again, I appreciate the panelists for coming and I appreciate 
the chairman for holding this hearing, and I yield back the 
balance of my time.
    The Chairman. The gentleman from California, Mr. Miller, 
who has an interest in this subject will be recognized for 3 
minutes, which will be too little.
    Mr. Miller of California. Thank you, Mr. Chairman.
    This is something that as you know we have been fighting 
for for about 5 years. We could see this coming in California, 
that liquidity was going to be a huge, huge problem in the 
marketplace, especially as the housing prices increased.
    In August of 2007, when Wall Street shut the money off, the 
market just plummeted. Loans were not available.
    We passed a stimulus package that increased those to about 
$727,000, which took a while to implement because FHA had to 
determine what the median prices were in areas, so it took a 
while to get going, but come December of this year, Mr. 
Chairman and Mr. Bachus, when the market changes again, and if 
we take GSEs and FHA out of the market in high-cost areas, 
unless Wall Street comes back, it is going to present the same 
result that occurred when Wall Street pulled out. It is just 
going to have a devastating effect on the marketplace.
    We have actually done something unusual, Chairman Frank. I 
have a letter signed by every Republican Member from the 
California Congressional Delegation supporting the concept of 
permanently increasing the loan limits to $729,750.
    Can I ask that this be introduced into the record?
    The Chairman. Without objection, it is so ordered.
    Mr. Miller of California. From 19 Republican Members, which 
to get all 19 to agree to anything is a major task. Every 
Member of our Delegation understands that--
    The Chairman. If the gentleman would yield, I would note 
that among those are four California Republican members of this 
committee.
    Mr. Miller of California. Very true. In California, we face 
a problem; 21 of the top 25 basically least affordable housing 
markets in the United States happen to be in California. The 
other side is California is also the largest economy in this 
country.
    One goes hand-in-hand with the other. The concept of being 
discriminated against based on geography, and that is what 
California and high-cost areas like Boston and other areas are, 
because of where people live, they are not entitled to 
participate in lower rate mortgages that the GSEs provide and 
FHA provides that every other area in the United States that is 
not a high-cost area does.
    It seems unfair to me that if you are in a housing market 
where the median home price is $150,000, you can really go out 
and borrow almost triple, and we cannot even reach median in 
most areas.
    In fact, after the recession in 2007, the median home cost 
in California was $558,100, after the downturn occurred.
    What we are doing right now in injecting liquidity in the 
marketplace for GSEs is working. It took a while to implement. 
What do you do to a buyer in California and other high-cost 
areas that enters an escrow in mid-November and for some reason 
they cannot close that escrow by December 31st? They are going 
to lose that opportunity.
    The jumbo marketplace has dried up. Look at the jumbo 
marketplace. Only 18 percent of the jumbo marketplace in 2005 
made fixed-rate 30-year loans. The fixed-rate loan for 30 
years, 18 percent. GSEs, 82 percent of all the loans made were 
fixed-rate 30- year loans. They are saving between $280 and 
$471 a month in interest payments. High-cost areas should 
benefit from that also.
    What we did on the stimulus package should be made 
permanent. It is proving to work. Right now, we are in a 
housing crisis. Some people bought a home and things did not 
work out. A trigger kicked in. Their rates jumped up. They may 
have had problems with their jobs. They cannot make the 
payments.
    Today the programs that we have implemented through FHA, 
high-cost areas cannot participate in. We need to change that.
    Mr. Chairman and Ranking Member Bachus, I hope we stick to 
our guns that every high-cost area in a State should be treated 
like the rest of the States are. We need to make sure this is 
permanent. It is a long time coming. I think it is a victory we 
can be proud of if we can accomplish it.
    I yield back the balance of my time.
    The Chairman. The gentleman from California asked me to 
yield briefly, if there is no objection.
    Mr. Sherman. Yes, Mr. Chairman, I also have a similar and 
even more strongly worded letter that only has 12 signatures so 
far, but I would like unanimous consent to enter it into the 
record when the record closes, and by then, I will have more 
than 19.
    Mr. Miller of California. Mr. Sherman, if I can help you 
circulate that, I would be happy to do so.
    The Chairman. If our competitive instincts over there can 
be restrained, yes, we will be happy to do that.
    The gentleman from North Carolina wanted to be recognized 
to make a brief statement.
    Mr. Watt. Thank you, Mr. Chairman. I want to be recognized 
for two reasons. Number one, I was getting the impression that 
this was only a California and Massachusetts issue. I wanted to 
give a broader perspective to it.
    In fact, while none of the communities in my congressional 
district get impacted by this as it turns out, even Charlotte, 
which I represent a part of, there is a recognition that the 
housing market and the credit market is a national market more 
than ever before.
    I think this is extremely important even to those 
communities that may not qualify for the benefits of the jumbo 
mortgage.
    Second, I wanted to express some degree of encouragement 
and appreciation to the GSEs and to the capital markets for 
continuing their efforts to make this a reality because if 
Fannie Mae and Freddie Mac do not set up a structure to do 
this, then it really cannot be effectively played out, and I 
know they have made some extraordinary efforts to enable that 
to happen.
    If the market into which they sell these loans does not 
take some extra steps and get aggressively involved in making 
this play out, it will not happen.
    It takes the members of the Securities Industry and 
Financial Markets Association to work with the GSEs to make 
sure that these loans can get into the secondary market. While 
that process has been slow, I think there has been movement on 
that front that they need to be applauded for, and they need to 
be encouraged to continue that movement because if it does not 
continue, then we cannot pull this off even if we make this a 
permanent provision in the law.
    Mr. Miller of California. Will the gentleman yield?
    Mr. Watt. I will be happy to yield.
    Mr. Miller of California. One comment. I agree with 
everything you said, Mr. Watt. The benefit of this is that 
people in high-cost areas are able to sell their home and in 
many cases move into areas that are not high-cost areas that 
are being impacted by the housing market today.
    You are correct. It is not just a high-cost area issue. It 
is a national issue. I thank you for your time.
    Mr. Watt. I thank the chairman for the time, and I yield 
back.
    The Chairman. The gentleman from New Jersey, Mr. Garrett, 
for 3 minutes.
    Mr. Garrett. Thank you, Mr. Chairman, Ranking Member 
Bachus, and all the members of the panel who are testifying.
    For the last several years, I have sat through numerous 
hearings of this committee and heard members and witnesses 
alike basically bemoan the fact that housing prices are just 
too high and people cannot afford anymore to buy their own 
homes. Now that the prices are coming down a bit to a more 
accurate and sustainable level, this Congress seems to be 
trying to prop those prices right back up to the unaffordable 
range.
    Most of the studies I have seen indicate that the spreads 
are still very large in the conforming jumbo market, and that 
due to the underwriting standards for those loans, the only 
people who are actually able to benefit are those who already 
have a mortgage and are able to refinance.
    The people that so many members claim to want to help, the 
first-time homebuyer, are really not able to benefit because 
they do not have the necessary downpayment available to them.
    If prices are coming down, should we be raising the 
conforming loan limits, much less keep them at the current 
level?
    It stands to reason that if housing prices are falling in 
these areas, especially areas like California and Nevada that 
have the largest housing cost increase, then we really should 
be looking at lowering the conforming loan limits.
    I have met with a number of economists and housing industry 
representatives on this issue. They inform me that when using 
appropriate underwriting standards, combined with a normal loan 
to value ratio, a family must make roughly $200,000 a year to 
afford a house around $700,000.
    I find it interesting that our colleagues across the aisle 
continue to advocate raising taxes on families making over 
$200,000 a year but they want to have the government help those 
very same people by subsidizing the cost of their house.
    Instead of allowing those families to keep more of their 
hard-earned money and allow them to decide how they want to 
spend it, what we are doing is to tax those families more and 
then have the government turn around and try to help them buy a 
home.
    Just this last week, my Democrat friends voted to raise 
taxes on households and small businesses making $500,000 a 
year. They claim that these people are the super wealthy 
families and they should shoulder a higher burden of the tax 
burden.
    This week, they advocate to have the government insure 
those families' homes to help them save a few bucks a month.
    I hope my friends across the aisle can better explain their 
rationale of why the government needs to take more money from 
hard working families that they say are too rich and then help 
those very same families insure their houses.
    I would like to again thank our panel for being here today, 
and I do look forward to your testimony.
    The Chairman. If the gentleman would yield, I would respond 
in part; according to the Congressional Budget Office, by 
raising the jumbo loan limit for the FHA, the Federal 
Government makes money. That is, they pay into the FHA more 
than the FHA pays out.
    Mr. Garrett. Reclaiming my time, that is really not the 
point whether it is making money or not making money.
    If we really want to help the first-time homebuyer, then 
you have to look to see who the first-time homebuyer is, and is 
that somebody who makes over $200,000 or $250,000 a year.
    Mr. Watt. Would the gentleman yield?
    The Chairman. Would the gentleman yield to me?
    Mr. Garrett. Let me just finish.
    The Chairman. I will recognize the gentlewoman from New 
York, but I will ask her to yield to me for 30 seconds.
    The gentleman from New Jersey often changes his arguments. 
Having made one, if it gets met, he gets another one. He talked 
about an--
    Mr. Garrett. Will the gentleman yield?
    The Chairman. No, I will not yield, just as the gentleman 
would not yield to me. The gentleman said there was this 
inconsistency with regard to taxation and he suggested that we 
were giving a subsidy--not suggested, he said we were 
subsidizing the upper-income people, that the government was 
subsidizing them by raising the jumbo loan limit.
    The fact is that the Congressional Budget Office certifies 
that by raising the jumbo loan limit, we make money for the 
Federal Government. There is no taxpayer subsidy. There is a 
taxpayer benefit. That is the argument the gentleman made.
    He then wanted to make another one, and he is entitled to 
do that, but the argument that we are somehow giving a taxpayer 
subsidy to the upper-income people in the jumbo loan limit is 
contradicted by CBO.
    Mr. Watt. Will the gentlelady yield to me to address his 
other issue, which is saving just a few dollars? If the 
gentleman would look at the difference between the rate on a 
jumbo loan of $418,000 and a conventional loan of $417,000, the 
difference is $250 a month, not a dollar or two a month.
    The Chairman. The gentlewoman from New York.
    Mr. Garrett. Would the gentlelady yield?
    Mrs. McCarthy of New York. I would like to make a statement 
first.
    The Chairman. I will give the gentleman time at the end of 
her statement.
    Mrs. McCarthy of New York. What I would like to say is that 
I live on Long Island; I certainly do not make $200,000 a year, 
although I feel I make a very good salary. With that being 
said, if the majority of people that I know have taken home 
equity loans out because they got all the credit that they 
needed, and yet those homes, and I will talk about my own 
house, I bought the house for $70,000. My estimated real estate 
is at $578,000. There is not a home in my area, and it is a 
tiny, tiny home, a 40-by-100 piece of property, and if I tried 
to sell that house tomorrow, I probably could not get $475,000.
    People have taken out home equity loans trying to build up 
because I have young families moving into the area, they are 
blue collar workers. They are not making the kind of money, 
over $200,000, so basically I am certainly going to fight to 
make sure that my constituents have the opportunity, if they 
have taken out one of these unfortunately predatory loans, and 
to be very honest with you, I did not think many of them did, 
but when we started looking at the map of what New York State 
is putting out, apparently in areas that we would have never 
suspected, we are seeing these kinds of foreclosures because 
young people have gone out and tried to buy a home in a middle-
class neighborhood. We are not talking about rich people.
    With that, I yield to the gentleman.
    Mr. Garrett. Part of the reason I did not yield is because 
I only have 3 minutes, and I know the chairman can have 
additional time.
    One of the points I was trying to make, and I tried to make 
a couple of points, was who are we trying to help? As the 
gentlelady was saying, in order to buy these homes, you have to 
be making a substantial amount of money, around $200,000.
