[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
U.S. GOVERNMENT PRINTING OFFICE
43-701 PDF WASHINGTON DC: 2008
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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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