    It may be two income earners. It may be a police officer 
and somebody else, a wife, who is a nurse, each one making 
$80,000 or $90,000. The household income there is approaching 
$200,000.
    What I am told by that real estate market is that the 
general rule was that around 2\1/2\ times your basic annual 
income goes toward the value of the loan you can afford--2\1/2\ 
times $200,000 comes out to $500,000 to $600,000.
    If that is who we are aiming for, that is my first 
question, who are we aiming for with this thing, is it people 
making around $200,000-plus who would be getting into this?
    Mrs. McCarthy of New York. Reclaiming my time, if we are 
talking about a young couple, whether it is a police officer, a 
fireman, or a nurse, their combined salaries are not going to 
come anywhere near $200,000. Yet, to buy a starter home on Long 
Island, I am telling you, a nice little home, which I consider 
my home to be, you are talking anywhere from $475,000 to 
$550,000. That is a starter home.
    The Chairman. I am guilty. Let's not get into a debate 
here. Let's finish the opening statements. We will have plenty 
of time to debate it after our witnesses.
    Let me call on Mr. Neugebauer now to give a statement.
    Mr. Neugebauer. I thank the chairman. I think one of the 
things that the marketplace needs now is just some certainty. 
We have done some things, the FHA reform, the GSE reform. We 
need to get those pieces passed. We need then for those 
regulators or the GSEs to give the GSEs the parameters of what 
the rules are going to be. We need to give FHA the relevancy of 
being able to be innovative and to keep up with the 
marketplace.
    These stop-and-go policies that we are trying to do here, 
while they are well-meaning, I think sometimes they cause more 
confusion in the marketplace when a marketplace really just 
needs more certainty.
    What we did know prior to this little hiccup that we have 
had in the housing and mortgage market is we had a very robust 
housing market, a very robust mortgage market.
    What my hope is, very quickly, Mr. Chairman, is that we get 
these passed and then we step back and let the marketplace 
begin to adapt and put this puzzle back together.
    I was thinking the other day, sometimes I sit down with my 
grandkids, and we get those 500 piece puzzles. It takes a 
little while to put that puzzle together.
    It is going to take a little while to put this marketplace 
back together because there are some uncertainties, some things 
happened that I can assure you probably will not ever happen 
again. There are some lessons learned.
    What I would hope is that while the chairman and I do not 
agree on all of the things we have been working on, I think the 
thing that we do agree on is that we need to bring this GSE 
bill, get that put in place, so that some parameters would be 
put in place so that the GSEs would be able to build a business 
plan around.
    The other is to make FHA more relevant so that they can 
price and develop products. I do not think it is our role to 
tell the marketplace this is a jumbo, this is not a jumbo. This 
is the underwriting standards for this, this is not the 
underwriting standards for this.
    What I think we do is we put parameters on those entities, 
we hold them accountable, and if they start doing some things 
that affect the safety and soundness of that, you make changes. 
For us to have to come running to Congress to determine how big 
a loan I can make or what the term of that loan is going to be 
or what the underwriting standards can and cannot be for that, 
I think long term, it is a hindrance to the housing market and 
not necessarily a plus to the housing market.
    Mr. Chairman, I hope that as you and I have talked, maybe 
there is some chance that those changes will be made and we can 
let the market move on.
    The Chairman. I thank the gentleman. I just have one piece 
of advice. He does not need advice from me. As hard as that 
puzzle is for you and your grandchildren to put together, do 
not invite a Senator, then you will never get it put together.
    [Laughter]
    The Chairman. Well, maybe, but it will take a lot longer.
    We have 4 minutes remaining and I am going to split it 
between my two colleagues, the gentleman from Massachusetts for 
2 minutes, and then the gentleman from New York for 2 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Very quickly, maybe 
some of my colleagues do not understand it, but my hope is that 
everybody on this panel understands it, there are different 
regional markets that require different approaches. Some 
markets are more expensive. Some markets are less expensive.
    In all of the most expensive markets, incomes are higher as 
well. In my district, you could not possibly live on $10,000 a 
year. You cannot do it, I do not care where you live or how you 
live, you cannot do it.
    In my district, $50,000 is a lower-middle-income person. In 
another district, you can live like a king on $50,000.
    I am here today to hear why the market is not doing what we 
need it to do, which is to provide an opportunity for middle-
class working people to own a home in a reasonable manner in 
the same way all across this country, from the rich markets to 
the poor markets.
    Why cannot the private industry, the private market, adjust 
to meet regional differences? That is what I am here to listen 
to. If my colleagues do not understand it, I am more than happy 
to invite any and all of them to my district to try to find a 
house for less than $500,000. If they can do it, I will help 
them invest.
    The Chairman. I thank the gentleman. With the indulgence, I 
miscalculated. The gentleman from Georgia is recognized.
    Mr. Scott. Thank you very much, Mr. Chairman. I appreciate 
that. I want to do several things here. First, I want to 
associate my remarks with those of Mr. Miller from California. 
I agree with you 100 percent. You are absolutely right and I 
will certainly work with you on that.
    I am so glad to hear from you, Mr. Chairman, that the 
President is going to sign our housing bill, our mortgage bill. 
That is so important.
    This country is in dire shape. I think there is a sense of 
urgency that is not resting where it ought to be. Nowhere is 
that sense of urgency more devastating, more impactful, than in 
my own district.
    Let me just tell you, Georgia as a State, ranks 8th in 
foreclosures at this very moment. In my own district which I 
represent, one of the fastest growing areas in this country, is 
the suburbs of Atlanta, which has been devastated by this 
crisis. One county alone, Clayton County in my district, ladies 
and gentlemen, has a foreclosure rate of nearly 2 out of ten; 
that is 20 percent. That is extraordinary.
    As we approach this issue, the hearts and the minds of the 
American people are literally breaking. They are hanging on by 
their fingernails.
    On top of that, Atlanta has just gone through a devastating 
pattern of thunderstorms and tornadoes that I am sure many of 
you have heard about and seen on the CNN reports. The estimated 
cost just to the housing loss is nearly $300 million. Just last 
evening, another storm came through.
    All of this is devastating to the area. I wanted to 
certainly make that point of how this mortgage meltdown and 
credit crunch is so devastating to my area and why I want to 
just use every opportunity I can to issue this cry of urgency.
    We need help in my home State of Georgia, particularly in 
my district.
    Mr. Chairman, I just want to get to what I think is the 
crux of the matter that I hope we can get to this morning.
    First, we have to answer this question: Why has it taken 
regulators, who were well aware of the subprime mortgage issue 
early on, so long to act, despite the clear evidence of 
problems in this market?
    Ladies and gentlemen, we have to solve that question. If we 
do not, so much of our other work will certainly be in vein.
    The other is as more and more creditors are cracking down 
on certain lending practices, which they are doing and it is 
good, we have to ensure that sound underwriting of these loans 
is rewarded.
    At the same time, we have to make sure that those players 
out there who continue to prey on individuals realize there are 
consequences, and while we make certain that credit continues 
to be available to those that qualify and are feasible 
candidates for home loans such as first-time homebuyers, lower-
income households, and minority families in communities.
    As such, we must increase the conforming loan limit, but 
will increasing the conforming loan limit indeed have a 
positive effect which will be felt by many homeowners and 
homebuyers.
    Finally, would lifting the limits permanently be good 
policy and encourage first-time homebuyers to purchase and 
further staunch the flow of foreclosures?
    I think that is the crux. Thank you very much, Mr. 
Chairman.
    The Chairman. The gentleman from Texas is recognized for 3 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I believe it was 2 days ago that the front page of USA 
Today had a headline ``Taxpayer Bill Leaps By Trillions.''
    The first paragraph says, ``The Federal Government's long 
term financial obligations grew by $2.5 trillion last year, a 
reflection of the mushrooming cost of Medicare, Social 
Security.'' It goes on to say that is now roughly $500,000 per 
household.
    I say that as background because I fear that we once again 
are looking at a situation where we may be adding more 
potential taxpayer liability and exposure.
    What we are speaking of today, I suppose the pressing 
problem, is to figure out how the GSEs can get involved with 
larger mortgages, as high as 24 times greater than the median 
income of every individual in the United States.
    We know that the conforming loan limits were increased in 
the recent tax rebate bill passed in February. I have several 
concerns. Number one, I am not sure it was a good policy to do 
this in the first place, given what the GSE charter is.
    Second of all, I have asked OFHEO to send me a map of which 
metropolitan areas, which geographic areas, would be impacted. 
I know it is a small map. Hopefully, everybody can see white 
and red.
    According to OFHEO's definition, the vast majority of the 
country seems to be left out. California, it seems like they 
may do well, and then from the Washington metro area up along 
the Atlantic Seaboard, South Florida, and that is about it.
    I believe, according to OFHEO as well, that 60 percent of 
the counties that would benefit literally are in those three 
spots.
    Besides the benefits going to a limited number of people, I 
believe that this effort just takes the GSEs away from their 
core mission, further away from affordable housing for the 
middle- and very-low-income families.
    I am not sure it makes sense in the context of the mission.
    Some have said we ought to raise these conforming loan 
limits because many people are facing higher prices through no 
fault of their own. Ultimately, people choose to live in areas 
of high density. One of the reasons is because they may have 
higher incomes. They may actually vote for more onerous land 
use and zoning and other restrictions that can make land more 
expensive and thus, drive up the cost of housing.
    Already, the conforming loan limit right now, $417,000, a 
family would have to earn at least $130,000, which is twice the 
median family income in the country, and one that would be 50 
percent higher, well under the $730,000 maximum limit, would 
serve families with incomes of up to $185,000, which ranks in 
roughly the top 5 percent of all families in America.
    With increased systemic risk that is still on the books 
threatening a still weakened economy, I am not convinced this 
policy makes sense. I yield back the balance of my time.
    The Chairman. Our final statement will be from the 
gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman. In the interest of 
time, I would just like to put my prepared statement in the 
record.
    The Chairman. Without objection, it is so ordered.
    Mrs. Maloney. I would just like to briefly say that I am 
strongly in support of the conforming loan limit increases and 
would like to be associated with the comments of my colleagues 
on both sides of the aisle who have spoken out on the need for 
liquidity in the housing market, certainty in the housing 
market, and the real difference that exists in our country in 
regional housing markets.
    I happen to represent a district in Queens and Manhattan 
with high housing costs. This is a very, very important issue 
to my constituents, and therefore to me. I fully support the 
increases and I fully support making them permanent.
    As the chairman pointed out, this is a taxpayer benefit. I 
would just like to conclude by saying that everyone knows we 
need to get liquidity in the market. This is one way to put 
liquidity into Fannie Mae and Freddie Mac. I think we should do 
it. It is going to help housing and it is not costing taxpayers 
money. It makes the system stronger, and would allow even my 
constituents to benefit from Fannie and Freddie and FHA loans.
    Thank you. I yield back.
    The Chairman. If the gentlewoman would yield just on that 
one point, let me add, one of the things that we consciously 
did in the stimulus, and I talked about this with the 
Secretary, we allowed the Fannie Mae/Freddie Mac piece to be 
retroactive to July 1, 2007, in the hope that some banks which 
had come up against their limits because they were loaned out 
and did not have the capital, could sell some of those loans to 
Fannie and Freddie freeing up capital, which could then be used 
for loans up and down the spectrum.
    We had hoped, and we still do, that loans that had been 
made in 2007 could now be sold and the selling of those loans 
would free up capital to make new loans to people all across 
the income spectrum.
    With that, we will begin the hearing, and I guess the 
witnesses have a sense of how engaged the committee is on this 
subject. I am going to begin with Mr. Thomas Hamilton, the 
managing director of Barclays Capital. He is testifying on 
behalf of the Securities Industry and Financial Markets 
Association.

   STATEMENT OF THOMAS HAMILTON, MANAGING DIRECTOR, BARCLAYS 
  CAPITAL, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL 
                  MARKETS ASSOCIATION (SIFMA)

    Mr. Hamilton. Mr. Chairman, Ranking Member Bachus, and 
members of the committee, I am Thomas Hamilton, managing 
director of Barclays Capital, and I am responsible for our 
residential mortgage asset backed and commercial mortgage 
trading businesses.
    I am pleased to testify today on behalf of the Securities 
Industry and Financial Markets Association, where I serve as 
vice chairman of the mortgage backed securities and securitized 
products division's executive committee.
    We commend Chairman Frank and Ranking Member Bachus for 
their leadership and efforts to address the problems we see 
today in the mortgage markets.
    We appreciate the opportunity to discuss the agency 
mortgage backed securities market, the most liquid secondary 
market for mortgage loans in the world.
    The agency market includes MBS issued by Fannie Mae, 
Freddie Mac, and Ginnie Mae. Specifically, I would like to 
discuss the to-be-announced market, an action taken by SIFMA 
with respect to which loans are acceptable for inclusion in 
TBA-eligible MBS pools.
    SIFMA is pleased to contribute to the understanding of the 
situation that is complex, with many moving parts and few 
simple answers, but of incredible importance.
    A TBA is a contract for the purchase or sale of agency 
mortgage backed securities to be delivered at a future agreed-
upon date. The actual identity of the mortgage loan pool is 
unknown, however, at the time of the trade.
    Actual mortgage pools are subsequently allocated to the TBA 
transaction upon settlement which may be one or more months 
after the trade date. Participants in the TBA market generally 
adhere to market practice standards commonly referred to as the 
``TBA good delivery guidelines,'' which are published by SIFMA 
through consultation with all its members.
    The overall market for agency-backed MBS' is huge. It was 
about $5.9 trillion at the end of 2007. It is no exaggeration 
to say that the market is vital to the mortgage finance system 
and this country, especially now when other secondary market 
sources of financing are closed.
    This market has been successful for one main reason, 
homogeneity of collateral. Investors who participate in the TBA 
market are confident that even though they do not know the 
identity of the exact mortgage pool they will be delivered, 
they are comfortable that the pool composition and performance 
will be within a certain criteria. If this confidence is lost, 
the mortgage market will suffer greatly as loans become more 
expensive.
    Pools that contain loans which are not homogeneous with 
TBA-eligible product are traded in what is referred to as a 
``specified pool market'' or packaged in collateralized 
mortgage obligations or CMOs. This is not an insignificant 
market. Outstanding CMOs alone were over $1 trillion at the end 
of 2007.
    The bright light in all this recent turmoil has been the 
performance of the markets for agency MBS. These markets have 
remained stable, given the guaranteed nature of these products, 
and the generally more conservative underwriting standards 
employed by the GSEs and FHA.
    As Congress deliberated on an economic stimulus package 
several months ago, the issue of providing liquidity to the 
jumbo loan market by increasing the agency's loan size limits 
became a matter of discussion.
    In January and February, SIFMA called together its buy and 
sell side members on multiple occasions to discuss the 
impending stimulus legislation. The legislation was viewed as 
extremely important both in the context of agency MBS markets 
as well as in the larger context of something that could 
counteract the contraction of the availability of credit to 
deserving borrowers more generally.
    SIFMA believed, and still believes, that this legislation 
could be an useful tool to help strengthen the mortgage 
markets. SIFMA also met with representatives from Fannie, 
Freddie, FHA, and Ginnie Mae. SIFMA realized that it must act 
quickly to minimize any uncertainty in the markets and to 
ensure that the GSEs and Ginnie Mae could implement their new 
programs as soon as possible.
    On February 15th, SIFMA announced its intention to publish 
an update to the ``good delivery guidelines.'' The updates to 
the guidelines reflect a decision by SIFMA members to keep the 
maximum TBA-eligible original loan balance at $417,000.
    I will now discuss the rationale for this decision. The 
importance of the continued liquidity and smooth functioning of 
the current conforming loan market must be underscored in this 
time of broad disruption to financial markets.
    SIFMA views this arrangement as the most expeditious and 
least disruptive methodology currently available to facilitate 
securitization and secondary market activity for higher balance 
loans, bringing liquidity and rate relief to higher balance 
loan borrowers while not imposing additional costs or impairing 
the liquidity for loans falling within the pre-existing loan 
limits.
    As I mentioned, the TBA market depends on perceptions of 
homogeneity and the introduction of jumbo loans which have 
significantly different prepayment characteristics in any 
amount and to TBA-eligible pools would have reduced the 
perceived homogeneity of the market.
    Given that the TBA market is so essential, especially in 
this time of stress, market participants are very hesitant to 
change the rules in a manner that they believe is likely to 
have negative consequences for liquidity and thus for the much 
larger class of conforming borrowers.
    There is a second important point, the legislation is 
temporary. While the program effectively has a 9-month life 
expiring on December 31, 2008, preliminary estimates as to when 
this program would become operational were in the 2 to 3 month 
range.
    These estimates have proven to be accurate. Market 
participants are hesitant to change and disrupt functioning 
markets for a program that has an uncertain future.
    While rates of jumbo loans have not yet returned to ranges 
approaching historical norms since the passage of the stimulus 
package, the reason for this does not relate to the TBAs or 
lack of inclusion of jumbo loans into TBA-eligible collateral.
    Rather, lenders and agencies face operational challenges to 
implement these programs and the programs are not running full 
speed yet at this point.
    One major hurdle was calculation of loan limits. 
Previously, Fannie Mae and Freddie Mac and their lenders 
operated with a national loan limit. The stimulus package, 
however, implemented more complex MSA-based regimes which were 
essentially already used by FHA and Ginnie Mae, but foreign to 
the GSEs and their lenders.
    This is not to say that the programs will not have the 
intended effect. We believe they will.
    The most mortgage analysts expect jumbo rates to drop is 
approximately 50 basis points over conforming loans which will 
be quite an improvement, and in the last few weeks, we have 
seen first issuance of jumbo loans backed by Ginnie Mae and the 
continued build out by Fannie and Freddie Mac of their loan 
purchase programs, and small pools are circulating on the 
trading markets.
    We believe the market is on the verge of relief from higher 
rates and have dropped a quarter point in the last month, and 
we expect that to continue as the GSEs and Ginnie Mae's 
programs grow.
    SIFMA supported the stimulus package provisions which 
increased the conforming loan limits and continues to do so. 
SIFMA believes that the housing agencies can, do and will 
continue to play an essential role in the recovery of these 
mortgage markets.
    SIFMA believes the correct decision was reached regarding 
TBA eligibility of pools containing jumbo mortgages. The 
decision strikes the correct balance between providing 
increased liquidity and rate relief to jumbo borrowers while 
preserving the liquidity of the TBA market that provides lower 
rates to the conforming borrowers.
    We thank the committee and its chairman for the opportunity 
to provide this testimony and would be happy to answer any 
questions.
    [The prepared statement of Mr. Hamilton can be found on 
page 57 of the appendix.]
    The Chairman. Thank you, Mr. Hamilton. Next, we will hear 
from Patricia Cook, the executive vice president and chief 
business officer of Freddie Mac.

  STATEMENT OF PATRICIA L. COOK, EXECUTIVE VICE PRESIDENT AND 
              CHIEF BUSINESS OFFICER, FREDDIE MAC

    Ms. Cook. Thank you, Chairman Frank, Ranking Member Bachus, 
and members of the committee. Good morning. My name is Patricia 
Cook, and I am executive vice president and chief business 
officer at Freddie Mac. Thank you for inviting me here to 
testify on recent developments.
    The Economic Stimulus Act that Congress passed in February 
is working as you intended, to bring liquidity and lower prices 
to targeted parts of the jumbo market.
    When the President signed the Stimulus Act on February 
13th, the jumbo market was largely frozen. The private 
investors who had typically financed jumbo mortgages had 
abandoned the market. Jumbo mortgages had become very expensive 
or even unavailable, creating significant hardships for 
borrowers in areas with high house prices.
    To help get money flowing, mortgage money flowing into 
these areas, Congress temporarily raised the dollar limit for 
mortgages that Freddie Mac can buy from $417,000 to a maximum 
of $729,750 in high-cost areas.
    Now rates on GSE-eligible agency jumbo loans are starting 
to come down, nearly to those on ordinary conforming mortgages, 
and mortgage money is increasingly available in high-cost 
areas.
    I want to briefly describe Freddie Mac's perspective on 
three key matters: First, the prompt steps we took to implement 
this new authority; second, the reasons why consumers are 
starting to benefit from these actions; and third, the role of 
our retained portfolio and the need for changes in the TBA 
market if increases are made permanent.
    The legislation required HUD to identify high-cost areas 
eligible for the increased limits. Three weeks after the 
passage of the legislation, HUD identified 224 separate high-
cost areas and OFHEO calculated individual loan limits for each 
of these areas.
    Just 6 days later, on March 12th, we announced credit terms 
and pricing on agency jumbo loans that met our current credit 
specifications.
    On April 17th, we announced that we expected to be able to 
buy $10- to $15 billion of new agency jumbo mortgages 
originated by the end of the year. By putting a bid in the 
market, we increased liquidity, because the bid meant our 
customers not only knew that we would buy these mortgages, but 
also at what price we would pay for them.
    The lower agency jumbo rates we are starting to see in the 
market are in my view entirely attributable to the GSEs. After 
our April 17th announcement, we saw rates on these mortgages 
offered by some lenders drop as much as three-quarters of a 
point from late March. Rates on agency jumbos are now a full 
point below other jumbos, and only about 20 basis points or 
less above conforming mortgages; about the same difference as 
in the most favorable market conditions.
    We expect this pricing will be the market norm for agency 
jumbo mortgages originated through the end of the year.
    It took only about 60 days after passage of the stimulus 
package for consumers to start to realize the benefits of our 
presence in the market. Normally, the primary market needs 60 
to 90 days of lead time to implement even ordinary market 
changes. Here, we implemented a fundamental market change in 2 
months.
    The third and final point I would like to make is that we 
are able to provide this support because we can buy agency 
jumbo mortgages and hold them in our retained portfolio.
    Currently, there is little investor demand for securities 
backed by jumbo mortgages. By buying for our portfolio, we are 
able to price more aggressively and bring down rates for 
borrowers.
    In times of market turmoil, our authority to buy and hold 
mortgages in our portfolio helps us sustain demand and keep 
rates low. This is the strategy we are now using with agency 
jumbos.
    In the long run, however, this situation is not 
sustainable. Agency jumbo mortgages are not eligible for 
inclusion in to-be-announced or TBA securities and hence do not 
have the liquidity that keeps prices low in the traditional 
conforming market.
    This treatment is tenable when the adjustments are 
temporary. If Congress decides to increase the loan limits 
permanently, as the House did when it passed H.R. 3221 a couple 
of weeks ago, these mortgages will need to become eligible for 
TBA securities. This would give these mortgages a 
securitization execution with the liquidity to be broadly 
attractive to investors, but only if investors can count on our 
ability to use the portfolio to ensure a backstop bid.
    Moreover, prohibiting the GSEs from holding agency jumbos 
means those mortgages cannot be TBA.
    I hope my testimony has been helpful and I am happy to 
answer your questions.
    [The prepared statement of Ms. Cook can be found on page 50 
of the appendix.]
    The Chairman. Next, we will hear from Mr. Thomas Lund, the 
executive vice president, single-family mortgage business, for 
Fannie Mae.

 STATEMENT OF THOMAS A. LUND, EXECUTIVE VICE PRESIDENT, SINGLE-
              FAMILY MORTGAGE BUSINESS, FANNIE MAE

    Mr. Lund. Good morning. Thank you, Chairman Frank, Ranking 
Member Bachus, and members of the committee for this 
opportunity to be here today.
    I have submitted my written testimony so in my short time 
this morning, I really want to make four or five key points to 
you.
    I think the first is that this committee for several years 
has recognized the need to expand the benefits of the 
conforming market to high-cost areas. When the economic 
stimulus package was passed, our goal at Fannie Mae was to be 
ready to take deliveries within 30 days of the time that HUD 
published the list of eligible high-cost areas. We met that 
goal on April 1st.
    Since that period of time, we have continued to expand our 
eligibility, improve our underwriting, and we have made 
significant pricing enhancements to make the programs more 
attractive.
    Despite that, we have done a limited amount of volume, 
about $80 million, through the month of May, and I believe this 
is really the result of two issues, as Patty just mentioned a 
minute ago, it is really about time. It takes us and our 
lenders time to bring the new product to market. It also takes 
time for consumers to apply for mortgages, get approved, have 
the lender close the loan, and ultimately deliver that loan 
into the secondary market. All and all, this can take anywhere 
from 60 to 120 days in that life cycle.
    The second issue really is the TBA market. It is the most 
efficient liquid market for mortgages in the world. These loans 
were not eligible for TBA and as a result, rates did not drop 
as quickly as people anticipated they might have.
    On May 6th, Fannie Mae announced that our portfolio would 
buy jumbo conforming loans at TBA-like rates even though they 
were not eligible for TBA.
    Since that announcement, mortgage rates on jumbo conforming 
loans have dropped from a high of about one and a quarter 
points above standard conforming rates to be virtually 
equivalent to the conforming rate market today.
    As you have heard earlier today, on a $700,000 loan, that 
represents about $400 in monthly savings to the average 
American family, and those are savings that are vitally 
important in times like this.
    We have committed to doing this through the end of the 
year, and this would not have been possible without our 
portfolio capability to buy these loans.
    Since the May 6th announcement, our lenders tell us that 
their pipelines of jumbo conforming loans have begun to swell. 
As a matter of fact, I called around to our top 10 lenders this 
week and they have told us they have about $3 billion in their 
pipeline as we speak, since this announcement has been made.
    We believe that it is beginning to work and starting to 
unfreeze the markets that we are attempting to get to.
    This pricing policy will last until the economic stimulus 
package runs out on December 31st. With a temporary loan limit 
through the end of the year, it is truly difficult to create a 
liquid market for these products.
    In order for investors, SIFMA and others, to get 
comfortable with them as a TBA product, they want the certainty 
that permanence will provide, and we believe that would help 
make these savings sustainable, and I believe that this 
committee has recognized this under your leadership over the 
course of the last couple of years.
    I thank you for your time today and I look forward to any 
questions you might have.
    [The prepared statement of Mr. Lund can be found on page 83 
of the appendix.]
    The Chairman. Next, Dr. Emile Brinkmann, the vice president 
for research and economics of the Mortgage Bankers Association.

    STATEMENT OF EMILE J. BRINKMANN, PH.D., VICE PRESIDENT, 
      RESEARCH AND ECONOMICS, MORTGAGE BANKERS ASSOCIATION

    Mr. Brinkmann. Mr. Chairman, and members of the committee, 
thank you for the opportunity.
    My message this morning is that pricing in the jumbo loan 
market is improving as a result of actions taken by this 
committee, Congress, the White House, mortgage lenders, the 
GSEs, and FHA.
    The higher loan limits have allowed lenders to make loans 
to jumbo borrowers during a period of time when the secondary 
market remains effectively shut down for all but Fannie Mae, 
Freddie Mac, and Ginnie Mae securities.
    It has taken some time, however, since the passage of the 
bill, for us to see lower pricing in the jumbo market for a 
number of reasons.
    First, when the higher loan limits were announced by HUD at 
the beginning of March, the capital markets were caught up in 
developments at Bear Stearn. Broker-dealers on Wall Street who 
would normally bid on GSE securities and who would be expected 
to bid on these securities needed to conserve cash and could 
not commit to a price on a new security when they did not know 
if or for how much they would be able to sell it.
    Mortgage lenders could not commit to a lower rate on a 
mortgage until they saw what investors were willing to pay for 
that mortgage.
    Second, the pricing of the new GSE jumbo securities was 
complicated by the fact that there were different limits for 
different parts of the country, with different home price 
trends and different prepayment speeds, thus making it 
difficult to commit to a generic price.
    For example, loans in New York traditionally prepay at 
slower rates than loans in California, and are therefore worth 
more to investors.
    Third, the temporary nature of the higher loan limits makes 
the securities potential orphans in that new issuances will 
come to an end shortly after the end of this year. Pricing of 
securities is generally determined by the most recently issued 
securities where most trading takes place.
    In the absence of the prospective of new issuance, 
potential investors faced having to hold an illiquid security 
that they could not sell because they could not get a reference 
market price. Therefore, they would demand a higher yield to 
compensate them for that illiquidity.
    What finally broke the log jam was the courageous move by 
Fannie Mae and Freddie Mac to simply announce a price at which 
they would buy jumbo loans that qualify for their programs. The 
establishment of a credible bid in the market has already led 
to greater interest among private investors.
    Keep in mind, however, that not every jumbo loan will be 
coming down in rate. The limited geographic coverage of the 
bill and the level of the loan limits exclude probably about 
half of the jumbo market that we saw for home purchases in 
2006, and given the credit standards of the GSEs, credit 
standards that reflect the current environment, only about half 
of that number, it has been estimated, will actually qualify 
them for GSE purchase.
    Therefore, borrowers will still see a range of quotes for 
jumbo loans based on where they live, the amount of their 
downpayments and other credit factors.
    A jumbo loan in an area that is not designated a high-price 
area will likely cost more than an identical jumbo loan in 
high-price areas as determined by HUD.
    In addition, the jumbo loan market is not traditionally a 
30-year fixed-rate market, with those loans making up roughly 
only a third of the jumbo market over the last 5 years. That 
has now changed with applications for fixed-rate loans making 
up about 70 percent of jumbo applications, but jumbo to 
conforming spreads on loans like 5-1 hybrids have not been as 
wide as those for 30-year fixed-rate loans, so there are still 
good alternatives for jumbo borrowers.
    FHA-insured loans are also playing an important role. The 
demand for Ginnie Mae securities never really slackened and the 
efforts of FHA to roll out its program in risk based pricing 
has made FHA loans a cost-effective choice for many borrowers.
    I said at the beginning that the efforts to improve jumbo 
pricing are working. The Mortgage Bankers Association conducts 
a weekly survey of mortgage applications from around the 
country. As recently as March 2007, applications for jumbo 
loans made up 12.1 percent of all applications. By March 2008, 
that jumbo share had fallen to only 4.4 percent; that was down 
from 12.1 to 4.4 percent.
    As of the first few weeks of May, however, that share has 
now increased to 5.8 percent, and we expect that percentage now 
to increase.
    Thank you very much, and I welcome your questions.
    [The prepared statement of Dr. Brinkmann can be found on 
page 44 of the appendix.]
    The Chairman. Thank you. Next, we are pleased to have 
Heather Peters, the deputy secretary for business regulation 
and housing for the State of California.
    Ms. Peters?

  STATEMENT OF HEATHER PETERS, DEPUTY SECRETARY FOR BUSINESS 
          REGULATION AND HOUSING, STATE OF CALIFORNIA

    Ms. Peters. Good morning, Mr. Chairman, and members of the 
committee. Thank you for having me here. As you mentioned, I do 
oversee all business regulation and housing in the State of 
California. I also have the privilege of chairing the 
Governor's Task Force on Non-Traditional Mortgages.
    I have been asked to address three items here today: The 
demand for the new loans authorized by the Stimulus Act; the 
impact the competitive pricing would have on the California 
housing market; and the obstacles to those rates becoming 
competitive.
    On the issue of demand, nowhere is the demand stronger than 
in the State of California. Governor Schwarzenegger has 
repeatedly emphasized that the previous loan limits of FHA and 
GSEs has rendered them virtually irrelevant in our large 
cities. He has said no single issue is affecting California's 
economy more than this one, of fair access to housing capital.
    We heard earlier in the opening comments that the median 
price of a home in Los Angeles is $589,200. We frequently hear 
use of the term ``starter home,'' and ``starter home'' here and 
``starter home'' there can mean quite different things.
    For a starter home in Los Angeles, I want to emphasize, the 
lots are so small that they are measured in square feet, not 
acres.
    Seventy-seven percent of all California home sales last 
year exceeded the traditional FHA loan limits, and 69 percent 
of all California home sales last year exceeded the traditional 
GSE loan limits.
    Thanks to the hard work of this committee and the Senate on 
the Stimulus Act, I had the pleasure of appearing with then 
Secretary Jackson in Los Angeles as he announced the new median 
home prices.
    Thanks to that Act, 47 of our 58 counties now qualify for 
more than the traditional FHA loan limits, and 14 of our 
counties now qualify for the maximum loan limit of $729,750.
    Fourteen counties may not sound like a lot until you 
examine the population, but 21 million people live in those 14 
counties, that is, half of the State of California's population 
lives in counties where the median price justifies loan limits 
of $729,750; 21 million people is more than the population of 
every State in the Nation except for Texas.
    As you go on your break this holiday weekend, I would like 
you to think just for a moment of what you would be facing if 
your entire State had no access, virtually no access, to FHA or 
GSE loans.
    In assessing the impact, the impact is huge. Prior to the 
summer of 2007, 40 percent of all the sales in California were 
made with jumbo loans--since then, only 10 percent. Sales in 
California are down 24.5 percent year over year; that means 
100,000 fewer homes have sold in California.
    We currently have 11.6 months of inventory on the market at 
the current rate of sales and we are adding to it every day 
with our REOs.
    Equally important, new construction is down 65 percent. 
Historically, normal levels of home building in California 
generates more than $70 billion in economic output, employing 
over half-a-million people, and providing nearly $5 billion in 
tax revenues.
    California has already seen a loss of $2 billion in tax 
revenues, and unlike Vegas, what happens in California does not 
stay in California. We are feeling it all across the Nation; 
the economic impact is huge.
    Addressing the obstacles, I am very pleased to report that 
they are much fewer now than they were just a few weeks ago. 
Both the announcements of Freddie Mac and Fannie Mae and what 
they are doing in this regard have been applauded by the 
Governor and are wonderful first steps.
    Unfortunately, there are still external and internal 
factors that hinder the bringing of these loans to market in 
California and other high-cost loan markets.
    The external factors include the market logistics that we 
have heard about from SIFMA and the TBA market, and there is 
just not enough time to develop an efficient market between now 
and the end of the year.
    The yo-yo effect, as the Chair mentioned in his opening 
remarks, is significant and a market cannot develop without 
certainty.
    Internal factors that have not been mentioned are not just 
the interest rates but the differing underwriting guidelines. 
Underwriting guidelines by Fannie and Freddie applied to 
traditional $417,000 loans differ from the new loans: 
Downpayments are higher; FICOs are higher; and debt to income 
ratio restrictions are more strict.
    Even if we close the interest gap, there still remain 
barriers to California and other high-cost-loan States.
    These are new in name only. They are not new to California 
or to other high-cost States. We know how these loans perform. 
There have always been $500,000 loans, $600,000 loans, and 
$700,000 loans.
    As the Chair noted in his opening remarks, we need to use 
that data, and the child needs to be taught they do not need to 
be afraid of touching every appliance in the home.
    One other procedural market issue I would like to bring up 
is on the FHA loans. You need to be FHA approved to originate a 
loan under the FHA programs. Unfortunately, in California, due 
to the virtual extinction of FHA, their loan volume in 
California had dropped by more than 98 percent.
    The FHA loans that were originated in California 
immediately prior to the crisis were less than 2,600 loans in 
the entire State of California.
    The problem is you have delivered the stimulus package that 
is bringing relief and the ability to get to FHA loans, but 
there is no one to write them. The brokers have let their 
approvals go because there were no loans to write.
    It takes 3 to 6 months for the brokers to get FHA loan 
approval to begin writing them again, right about the time this 
expires. They have apparently discussed this with HUD and have 
not been able to streamline that process.
    I thank you for the opportunity to address the committee.
    [The prepared statement of Ms. Peters can be found on page 
94 of the appendix.]
    The Chairman. Ms. Peters, I noticed four ears perking up, 
two over there, Mr. Miller, and two over here, Ms. Waters. I 
think you are probably going to see some joint intervention 
with HUD to see if we can speed up that process. Obviously, we 
would like to move as well.
    Thank you. That is a very useful specific idea. I think my 
colleagues will be talking about trying to speed up that 
approval process.
    Our final witness is Mr. Vincent Malta, who represents 
Malta & Co., and he is here on behalf of the National 
Association of Realtors.

STATEMENT OF VINCENT E. MALTA, MALTA & CO., INC., ON BEHALF OF 
              THE NATIONAL ASSOCIATION OF REALTORS

    Mr. Malta. Thank you for inviting me to testify on the 
impact of higher loan limits for government-sponsored 
enterprises on both the housing market and consumers.
    My name is Vince Malta and I am a broker-owner of Malta & 
Company, a San Francisco-based real estate sales and management 
firm. I am also chair of the public policy coordinating 
committee for the National Association of Realtors. And on a 
personal note, I would like to thank Chairman Frank for 
addressing that committee last week at our legislative meetings 
and providing valuable and insightful information that was very 
well-received by our members.
    I also serve voluntarily on Fannie Mae's National Housing 
Advisory Council. Today I am here to share the views of more 
than 1.2 million Realtors who engage in all aspects of the real 
estate industry. Today's hearing asks the question, why is it 
taking so long for the new jumbo conforming loan limits to 
reach homebuyers and homeowners?
    The truth is that it is not an easy or simple task. 
Implementing the new loan limits has been difficult for a 
couple of reasons. First, the authority is temporary, which 
raised questions for both lenders and investors on how to 
handle the loans. Second, new underwriting guidelines from both 
Fannie Mae and Freddie Mac have created some confusion about 
downpayment and other requirements. Difficulties aside, the 
fact remains that the new limits have not been in effect long 
enough to have a substantial effect on the housing market.
    In many States, lenders have only been able to make loans 
with the higher limits for a couple of months at most. Realtors 
believe that the new limits can have a substantial impact on 
the market, but only if we give them a real chance to live up 
to their promise.
    We estimate that a permanent increase in the loan limits 
could mean as many as 350,000 additional home sales, lower 
inventories, and a 2 to 3 percent increase in home prices next 
year. A boost in home prices could also reduce the number of 
foreclosures by as many as 210,000 by making it easier for 
consumers to refinance or sell.
    According to our estimates, the new limits would also 
enable more than 500,000 borrowers with loans above $417,000 to 
refinance to lower interest rates. This kind of stimulus is 
just what we need. Even when the housing market recovers, we 
believe higher limits will continue to play a vital role in 
giving families in high-cost areas equal access to fair and 
affordable loans. Jumbo mortgages have become the primary 
option for large numbers of working class people who live and 
work in more expensive areas of the country like my home State 
of California--as stated by Ms. Peters, and so eloquently by 
Representatives Miller and Sherman--the chairman's home State 
of Massachusetts, and many States in between, including West 
Virginia, Ohio, Tennessee, Florida, New Jersey, New York, 
Connecticut, and Washington. In fact, 240 counties in 24 States 
and the District of Columbia benefit from the higher limits. 
Let's not forget that raising the GSE limits could stimulate 
$35 billion in additional economic activity. That is good for 
every American, whether you own a home or not.
    Finally, without affordable alternatives available across 
the country, we could run the risk of another credit crisis at 
some point in the future. The House of Representatives already 
has included permanent, higher limits in H.R. 3221, the 
American Housing Rescue and Foreclosure Prevention Act of 2008.
    NAR wants to thank the chairman and other members of the 
committee for working so hard to include permanent, higher loan 
limits in this bill. We ask that you continue on this course in 
the coming weeks, and make the higher conforming loan limits 
permanent before they expire at the end of this year. Doing so 
is the right move for the housing market and the economy, and, 
more importantly, it is necessary to preserving the American 
dream.
    Thank you for the opportunity to testify today, and I will 
be happy to answer any questions you may have.
    [The prepared statement of Mr. Malta can be found on page 
86 of the appendix.]
    The Chairman. Thank you.
    I appreciate all the panelists who were very much on point.
    Ms. Peters, let me ask you, because you have both hands-on. 
You have heard one of the points raised, that this is going to 
go primarily to a very small slice of upper-income people, 
people making $200,000 or more.
    What will the income impact be? What kind of families are 
we talking about if we were to raise the loan limits in 
California as opposed to leaving them alone?
    Ms. Peters. We are talking about basic working families in 
California, and we are not talking about millionaires. We are 
not talking about McMansions. For example, this weekend, I was 
out looking for a place to live, myself. I saw a one-bedroom 
condo, 768 square feet, where the Realtor was telling me what a 
wonderful bargain it was now that the prices had dropped from 
$540,000 to $500,000.
    The Chairman. We have heard the numbers. But we are told, 
well, this is the rule of thumb that you would have an income 
of so much to buy that. My experience is that the problem in 
some of the areas that I represent is that thumb gets stuck in 
people's eyes because like it or not, if they want to have 
decent housing for their families, and live within a reasonable 
distance of work, they have to go above that. So we are talking 
about people who aren't making $200,000 a year, but are paying 
more of their income than we wish they had to. Would that be 
accurate?
    Ms. Peters. Yes, very accurate. In California, the 
percentage of a family's income that goes to meet housing 
requirements is far greater than that. Unfortunately, the 
prices in California have led people to reach further and 
further and go without many other necessities to be able to put 
a roof over their family's head.
    The Chairman. Thank you.
    I do appreciate all of the witnesses; I think all of you 
agree that the temporary nature of this is part of the problem, 
and, I appreciate that.
    Let me raise another issue, and that is the question of 
what is in the Senate bill and not in the House bill in the 
overall package, which is the requirement that all loans above 
the current limit be securitized. I would be interested in 
anybody's comments. Mr. Hamilton, is this going to make good 
business for your people? Do you want to see that happen?
    Mr. Hamilton. It doesn't hurt us. You know, certainly, the 
industry, their interests are to get rates as low as possible 
for everybody across the credit spectrum and across the loan 
limit spectrum, whether the loan is securitized in a Ginnie 
Mae, Fannie Mae, or Freddie Mac security, or whether it's a raw 
loan. I'm not sure it has an enormous impact either way.
    The Chairman. So, you are not advocating a requirement that 
there be securitization?
    Mr. Hamilton. We would be indifferent.
    The Chairman. Let's go down the panel, and that will be my 
last question.
    Ms. Cook?
    Ms. Cook. We are definitely not indifferent, and we think 
the requirement for securitization is a real issue for the 
success of the program going forward. You know, if you look at 
the situation right now, without a liquid market for 
securitized jumbos, for us to have to securitize them and sell 
them, it would completely undermine the objective of trying to 
keep rates low, because there isn't a bid in the marketplace. 
It's a circular argument. It's important to preserve the 
ongoing availability and stability in that market to be able to 
purchase those loans when appropriate.
    The Chairman. You are talking about securitizing. You are 
not ruling out securitizing?
    Ms. Cook. No.
    The Chairman. Yes, Mr. Lund?
    Mr. Lund. And I would just add, if I could, you would 
create a separate class of security, and it would be the only 
security that's conforming that couldn't be put in the 
portfolios. Therefore, they would not be TBA eligible. And, 
once you take away that TBA eligibility, you add increased 
interest rate to the consumer.
    The Chairman. Dr. Brinkmann?
    Mr. Brinkmann. One of the issues that goes without saying 
is not being able to get a street bid on these securities that 
would be created with these jumbos, so we do need the support 
of some other execution mechanism.
    The Chairman. Agreed, holding the portfolio.
    Mr. Brinkmann. Yes, sir.
    Ms. Peters?
    Ms. Peters. Yes, we advocate maximum flexibility in this 
uncertain time.
    The Chairman. Mr. Malta?
    Mr. Malta. It would be the same and we would look at how 
they would affect rates in the long term, and we think 
negatively if that were required.
    The Chairman. I am quitting while I am ahead, and I 
recognize the gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. I thank the chairman.
    Of course, he asked my questions, so that I think I heard 
from most of the panel that everybody is in agreement that this 
should be made permanent. Was there a dissenting opinion?
    Mr. Brinkmann?
    Mr. Brinkmann. I believe our position is that we needed a 
program to carry us over until the markets began to work again. 
And our original idea for these limits, I think, was about a 2-
year program, not to this year end, as well as more uniform 
limits across the country. So the MBA's position is a little 
different.
    Mr. Neugebauer. So your position is that the market will 
return to kind of the pre-bubble marketplace that in the 
private to non-GSE-backed that there would be a robust 
securitization market for those securities and would not 
necessarily need for Fannie and Freddie to be in that market?
    Mr. Brinkmann. I think our position is that it has been 
very difficult to predict what the market was going to do from 
month-to-month, much less 2 years out. But we thought that 
about a 2-year period would give us enough room to get this up 
and going again and bring the private market label back up to 
functioning.
    And, of course, if that happened, there would be the option 
of extending, but to try and operate in this environment and 
say this then requires a permanent new fix going forward is not 
something that we agree with.
    Mr. Neugebauer. Over the years--I think I have shared 
before that I was in the home building business and housing 
business for a number of years and watched these markets go up 
and go down. And I have watched the issue on the GSEs recently 
and previous years, and I kind of have to relate it to Uncle 
Billy. You know, Uncle Billy is the guy that nobody wants to 
come to any of their parties, and they don't invite him for 
Christmas until Uncle Billy wins the lottery, and then 
everybody wants Uncle Billy at every event. And I think that 
has kind of been the way with the GSEs, when things were kind 
of rocking along, people wanted to limit the ability of what 
GSEs could and could not do.
    When the marketplace began to get a little unstable, as it 
has done in years past, everybody is looking for Uncle Billy to 
be a part of the process; and, I think what I struggle with is 
how do we keep a normalcy and a consistency here, as I said in 
my opening statement, where we let the markets function along? 
We don't have this in and out.
    Okay, now we want to raise the lending limits for GSEs. We 
want to raise the amount of loans they can hold in their 
portfolios, but as soon as things somewhat kind of settle down, 
we want to go back in and put the claims back on that process. 
And, so, I am trying to find a market-based solution to this 
where we are not up here and we are not knee-jerking back and 
forth.
    What is the right policy, Mr. Brinkmann?
    Mr. Brinkmann. Maybe if you let me go a little bit beyond 
at the moment the housing market and give you another example, 
I also deal with commercial, multi-family lending. A large 
portion of that lending has been in the CMBS market, the 
conduit market. And when we look at what the originations 
volumes were in that market for the first quarter--we will be 
putting out the number shortly--that indicate that the decline, 
year over year now, has been in excess of 95 percent.
    So that is an example of a market that has frozen. Do we 
expect that to remain frozen? No. And so when we look at the 
policy to say, okay, we know that eventually investors will 
then come back to this office. What do we need to do to 
encourage them to come back to give credible bids, to have the 
GSEs fulfill their role in supporting those markets in times of 
need.
    But I think there is a balance in the policy to say that 
they are there. They are given certain privileges. We expect 
certain things of them in terms of supporting the market. But 
they are not to be the market in all circumstances going 
forward. And, I guess, we don't have a good answer to your 
question, at least I don't this morning.
    But to say that maybe now is not the time to be 
establishing permanent rules going forward, which would be 
difficult, than to change if things didn't develop. But maybe 
take more of an intermediate perspective that we know the 
markets aren't functioning now. We have problems across the 
spectrum of lending, but that is rapidly as things changing, we 
may be seeing a different market 6 months from now or a 
different market a year from now, which then perhaps would lead 
to different policy ideas.
    Mr. Neugebauer. I thank the chairman.
    Ms. Waters. [presiding] Thank you very much.
    I will recognize myself for 5 minutes. Let me welcome all 
of our panelists who are here today. Before I get to a question 
that I have for Mr. Lund, I would like to ask you, Ms. Peters: 
Could you explain to us the two ways that one can be a broker 
in California?
    As I understand it, we license brokers, but we also license 
companies that hire brokers that do not necessarily have to 
have individual license. And, if that is the case, have you 
found that those companies that have the license who hire 
people who do not have a license have created part of the 
problem that we have in the subprime meltdown?
    Ms. Peters. Yes. Thank you for the question.
    California's regulatory structure is unique and quite a 
challenge from my perspective. We do have a number of different 
ways that people can get involved in the mortgage business. The 
traditional mortgage broker as you use the term is licensed by 
the Department of Real Estate. That is, any licensed real 
estate agent in the State of California can use that license to 
broker loans. They owe a fiduciary duty to the people for whom 
they are brokering loans.
    We also have the Department of Corporations licensing 
companies under the California Finance Lenders Act and the 
Residential Mortgage Licensing Act. Both of those Acts allow 
finance lenders, non-depository lenders, such as Countrywide 
financial, New Century Financial, and so many others we have 
heard about, to have a corporate license. And then within that 
corporate license, they hired employees as any other 
corporation hires employees that are not individually licensed.
    As a practical matter in California, most of those 
companies are out of business. As a going forward matter, to 
prevent it from happening again in the future, we are examining 
the national licensing concept that is put forward by the CSBS 
and the Armour Association as well as the bills that are 
pending in Congress.
    Ms. Waters. Well, thank you very much. And I was just 
questioning our staff, because I thought we had in one of our 
pieces of legislation tried to make sure that every person 
selling real estate would have a license, because we recognize 
that under Countrywide and AmeriQuest and some of these other 
places, a big problem was started. I am surprised it has taken 
California so long to correct that, and I would hope that, I 
will go back and take a look at what I think we have done and 
one of the pieces of legislation. But, I would hope that the 
State would move aggressively on that also.
    Let me go to Mr. Lund, because this is one area that I 
really want to learn a lot more about.
    We have heard that interest rate resets would not be as 
serious for some borrowers because of the Federal Reserve's 
recent rate cuts. However, some borrowers have what is called 
the margin on their loans, which is the portion of the interest 
rate on an adjustable rate mortgage that is over and above the 
adjustment index rate.
    Can you explain what the margin is? What policies guide 
these margins and how these mark-ups affect homeowners with 
resetting interest rates?
    Mr. Lund. Sure. In reality, it is an adjustable rate 
mortgage. And, typically, what they will do is they will set a 
base rate, whether it be a Treasury, whether it be a LIBOR 
rate, and then they will set above that what the expected 
return would need to be above a risk-free rate. In some cases 
in the conforming market, that may be as little as 2 points. 
Where there is additional credit concerns, it may be 3, 4, or 5 
points, and it can be very different. It is all very dependent 
on what the end investor requires in return to be able to make 
those mortgages to an individual borrower.
    You know, one of the things that we do advocate, as we 
heard one of the Members of Congress talk about a little bit 
earlier, is we believe that fixed rates are the appropriate 
product, particularly in times like this. And, ARMs have a 
place, but a fixed-rate product is a known payment for a 30-
year or 15-year piece of time, and it allows borrowers to know 
going in exactly what their payments are going to be and not 
have any surprises along the way.
    Ms. Waters. Yes, well, I would certainly agree with that. 
And as I have began to look at these margins, it appears that 
there is no rhyme or reason for the margin that is being 
charged by some of the loan initiators, and it could cause the 
reset to quadruple almost in some cases. And, if ARMs are to 
continue to exist, certainly I think there should be some kind 
of cap on margins. I am just exploring this now, but thank you 
for that information.
    With that, I will recognize the gentleman from California, 
Mr. Miller, for 5 minutes.
    Mr. Miller of California. Thank you, Ms. Waters.
    Mr. Brinkmann, just for the record, I know you said you had 
a position in the opposition.
    Mr. Chairman, may I introduce a letter for the record in 
support of this bill, from the California Mortgage Bankers 
Association, building associations, mortgage brokerss and 
Realtors?
    The Chairman. Yes. Without objection, it will be entered 
into the record.
    Mr. Miller of California. Ms. Peters, thank you very much 
for coming and for your testimony.
    I represent parts of 3 of those 14 high-cost areas in 
California, and we have really, really, been battered. In the 
State of California, you know, revenues in 2007, were down 
about $2 billion to the State of California because of the 
impact on the housing industry. And I know the homebuilding 
industry creates about $70 billion of economic output for the 
State of California and we have just really been plummeted in 
recent years.
    I really think that my good friend, Mr. Hensarling, showed 
a chart. And I know many things are a matter of perspective, 
and he is my good friend. And he said the red areas are the 
only areas who are benefiting from this. I say the red areas 
are the only ones to have been excluded in the past. And I 
think that we have been discriminated against because we are 
high-cost areas.
    And we have had some really good testimony, but the 
conforming marketplace in the past, all the loans, about 82 
percent of the loans, have been fixed-rate 30-year loans. Yet, 
when we are forced into the jumbo, the exotic marketplace, only 
18 percent. And the other ones have been negative AMS, what 
triggers to 3 to 5 years, and that is what is killing 
California.
    My good friend, Ken Calvert, represents a city in Riverside 
County, where home prices that were normally $1,200,000, 3 or 4 
years ago, are selling for $600,000 today. And part of the 
problem in communities like that in high-cost areas, when the 
prices drop down to $900,000, most bankers were not making 
loans, because the liquidity was gone. They had no money to 
lend.
    The comments you made, Ms. Cook, today, are everything I 
have tried to say in the past. In the entire panel, we have 
talked about since GSEs got involved in the marketplace, that 
loan rates have dropped between 100 basis points and 125 basis 
points.
    Would you like to please comment on that? I want to hear 
that again, because I have been saying the same thing. In 
California, what is killing us, because we are not able to 
participate in a good program, GSEs. And I really support the 
members who are able to have a mortgage marketplace who can 
qualify for those loans. We just haven't been able to, but 
please speak to that. That is a huge savings to people.
    Ms. Cook. Yes, thank you for the question, and I would make 
two points.
    You know, in this environment, you have seen the GSEs 
demonstrate their unique ability to provide liquidity stability 
in the mortgage market. And, I think, throughout the crisis, 
the one thing that has been true is 30-year, fixed-rate agency 
mortgages have been broadly available.
    By increasing the loan limits for us, liquidity and 
stability that is available to conforming mortgages is extended 
to those conforming jumbos that now qualify. So as soon as you 
made that adjustment, those same mortgage rates became 
available to the qualifying jumbos.
    Mr. Miller of California. Let me ask you a question: You 
have underwriting criteria that you use for, let's say, a home 
in the $400,000 marketplace. Do you use the same, identical, 
underwriting criteria as far as safety and soundness as you 
would use in the $700,000 marketplace?
    Ms. Cook. Yes, with one exception. If you look at the 
credit standards that we put out for the agency jumbos, they 
differ from the conforming space in a couple of dimensions. The 
one that probably can get the most attention is that our 
maximum LTV is 90 percent, whereas, in conforming space, it is 
95 percent.
    Mr. Miller of California. So you are making it tougher for 
those in high-cost areas?
    Ms. Cook. A little bit, but I think the thing that we are 
trying to address from a safety and soundness perspective is 
that the agency jumbo market, as the map earlier demonstrated, 
is highly geographically concentrated.
    Mr. Miller of California. Yes, it is.
    Ms. Cook. That poses some additional risks. In addition, 
those markets right now are actually declining in home prices, 
and, in order to make sure that that homeowner is in a 
sustainable position, we think it is prudent to consider.
    Mr. Miller of California. But you are taking that risk into 
consideration, so this is not a big give-away. We are not 
trying to put the government at additional risk. We are trying 
to safeguard for that. True?
    Ms. Cook. And that is the second point I was going to make, 
which is that the underwriting standards reflect the 
appropriate safety and soundness considerations that we are 
going to balance against providing all the required financing.
    Mr. Miller of California. I applaud you for that, because 
that is a huge consideration.
    You talked about securitization, and you said it has to do 
with success or failure. And my gleaning from that is that if 
we require securitization, we are putting the program at risk 
where if we want to make sure that it is a success, we treat 
them like every other loan. Is that not a fair statement?
    Ms. Cook. That is correct.
    Mr. Lund. I would add what has really happened over the 
course of the last year is that virtually all mortgage 
investors have pulled out of the market, really with the 
exception, almost, of Fannie Mae, Freddie Mac, and the FHA. And 
in the areas of the country in which you operate, there was no 
liquidity.
    So despite the fact that it might have been quoted as a 
point-and-a-half rate differential, it may not have had access, 
period.
    Mr. Miller of California. In my area, many banks pulled out 
of the marketplace. They couldn't make a loan. When we put the 
SIFMA package forward, those same banks went back into the 
marketplace making loans. A great comment by Ms. Peters was 
``FHA in my district, between 2000 and 2005, dropped by 99 
percent. That means for every 100 loans made in 2000, we made 
one loan in 2005.''
    Do you believe this has had a positive benefit on the 
liquidity in the marketplace for homebuyers today, what we are 
doing?
    Mr. Lund. Well, I think if you don't give the GSEs 
portfolios access to buy those securitizations, or those whole 
loans, it really won't have an impact, until those investors in 
fact come back to the market, which they have not, yet. So I 
think to jump-start the market, you need to have the capability 
to have a portfolio.
    Mr. Miller of California. And you have provided liquidity 
to-date?
    Mr. Lund. That is correct.
    Mr. Miller of California. Thank you.
    I yield back.
    The Chairman. Let me invite Members who want to vote, to go 
and come back. Maybe we can keep this going. There are going to 
be a series of votes. We will give everyone a chance.
    I have asked the witnesses to stay, so if members want to 
go and come back, maybe somebody will come back and take over. 
So if somebody wants to go right away, come back. I will try 
and pass on the baton.
    The gentleman from North Carolina is recognized.
    Mr. Watt. Thank you, Mr. Chairman.
    I actually think I want to ask a similar question to the 
ones that were raised by Mr. Miller from a safety and soundness 
perspective from the other side of the coin. Because one of the 
concerns that a number of constituents and people in my 
community raise is what impact will this have on my rate.
    They don't understand how you can charge a rate for a 
$600,000 loan that is the same as a rate that you charge for a 
$200,000 loan. And their concern is that as a result of this 
jumbo mortgage that they don't understand, there will somehow 
be some blended rate that will work to some disadvantage to 
them. I think that is the same issue on the borrower side as 
the safety and soundness issue on the lender side.
    But I wanted to get on the record your response to that so 
that people can be reassured. I hope that is what you were 
going to say: reassured that this is not going to have an 
adverse impact on people who have loans within the current, 
conventional mortgage limits. Any of the panelists, I think, 
could answer that, but I would be especially interested in 
hearing from Ms. Cook and Mr. Lund on that.
    Ms. Cook. Yes, thank you for the question.
    When you look at the difference in loan amounts, it is not 
just the loan amount that determines the credit quality of the 
borrower, right? There are a lot of characteristics that one 
looks at when they are underwriting a loan, including income 
ratios and a variety of other characteristics. In and of 
itself, a loan of $200,000, relative to $400,000, relative to 
$500,000, isn't necessarily riskier. So identifying the loan 
size as the primary risk variable would be inappropriate.
    When you think about whether this change to include 
conforming jumbo loans will cost the average conventional 
conforming borrower today a higher rate; the key thing there is 
going to go back to the way we ultimately deal with the TBA 
eligibility and whether or not we can do it in a way that 
maintains the liquidity of that market and maintains its 
effective trading in the marketplace which Mr. Hamilton 
addressed earlier.
    Mr. Watt. Perhaps that is the question I am asking. Can you 
do it in a way that maintains?
    Ms. Cook. Yes, I believe we can.
    Mr. Watt. Okay. I wanted to make sure I got a specific 
response to that, because otherwise what I hear you saying, it 
could potentially have, if you don't have some adverse impact 
if you don't maintain that model.
    Mr. Lund?
    Mr. Lund. We have not changed our pricing for our core 
primary business as a result of the incremental that was added 
as part of the economic stimulus package. As Ms. Cook said, we 
look at individual characteristics of borrowers. We look at the 
kind of loan products. All that goes into how we evaluate 
pricing for that and that is pretty standard.
    Mr. Watt. Is there anybody on the panel who has a different 
opinion on this? Everybody is nodding that they agree.
    Mr. Hamilton?
    Mr. Hamilton. I would just want to make it clear that I 
think one of the things that is important now, what went into 
the decision by SIFMA to make these non-TB eligible was the 
main determinant of why we didn't do that was that our main 
concern was not raising mortgage rates for the conforming 
borrower.
    Now, if there is an extension to the program, certainly, 
SIFMA is going to re-evaluate the TB-eligibility of these 
pools. But I think to make a statement to say, ``We're going to 
originate jumbo loans to make them TB-eligible and it's not 
going to impact the conforming borrower,'' is a touch of a 
stretch. We need to do a lot of work on that, and I think 
coordination between Fannie, Freddie, and securities industry 
membership can potentially make that work. But it's not a turn-
key operation by any stretch.
    Mr. Watt. But if you use the same criteria for these larger 
loans that you have been using for the conventional loans up to 
now, I mean, is that the key? Or, what are you saying?
    Mr. Hamilton. I'm just saying that Ms. Cook is right, and 
size is not the only determinant. But I think they would also 
agree if the identical three credit borrowers came to the table 
and wanted a $200,000, a $400,000, and a $600,000 loan, I don't 
think anyone would disagree that the $600,000 loan demands a 
higher rate. It is simple math.
    Mr. Watt. But if they came to the table with a $200,000, 
$400,000, and $600,000 loan, and they had $200,000 income, 
$400,000 income, and $600,000 income, and the same kind of 
credit profiles, why would the rate be higher?
    Mr. Hamilton. It's not a matter of credit at that point, 
but a matter of pre-payment.
    Mr. Watt. Same applicable principals, prepayment and 
otherwise applying.
    Mr. Hamilton. Right. But if someone prepays a $600,000 
loan, it costs a lot more money to be owed than on a $200,000 
loan. So we just have to be careful about the eligibility of 
that and how we work that going forward.
    Ms. Cook. Maybe one thing I would want to add in agreement 
with Mr. Hamilton is that we want to tread carefully on the TBA 
market because it is the core liquidity provider in the 
mortgage market right now.
    So when we look at TBA eligibility, we have to remain true 
to: One, that it is permanent; and two, that the homogeneity of 
the TBA market today is in large measure preserved while 
considering what small differences will emerge by including 
jumbos.
    The Chairman. I have to interrupt, because I was wrong. We 
have a series of votes. So, we will come back, and there will 
be a few more members.
    I actually will be gone about 20 minutes or so, so we will 
come back. I also ask unanimous consent to put into the record 
a statement from George Hanzimanolis, the president of the 
National Association of Mortgage Brokers, on this issue. 
Without objection, that will be put in the record.
    We will be in recess until after the roll call.
    [Recess]
    The Chairman. I am going to give members a few minutes. If 
no one shows up, then the hearing will be over. There was an 
unexpected privilege resolution that held us up a little, but I 
am told there is not going to be another vote, so we will just 
wait a few more minutes.
    If no members show up, I will adjourn with thanks to the 
panel. It has already been very useful. We are going to wait to 
see if there are others who have questions, but the one member 
whom I thought was coming back will not be coming back, so the 
hearing will conclude.
    I appreciate the testimony very much, and we will be 
obviously be in touch with others as well.
    [Whereupon at 12:43 p.m., the hearing was adjourned.]




                            A P P E N D I X



                              May 22, 2008


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